Achieving South Korea’s climate targets, including carbon neutrality by 2050 and strengthened Nationally Determined Contributions (NDCs), requires a rapid and large-scale shift away from coal. This transition is not only technologically complex but also financially demanding, particularly in a context of a fiscal conservative government and sensitivity to public debt expansion.

While Korea has established initial financing mechanisms, such as the Climate Response Fund and the Korean Emissions Trading System (K-ETS), current funding levels and institutional structures remain insufficient to meet the scale of required investment. At the same time, discussions on sovereign green bonds are gaining momentum as a potential tool to mobilize additional capital.

This issue brief examines how Korea can structure coal-to-clean financing more effectively by drawing lessons from Germany. Despite operating under strict fiscal constraints, such as the countrey's constitutional debt brake, Germany has developed a financing model that mobilizes substantial transition investment for a clean energy transition without permanently expanding structural deficits.

At the core of this approach is a clearly defined financing architecture combining:

• Carbon pricing revenues as a predictable funding source

• Legally separated special-purpose funds for multi-year transition investment

• Sovereign green bonds used primarily as refinancing instruments, combined with strong transparency mechanisms

A key feature of this model is the institutional separation between coal exit costs and forward-looking investment, as well as the framing of transition spending as temporary, purpose-bound, and investment-oriented. This structure enhances fiscal credibility, supports political acceptance, and aligns public spending with the polluter-pays principle.