Effects of Higher Auctioning Rates and the Exclusion of Indirect Emissions in Korea’s Emissions Trading Scheme

Abstract

This study evaluates the macroeconomic and distributional impacts of design options for the Korea Emissions Trading Scheme (K-ETS) in meeting South Korea’s 2030 NDC target, focusing on (1) raising the auction share and (2) regulating indirect emissions alongside direct emissions, considering both efficiency and inter-industry equity. Using a computable general equilibrium model, policy scenarios combining emission coverage (direct only vs. direct plus indirect) with auction coverage (electricity only vs. all industries) are analyzed. Raising the auction share improves GDP and welfare when carbon revenue is recycled through labor tax reductions, particularly when applied to all industries. Under joint regulation of direct and indirect emissions, raising the auction share in electricity generation alone reduces GDP owing to higher electricity prices, although the welfare effect is much weaker. Greater free allocation distributes reduction burdens more equitably across industries, revealing an efficiency–equity trade-off. We further show that the assessment of auctioning is inseparable from the revenue-recycling rule and the treatment of regulated electricity prices: when carbon revenue stabilizes electricity prices under a fiscal budget constraint, auctioning confined to the electricity sector becomes equivalent to free allocation, whereas economy-wide auctioning can finance full electricity price stabilization while retaining room for labor tax reductions.