While some experts say the warnings could be overblown, they are a stark reminder of one of the biggest challenges Hyundai faces - how to make greener cars to ward off competition from more fuel-efficient rivals.
Seoul plans to reward and penalise vehicle purchases based on carbon dioxide emissions starting in January next year, hoping to prod consumers to buy electric cars and small cars with greater fuel efficiency.
The scheme, already delayed by almost two years amid strong opposition from Korean and U.S. car makers, could deal a major blow to Hyundai as mid-sized or bigger cars account for 60 percent of its domestic sales.
South Korea's biggest carmaker estimates the proposal could prompt 9 percent to 10 percent of domestic buyers to switch to imported cars, three people familiar with the matter said, quoting Hyundai's own projections.
That suggests its annual vehicle sales could fall by 46,849 vehicles, dealing a 1.6 trillion won ($1.5 billion) blow to revenue, according to Reuters' calculations based on Hyundai's 2013 sales.
"Hyundai was looking into the worst case scenario," when it came up with the 9-10 percent figure, said one of the sources who declined to be identified due to the sensitivity of the matter. He said the actual impact would be smaller once the government had finished revising the scheme.
A Hyundai spokesman denied the company had produced any such sales projection and attributed it to the Korea Automobile Manufacturers Association. The association declined to comment on its research, citing confidentiality, but said it opposed the tax.
"We want the government to withdraw the plan ... this will only help imported cars gain more market share," a senior association official said.
The current third draft of the scheme, obtained by Reuters, shows Seoul plans to levy up to 7 million won ($6,600) of tax on vehicles that emit more than 126 grams (4.4 ounces) of carbon dioxide per kilometre.
Those emitting less than 100 grams can get subsidies of up to 7 million won, while electric vehicles will receive as much as 10 million won in subsidies.
In a country where 72 percent of vehicles are mid- to large-sized vehicles, the proposal means consumers would face a tax burden of $1 billion.
Of that amount, $641 million would be levied on customers of Hyundai and affiliate Kia Motors, which together control about 70 percent of the market, industry estimates showed.
Park Kwang-shik, a Hyundai executive dealing with government affairs, told a meeting with regulators last month that authorities should be careful as the industry was already struggling to cope with rising competition from Japanese car makers benefiting from a weaker yen, according to a government statement after the meeting.
The stakes are even higher for Hyundai, which is also losing market share to imported brands that have become cheaper thanks to free trade deals between Korea and the European Union as well as the United States.
Consumers have developed a particular taste for diesel-powered vehicles made by the likes of BMW and Volkswagen that have greater fuel efficiency than Hyundai's mainstay gasoline-powered vehicles.
U.S. automakers, which have less than 1 percent market share but hope to increase sales following a trade deal, have also asked Seoul to reconsider the plan.
"It will deal a big blow to our profits. We are not yet ready for the system," an official at Chrysler/Jeep in Korea said, declining to be named due to the sensitivity of the subject.
The American Chamber of Commerce in Korea warned in a statement sent to Reuters in March the tax could "lead to unintended consequences including on the domestic industry".
While foreign carmakers can expect little sympathy from the government, officials say the next draft of the scheme due for release in April may exclude 2,000-cc local cars, meaning no tax increase on Hyundai's Sonata and Kia's K5 models. The tax burden may be also lowered for Hyundai's Equus and Genesis large sedans.
That will be a big relief to Hyundai as Sonata accounts for nearly a fifth of its local sales.
Kim Pil-soo, a professor of automotive engineering at Daelim University College, said Hyundai had plenty of time to prepare for the emissions tax.
"The tax scheme was first proposed six years ago but Hyundai has been slow in pushing for green technologies and focused instead on selling larger-sized cars as they garner higher margins than small cars," he said.
Hyundai said in a written response to Reuters questions on the tax that it was expanding its line-up of diesel and hybrid cars in line with changes to "consumer perception".
Like Japanese rival Toyota Motor Corp, Hyundai has long concentrated on fuel-cell vehicles powered by electricity generated using hydrogen.
But it is expanding its offering by also investing in battery-powered cars and plans to launch its first rechargeable battery-powered vehicle in 2016.