[Tax Story] Carbon Tax Viewed from Gulupdo

Professor Ahn Chang-nam, Taxation, Kangnam University

Gulupdo Island off the coast of Incheon is called Korea's Galapagos. Its pristine coastal scenery is well preserved, and various natural monuments inhabit the area. Although there are few residents and limited convenience facilities, backpackers enjoy visiting to savor the scent of nature. However, the air on Gulupdo is not the taste of nature. It is polluted by smoke not only from factories along the adjacent Chinese coast but also from the chimneys of thermal power plants on Korea's west coast (we mostly blame China for this). If we shift our perspective from viewing Gulupdo as lying between Korea and China to seeing it as part of the global village, Korea is not free either. It is one of the countries with increasing carbon dioxide emissions. Air easily crosses the thin borders drawn by humans. Therefore, international measures are necessary.

International efforts to curb global warming have developed through the 1992 United Nations Framework Convention on Climate Change, the 1997 Kyoto Protocol, and the 2015 Paris Agreement, progressing from declarative and voluntary stages to a 'mandatory stage.' In particular, the Paris Agreement recommended that all UN member countries voluntarily adhere to carbon emission reduction measures (such as carbon taxes and carbon emissions trading systems), which were previously required only of developed countries.

The 'carbon tax' is a tax imposed on energy sources such as fossil fuels based on the amount of carbon dioxide emissions. The carbon emissions trading system allocates carbon emission rights to companies within a country, allowing them to emit greenhouse gases within that limit, and enables trading of surplus or deficit emission rights to incentivize greenhouse gas reduction. However, if carbon reduction measures are enforced only on developed countries, the phenomenon of carbon leakage may occur, where companies move to developing countries with less regulation to emit greenhouse gases.

To prevent this, the United States and the European Union are recently promoting the introduction of a 'carbon border adjustment mechanism.' This means imposing additional charges such as carbon taxes on companies importing from countries with minimal carbon reduction measures. For example, if China does not implement global warming prevention measures, when Korean companies import products from China, importers would be charged a carbon tax as a burden (which Chinese companies would bear if they were Korean companies).

The United States, which was previously negative about introducing a carbon tax, has changed since the Biden administration took office. It rejoined the Paris Agreement and adopted a proactive stance toward carbon taxes and the carbon border adjustment mechanism. Korea should not approach this issue passively but fundamentally examine it. Otherwise, it could lead to greater burdens such as blocking Korean companies' exports.

The carbon tax demands fundamental changes in the global industrial structure. If Korea's perspective and policies on the carbon tax remain at the level of Gulupdo, it will be difficult to escape responsibility for global warming. Korea, which has joined the ranks of developed countries through rapid digital transformation, now faces a new test called the carbon tax. Carbon neutrality (measures to absorb as much carbon dioxide as emitted) has already emerged as a key topic in corporate management. In a situation where the carbon tax whip is becoming a reality, tax incentives that promote corporate ESG (environmental, social, and governance) management also seem necessary as a carrot. Ultimately, the success of the carbon tax test depends on the determination of the government and companies. For a people with a kind nature, there is no trial they cannot overcome.

Changnam Ahn, Professor of Taxation, Kangnam University