A study on the effect of climate change policies on the Korean economy

The purpose of this thesis is to analyse the impacts of Climate Change policies on the Korean economy. Chapter two assesses initial emission allowance allocation methods in the Korean electricity market with a Mixed Complementarity Problem (MCP) model. Giving away free permits makes the emission reduction more expensive, but the extra capacity triggered by the free allowances to new entrants based on the fuel-specific benchmark raises social welfare when the industry is not competitive. Chapter three provides an integrated model that combines a macro-econometric model and a MCP electricity model. Dynamic linear logit model is employed to capture fuel substitution behaviours in the macro-econometric model. Chapter four analyses the effects of restructuring the energy tax and electricity pricing system when a carbon tax is introduced using the integrated model. Simulation results show that restructuring pre-existing energy taxes and the electricity pricing system can lessen the economic costs of CO2 emissions reduction, which implies that adjusting the energy pricing system to reflect social costs accurately is the way to reduce emissions more efficiently. However, gradual restructuring of the current electricity pricing system would be recommended in order to minimize the negative effect on the industrial competiveness in the Korean economy