Under President Lee Myung-bak's regime, Seoul's Blue House has been trying to find a way to revitalize the country's slowing economic growth by capitalizing on the global drive to reduce polluting gas emissions.
"The investment is a move in the right direction as it signals the government's intention to boost its competitiveness by leading in the greentech sector," said Yong-Jin Kim, Head of Global Business Group at Daishin Investment Trust Management.
"Korea could be a niche player in the global greentech market as it promotes its LEDs and other manufacturing industries such as the auto industry with the focus on doing research to make production processes environmentally friendly."
The government gave no specific details over how it would fund the plan.
As part of the plans the government will require automakers including Hyundai Motor and Kia Motors to either raise the average fuel efficiency of their vehicles above 17 km per liter or cut greenhouse gas emissions below 140 grammes per kilometer from 2012, the Blue House statement said.
"To advance in green car development, South Korea plans to raise the bar for auto fuel efficiency and greenhouse gas emission rules above U.S. standards," a separate statement from the government said.
Cars made in South Korea, the world's fifth largest auto producer, currently have an average fuel efficiency of 11 km/liter and emissions of 201 g/km.
Aggressive new standards unveiled by the United States in May would raise average fuel efficiency standards for all new passenger vehicles to 35.5 miles per gallon by 2016, the equivalent of 15.1 km/liter.
South Korea will apply the new fuel efficiency and emission rules to 30 percent of cars sold by each automaker in 2012, rising to 100 percent by 2015.
The government also aims to raise South Korea's international market share of green technology products to 8 percent by expanding R&D investment and strengthening industries such as LEDs, solar batteries and hybrid cars.
The world's 4th largest LED producer, Seoul Semiconductor, rose nearly 11 percent on the news, while hybrid car component maker Hyundai Mobis gained 3.7 percent in a flat Seoul market.
The government said it will test trading carbon credits in 2011, for actual trading from 2012 onward.
It will cut greenhouse gas emissions according to mid- and long-term goals to be finalized this year. It also set a target of localizing nuclear power generation technology and exporting a nuclear power plant for the first time by 2012.