Towards an equitable cap-and-trade scheme in South Korea: based on input-output analysis of the distributional implications of carbon pricing mechanisms

Kim, Hana
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University of Delaware
While the efficiency of cap-and-trade programs has attracted the attention of several countries, equity implications of the programs require equal attention. The programs impact income distribution as the cost of mitigation is passed on to consumers in the form of increased prices. A great deal of literature shows that the incidence of these programs is regressive in developed countries, indicating that this program will exacerbate the distributional equity without appropriate countermeasures. Facing the impending implementation of cap-and trade schemes in South Korea in 2015, a handful of experts have studied the equity implications of the scheme. The literature often provides a partial analysis on equity implications of the scheme focusing only on regional distribution or on distribution between different income groups. However, this dissertation evaluates the comprehensive equity implications of a carbon pricing policy as well as the impacts on other dimensions. Input-output analysis (IOA) is employed to assess the comprehensive impacts of a carbon pricing policy in South Korea. Beyond a typical IOA, hybrid IO tables are developed to estimate energy consumption and CO 2 emissions by sector and to analyze the impacts of the implementation on different sectors. In addition, this study makes it possible to assess equity implications by introducing a transition matrix to link Household Survey Data with the IO table. The analysis of three different carbon-pricing scenarios reveals that a comprehensive participation scenario (S1) impacts economy less adversely than the partial participation case (S2). The S1 more adversely impacts the distribution without revenue recycling. Coal consumption is reduced more in the S2 and the reduction in non-energy use such as naphtha is larger in the S1. Of course, a higher carbon price (S3) can reduce more emissions and energy consumption, but can more adversely affect economy and distributional equity. Regardless of scenarios, the analysis shows that the households with lower capacity, such as those with low-income or with elderly heads, are likely to be more adversely affected. However, these groups can be beneficiaries if the program is in practice together with revenue recycling through lump-sum transfer. In addition, there is not great difference between the burdens on rural and urban households. In conclusion, there is no best-case scenario for every dimension. Since the policy impacts economy, energy, environment and equity--important pillars of sustainable development--we need to consider the comprehensive impacts of the policy. In addition, we need to explore a more effective method to recycle the revenue to alleviate the inequity.