Application of the Carbon Emission Pricing Model in the Korean Market

Abstract

The international debate on carbon emission reduction to mitigate the global warming phenomenon has focused the attention of scholars and policy makers on finding rational solutions. The optimal level of carbon emission is determined by the equilibrium carbon emission price, where the marginal damage by climate change is equal to the marginal cost of carbon emission reduction. This study has been conducted because the international trade of carbon emission allowances requires the optimal carbon emission prices of each region to be estimated. By using the carbon emission pricing model of Nordhaus (1991), which considers both economic and environmental factors, this study estimates the optimal carbon emission prices in the Korean market, which is expected to play a crucial role in carbon emission pricing power regionally and internationally due to the passage of the “Act on the Allocation and Trading of Greenhouse-Gas Emission Permits” on May 2, 2012. We find that the marginal cost of carbon emission reduction generally increases with increasing sensitivity of temperature to concentrations of carbon emission and with increasing economic growth rate, but decreases with increasing real capital return.