"Producer Prices May Increase by Up to 1%P When Carbon Tax Is Imposed"

Bank of Korea-Korea Economic Development Association Joint Symposium
"Carbon Tax Imposition Raises Producer Prices by 0.4~1%P Annually"
"Energy Transition Delays Could Increase Up to 1%P"

A study has found that if a carbon tax is imposed to achieve carbon neutrality by 2050, the producer price inflation rate could increase by up to 1 percentage point annually. This is because production costs are expected to surge, especially in carbon-intensive industries.

Yonhap News

On the 12th, Professor Lee Dong-jin of the Department of Economics and Finance at Sangmyung University spoke at a joint symposium between the Bank of Korea and the Korea Economic Development Association held at the Bank of Korea annex 2nd floor conference hall in Jung-gu, Seoul, on the topic of "The Economic Impact and Response to Climate Change, and the Role of Central Banks."

Professor Lee stated, "If voluntary carbon reduction by companies is induced through measures such as imposing a carbon tax to realize carbon neutrality by 2050, this could lead to increased production costs. Directly, the cost of paying the carbon tax, and indirectly, the rise in intermediate goods prices due to the carbon tax, will act as causes for increased production costs."

The study analyzed that if a carbon tax is imposed in a scenario where more than 60% of total power generation is replaced by renewable energy, production costs in carbon-intensive industries such as primary metals, coal and oil, and chemical products will increase, causing the producer price inflation rate to expand by an average of 0.4 percentage points annually.

In particular, the primary metals sector is estimated to be most affected, with production costs increasing by more than 30% by 2035 due to the carbon tax burden.

If production costs in carbon-intensive industries rise, the burden could be transferred to related manufacturing sectors such as metal processing, machinery equipment, and transportation equipment. Accordingly, production costs in these industries are analyzed to increase by around 20% by 2035.

If the energy transition is delayed and the share of renewable energy power generation remains at 45% by 2050, carbon reduction costs will increase, potentially expanding the producer price inflation rate by up to 1.0 percentage point. Especially, production costs in the primary metals sector are estimated to surge by about 60% by 2035.

Professor Lee suggested, "It is necessary to prepare tailored support and policies considering the differences in direct and indirect costs by industry arising during the carbon neutrality process. At the same time, accelerating the expansion of renewable energy is essential to alleviate the burden of reduction costs."

During the discussion following the presentation, Sung Won, a senior researcher at the Micro-Institutional Research Division of the Bank of Korea Economic Research Institute, said, "If the direct cost effect is significant in carbon-intensive industries, there will be considerable burdens on Korea’s key industries such as semiconductors and automobiles. Expanding renewable energy is very important for Korean manufacturing industries to survive in global competition and is also urgent from a policy perspective."