Risk of Carbon Leakage and Border Carbon Adjustments under the Korean Emissions Trading Scheme

Abstract

Purpose – This paper examines South Korea’s potential status as a carbon leakage country, and the level of risk posed by the Korean emissions trading scheme (ETS) for Korean industries. The economic effects of border carbon adjustments (BCAs) to protect energy-intensive Korean industries in the process of achieving the carbon reduction target by 2030 through the Korean ETS are also analyzed. Design/methodology – First, using the Korean Input–Output (IO) table, this paper calculates the balance of emissions embodied in trade (BEET) and the pollution terms of trade (PTT) to determine Korean industries’ carbon leakage status. Analyses of the risk level posed by carbon reduction policy implementation in international trade are conducted for some sectors by applying the EU criteria. Second, using a computable general equilibrium (CGE) model, three BCA scenarios, exemption regulations (EXE), reimbursement (REB), and tariff reduction (TAR) to protect the energy-intensive industries under the Korean ETS are addressed. Compared to the baseline scenario of achieving carbon reduction targets by 2030, the effects of BCAs on welfare, carbon leakage, outputs, and trading are analyzed. Findings – As Korea’s industrial structure has been transitioning from a carbon importing to a carbon leaking country. The results indicate that some industrial sectors could face the risk of losing international competitiveness due to the Korean ETS. South Korea’s industries are basically exposed to risk of carbon leakage because most industries have a trade intensity higher than 30%. This could be interpreted as disproving vulnerability to carbon leakage. Although the petroleum and coal sector is not in carbon leakage, according to BEET and PTT, the Korean ETS exposes this sector to a high risk of carbon leakage. Non-metallic minerals and iron and steel sectors are also exposed to a high risk of carbon leakage due to the increased burden of carbon reduction costs embodied in the Korean ETS, despite relatively low levels of trade intensity. BCAs are demonstrated to have an influential role in protecting energy-intensive industries while achieving the carbon reduction target by 2030. The EXE scenario has the greatest impact on mitigation of welfare losses and carbon leakage, and the TAF scenario causes a disturbance in the international trade market because of the pricing adjustment system. In reality, the EXE scenario, which implies completely exempting energy-intensive industries, could be difficult to implement due to various practical constraints, such as equity and reduction targets and other industries; therefore, the REB scenario presents the most realistic approach and appears to have an effect that could compensate for the burden of economic activities and emissions regulations in these industries. Originality/value – This paper confirms the vulnerability of the Korean industrial the risk of carbon leakage, demonstrating that some industrial sectors could be exposed to losing international competitiveness by implementing carbon reduction policies such as the Korean ETS. The contribution of this paper is the identification of proposed approaches to protect Korean industries in the process of achieving the 2030 reduction target by analyzing the effects of BCA scenarios using a CGE model.