Efficiency versus Equality: Comparing Design Options for Indirect Emissions Accounting in the Korean Emissions Trading Scheme

Abstract

Abstract:The Korean emissions trading scheme (ETS) has one special characteristic that makes it different from other schemes, such as the EU ETS. While the other schemes consider only direct emissions from fossil fuels, the Korean ETS also regulates indirect emissions arising from the consumption of electricity. The problem of double counting arises under this setting, in which emissions from the power sector can be accounted for twice, when electricity is produced and consumed. This study aims to compare design options on indirect emissions accounting for the Korean ETS using a computable general equilibrium model. Four scenarios are generated for options accounting for direct and/or indirect emissions and are evaluated in terms of efficiency and equality. The result shows that the ETS operates most efficiently when only direct emissions are considered. However, the option that includes both direct and indirect emissions produces a competent result in terms of equality by spreading the economic burden of emissions reduction among industries. We conclude that this option can be an alternative to meet the key purposes of the Korean ETS.

Impact and Interactions of Policies for Mitigation of Air Pollutants and Greenhouse Gas Emissions in Korea

“…The CGE model is a top-down model frequently used for analyzing various policy effects [14,15,16,17,24,25,26,27,28]. It assumes that the economy consists of representative production and consumption agents.…”

“…The CGE model simulating energy use and GHG emissions has been extensively used to analyze the economic effects of GHG reduction policies, such as emission trading schemes [24,25,26,27,28]. In this study, a satellite database on the emission of air pollutants is added to the existing CGE model, then the effects of air pollutant reduction policies on GHG emissions and economic activities are examined.…”

Treatment of indirect emissions from the power sector in Korean emissions trading system

“…This kind of discretionary pricing system employed by the Korean government raises the concern that the carbon cost levied at the point of production cannot pass through thoroughly to the final price of electricity. Oh et al (2015) asserted that an incomplete passthrough of carbon price due to a non-market-based electricity pricing system causes inefficiency as final demand for the electricity does not reflect the correct social cost of electricity.…”

Characterizing the Difference between Indirect and Direct CO2 Emissions: Evidence from Korean Manufacturing Industries, 2004–2010

“…For example, Korea regulates the indirect emissions from the electricity consumption side, while the EU only considers the direct emissions. The difference between these schemes leads to double counting in estimating emissions since electricity generating and consuming activities simultaneously require emission allowances [6]. Nevertheless, the Korean government has preferred the indirect emission for the following reasons: (i) To reduce the electric intensity of the economy; (ii) to include carbon prices on the consumption side; and (iii) to evenly distribute the emission reduction burden across industrial sectors [6].…”