South Korea's hydrogen subsidies fall 40% in two years even as government touts sector's growth

South Korea's hydrogen industry appears to be losing momentum. The government, which has publicly pledged to develop the "hydrogen economy" as a future growth engine, has been rapidly scaling back its support. Subsidies for hydrogen fuel cell vehicles have been cut for two consecutive years and will fall roughly 40 percent below 2025 levels by next year, while budgets for charging stations, tax incentives and hydrogen power auction volumes are all shrinking. The government describes the changes as a policy realignment focused on clean energy credentials and economic viability, but the retreat stands in sharp contrast to major economies ramping up hydrogen investment under the banner of energy security.

According to government and industry sources Monday, next year's purchase subsidy budget for hydrogen fuel cell vehicles stands at 445.7 billion won ($330 million), a 22.6 percent cut from this year. After peaking at 721.8 billion won in 2025, the budget has declined for two straight years and is now 38.3 percent below its peak.

Charging infrastructure faces the same trajectory. The budget for hydrogen refueling station support fell from 196.3 billion won in 2025 to 189.7 billion won this year and will drop further to 119.7 billion won next year — a roughly 39 percent decline in two years.

The reductions go beyond purchase subsidies. Tax benefits are also being phased out. The individual consumption tax exemption cap for passenger hydrogen fuel cell vehicles will fall from a maximum of 4 million won per vehicle this year to 3 million won next year and 1.5 million won in 2028, before the exemption expires at the end of that year.

The acquisition tax reduction for hydrogen fuel cell vehicles, currently capped at 1.4 million won, is also set to expire at the end of next year.

Tax support for buses is being cut as well. Electric and hydrogen buses used on city, rural and village routes are currently exempt from the 10 percent value-added tax applied at the point of vehicle supply. Although the exemption was set to run through the end of 2028 under current law, the government plans to end it two years early, at the close of this year.

The market that drives hydrogen production and power demand has also contracted. The government's hydrogen power auction volumes announced in June set this year's allocation at 500 gigawatt-hours for clean hydrogen and 930 GWh for general hydrogen — down 83 percent and 28 percent, respectively, from the volumes announced last year.

Visibility into future market size has also diminished. In the past, the government released multi-year auction volume projections in advance, but this year it set only the 2026 allocation and deferred the 2027 figure to be decided next year. Given that the hydrogen industry requires large upfront investment in production facilities, storage and transport networks, and power plants, critics say companies will struggle to draw up medium- to long-term business plans.

Until just a few years ago, South Korea was regarded as one of the most proactive countries in building a hydrogen regulatory framework. In 2020, it became the first country in the world to enact a dedicated hydrogen economy law — commonly known as the "Hydrogen Act" — covering the promotion of the hydrogen economy and hydrogen safety management. In 2024, it opened a clean hydrogen power auction market. Despite this government-led effort to broaden the hydrogen market's foundations, the direction of policy has shifted of late.

The underperformance of market mechanisms introduced to stimulate the sector is widely cited as the backdrop for the recent policy adjustments.

In the 2024 clean hydrogen power auction, only 750 GWh out of 6,500 GWh — about 11.5 percent — was awarded. The government-set price ceiling failed to adequately reflect actual generation costs, resulting in lower-than-expected participation from operators.

Last year's auction was canceled outright. The trigger was a conflict between the coal-ammonia co-firing approach and the government's own "coal phase-out by 2040" policy.

The government views these changes not as an abandonment of the hydrogen industry but as a policy restructuring. The stated intent is to shift the emphasis from simple volume expansion toward evaluating carbon reduction impact and economic viability. Excluding coal-ammonia co-firing from auction eligibility and redirecting focus toward domestic clean hydrogen production is part of the same logic.

Kim Hee-sung, a senior researcher at the Posco Research Institute of Management, said both cases "suggest that markets do not form when policy fails to reflect reality," adding that "South Korea has not built a sufficient price support and policy finance framework to generate adequate private investment incentives."