The Korean government is tightening its environmental regulations on polluting firms to meet public and international demands. At the same time, the productivity in steel industry is also slowing down. Consequently it is important to examine how much environmental costs are impacting on the productivity of the steel industry. Based on our study, we concluded that environmental costs are one variable that partially explains the slowdown of productivity growth, and that the negative effects increase as government environmental regulations increase. To improve productivity, Korean steelmakers will be required to reduce costs through facility efficiency, technology development, and R&D for the development of high value-added products. Secondly, recycling must be maximized by replacing conventional processes with more environmentally sound processes so as to reduce waste and the costs of production. Thirdly, even though environmental regulations are one factor responsible for reducing productivity, Korean steelmakers must also be deeply concerned with environmental issues.