[Takryu Cheongron] Emissions Trading System Easier to Predict and Manage Targets Than Carbon Tax First

This January was reportedly the warmest since weather observations began. This summer's monsoon set a record as the longest ever, lasting 54 days. Given the signs of the climate crisis, the transition to a decarbonized society is urgent. This is why carbon neutrality by 2050 has emerged as a national policy goal.

The representative indirect regulatory measures to curb carbon emissions are the emissions trading system and the carbon tax. The carbon tax imposes taxes based on the amount of carbon generated, while the emissions trading system involves the government allocating carbon emission permits and allowing them to be traded in the market.

The carbon tax is a powerful tool for carbon reduction. The International Monetary Fund (IMF) argues that to achieve the goals of the Paris Agreement on climate change, a carbon tax of at least 80,000 KRW per ton should be imposed. The carbon tax aligns with the polluter pays principle, where polluters bear the environmental damage costs. It is also easy to implement and has low enforcement costs. From a corporate perspective, it offers the advantage of predictability in cost burdens related to carbon emissions.

However, if companies decide to emit carbon despite the tax burden, achieving reduction targets becomes uncertain. The carbon tax functions similarly to a price policy. For example, if fuel prices fall and offset the cost increase caused by the carbon tax, there is no market change factor, making it difficult to induce emission reductions.

The carbon tax rate should compensate for the social damage caused by environmental pollution, but calculating the social cost of climate change is not an easy task. Also, as a tax, it is applied broadly and immediately reflected in energy prices.

In South Korea, fuel prices such as liquefied natural gas (LNG) and bituminous coal are adjusted through the application of individual consumption tax. There are also plans to establish a climate response fund for carbon neutrality. Such taxes or funds effectively serve the same role as a carbon tax. Introducing a carbon tax could likely result in double taxation.

The emissions trading system sets carbon reduction targets and achieves reductions through market transactions. Companies that reduce carbon emissions and have surplus emission permits can sell them in the market, while companies needing to emit carbon can purchase these permits. If emission permits become expensive, it encourages efforts to reduce emissions; if permits are cheap, the economic burden is lower, mitigating the shock of carbon reduction costs.

Through setting emission targets, it is possible to induce appropriate carbon reduction goals and emission permit prices. Unlike the carbon tax, which leaves companies no choice, the emissions trading system allows companies to choose whether to accept carbon emissions and gain business profits or not emit and profit by selling permits.

The emissions trading system efficiently allocates costs between companies that can reduce carbon emissions well and those that cannot. Nationally, it allows for more reliable prediction of carbon reduction amounts compared to the carbon tax, making target management easier.

According to the World Bank, European countries commonly apply the European Union (EU) emissions trading system and introduce carbon taxes according to their national circumstances. Countries like Germany implement only the emissions trading system, while France operates both carbon tax and emissions trading system. Countries that implement only the carbon tax include South Africa, Ukraine, and Argentina. South Korea, China, and Australia operate only the emissions trading system.

Considering global trends, prioritizing the emissions trading system and reviewing the carbon tax in the mid to long term is advisable.

Jung Dong-wook, Professor, Department of Energy Systems Engineering, Chung-Ang University