| Abstract | Many countries are preparing their own domestic emission trading for the effective
abatement of C02 emission and as preparation for the patticipation in the international
GHG emission trading. Different from international emission trading, domestic emission
h·ading has some unique issues in the design of the system. These issues have not been
highlighted in academic research and analysis so far mainly because domestic emission
h·ading is considered to be the simple extension of international emission trading.
Outstanding issues in the design of domestic emission trading are analyzed in this study.
1) To meet the national greenhouse gas abatement target, emission trading is regarded as
one of the most efficient policy tools which can reduce emission at the least cost. However,
in reality, it is impossible to inh·oduce emission trading to all the emitters in the country.
Thus, a dual system consisting of carbon tax for small emitters and emission h·ading for
large emitters is recommended. For effective C02 abatement, studies on a dual system of
domestic emission trading need to be explored. 2) The method of initial allocation is also an
important issue for the design of domestic emission trading. Especially in the domestic
context, a special allocation method can be emphasized as a useful tool for specific policy
objectives. Mainly because of the non-equity based characteristic of special allocation,
studies on special allocation in the domestic context have not been done so far. Thus the
usefulness of special allocation needs to be evaluated through research and analysis.
3) Decision on the criteria for initial allocation of emission permit is another topical issue in
the design of domestic emission h·ading. Value-added criterion and emission criterion can
compete with each other, especially in domestic C02 emission trading. According to the
dish·ibution of emitters, especially the value-added structure and C02 emission structure of
emitters, preferences can be different depending on the country.
The economic effects and implications of those three issues on the design of
domestic emission trading were evaluated by the simulation of the assumptive Korean
emission trading system. For a comprehensive analysis incorporating interactions among
sectors, Korean General Equilibrium Model for the evaluation of Domestic Emission
Trading System (KGEM-DETS) - a multi-sector, recursive dynamic general equilibtium
model - was developed. Many existing Korean CGE models such as Kang's (1999) and
Joh's (2001) were examined as references. Based on the 1995 social accounting matrix
(SAM), this model evaluated the results up to the year of 2030. The model was solved
using the nonlinear programming package called the Generalized Algebraic Modeling
System (GAMS). For the analysis of the dual system, the model was designed to haye two
different equilibriums. One is the equilibrium for the sectors in which a carbon tax scheme
is implemented and the other is for the sectors in which emission h·ading is inh·oduced.
Those two parts counteract each other. For the two equilibriums, C02 emitted from small
emitters and C02 emitted from large emitters are h·eated as different goods in the model.
By analyzing the dual system, this study tried to evaluate the economic effects of
the dual system on the Korean economy. Future levels of carbon tax for small emitters and
the prices of emission pe1mit for large emitters were estimated. Answers for the questions
on the variations of GDP, consumption, production and international trade by the
introduction of the dual system were suggested. Fmther, this study broke down those effects into two categories according to the origin of the effects; carbon tax and emission
trading. This study concluded that the dual system with carbon tax for small emitters and
emission trading for large emitters can be considered as an efficient and cost-effective
policy tool for a C02 abatement strategy for the Korean economy.
The second part of the study attempted to analyze the possibility of using the
initial allocation of emission permit as a policy tool for social planning. From a comparison
with the grandfathering allocation case, major implications of special allocation method
were verified. In theory, total system costs are independent of the method of initial
allocation. Despite the neutrality of the total system cost, the system designer can pursue
other designed policy objectives by the introduction of special allocation. This study
verified the usefulness of special allocation as a policy tool which can contribute to C02
abatement as well as to policy for the development of national industry.
Another issue of the initial allocation of emission permit discussed in this study is
the criteria for initial allocation. Emission criteria and value-added criteria were compared
under the general equilibrium situation of the Korean economy. The economic impacts of
the two criteria were evaluated to be quite different especially in participants' C02 emission
after trading, participants' monetary interest, overall production, and GDP. Under the
allocation based on value-added criteria, energy efficient industries can be the beneficiaries
of the transactions of emission permit in Korean emission trading. On the other hand,
energy intensive and low value-added indushi.es can be the beneficiaries of the transactions
of emission permit under the allocation based on emission criteria. In the Korean economic
structure, value-added criteria can be the alternative to emission criteria for the initial
allocation of emission permit.
This study analyzed the economic effects of the dual system for the effective
abatement of C02 emission. When practical constraints on emission trading were
considered, introduction of the dual system with carbon tax and emission trading is
recommended for the Korean economy. Further, this study found that the Korean
government can introduce special allocation for effective C02 abatement and as well as for
the policy objective of industrial development. This study also evaluated the economic
effects of different criteria for initial allocation on the Korean economy. In the Korean
economic structure, the government can take value-added as a criterion for initial allocation
in order to support high value-added and low energy intensive industries in emission
trading. Alternatively, the government can take historical emission as a criterion for initial
allocation in order to support low value-added and high energy intensive industries in
emission trading. |