'Front-loading cuts raises early burden, steady reductions pile up shock at the end': the cost of carbon neutrality

Achieving carbon neutrality by 2050 could reduce South Korea's GDP by as much as 8 to 10 percent below its baseline trend, a new analysis has found. The timing of that burden differs sharply depending on the reduction pathway chosen — front-loading cuts amplifies early inflation and growth pressures, while a steady linear approach concentrates the shock after 2045.

Kim Jae-yun, a senior official at the Bank of Korea's Climate Risk Analysis Team, and colleagues released the findings Wednesday in a report titled "Economic Effects of Carbon Neutrality Implementation Pathways." The report examined two scenarios for reaching carbon neutrality by 2050: a linear reduction path, in which emissions fall at a constant pace, and an early reduction path, in which the pace of cuts accelerates from 2030.

Under the early reduction path, GDP would fall 1.7 percent below the baseline scenario — which assumes no carbon neutrality measures and average annual growth of 1 percent — by around 2030. The gap would widen to 2.5 percent by 2035, 3.5 percent by 2040, 6.1 percent by 2045 and 8.2 percent by 2050. After 2050, the economy is projected to gradually recover, with the shortfall narrowing to 2.2 percent by 2060.

Under the linear reduction path, the GDP shortfall would remain more contained in the near term — 2.1 percent by 2035 and 2.7 percent by 2040 — before widening sharply to 4.7 percent by 2045 and 10.2 percent by 2050. After 2050, the gap is expected to narrow to 2.5 percent.

"In terms of the change in average annual growth rate, the linear reduction path results in a decline of 0.07 percentage points and the early reduction path 0.06 percentage points — a slight difference, but one that does not account for discounting," the report said. "Given that the early reduction path concentrates costs in the initial period, it is difficult to declare one path clearly superior to the other in aggregate terms."

The report found a similar pattern in producer prices. Under the early reduction path, aggressive early emissions regulations push producer price inflation higher between 2030 and 2045, while the linear reduction path sees price pressures build between 2045 and 2050.

"A defining feature of both paths is that the periods of concentrated burden are clearly distinct," the report said, adding that policymakers need to examine potential trade-offs between price stability and economic stability during the low-carbon transition and strengthen risk management in the financial sector.