Carbon pricing under electricity market constraints: analyzing rent management dynamics in the Republic of Korea

Abstract

ABSTRACT How do policymakers manage the tension between enforcing a carbon price and ensuring low-cost electricity provision? This paper answers this question in two steps. First, it combines literature on electricity market design and rent management to arrive at a novel analytical framework. Carbon pricing can disrupt longstanding rent transfers between the state and electricity consumers by making it more expensive to produce and/or consume fossil fuel-based electricity. We theorize that policymakers respond to this dilemma by making incremental policy design adjustments to gradually enforce rent losses across the electricity production value chain. We apply this framework to study the implementation of the Korean emissions trading scheme (ETS) policy 2015–2022. Drawing on 20 expert interviews and policy documents we identify an initial sequence of policy design adjustments which enable, but also delay, the enforcement of the carbon price signal in the electricity system. This incremental and politically contentious process reduces the ETS policy’s ability to abate greenhouse gas emissions from the Korean electricity sector in the short term. The findings suggest that the effectiveness of carbon pricing in the electricity sector hinge on the parallel construction of supportive institutions to permit meaningful carbon cost pass-through.