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Tax Reform for the Energy Transition in Korea’s Power Generation Sector

Author

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  • Sung-Jin Cho

    (Electriticy Policy Research Team, Korea Energy Economics Institute, Ulsan 44543, Korea)

  • Yoon Kyung Kim

    (Department of Economics, Faculty of College of Social Science, Ewha Womans University, Seoul 03760, Korea)

Abstract

The tax structure capable of achieving an energy transition in the power sector was analyzed by applying the Pigouvian tax on generation fuels. Under the 2018 Tax Act Amendment, the tax rate criteria for the excise tax on power generation fuels changed from the calorific value to environmental externalities of the fuel. However, to reverse the merit order of bituminous coal generation with liquefied natural gas (LNG) generation, reflecting only some external costs of the environment as a tax is not enough. In this paper, we established four tax reform scenarios for bituminous coal and LNG considering environmental externalities, and we analyzed the reversal of dispatch priority using the electricity system unit commitment and M-Core economic dispatch model. According to the analysis results, the share of bituminous coal generation will be reduced to 10–20% depending on the scenario, reflecting the relative tax rate equalizing the fuel costs of bituminous coal and LNG power. To achieve an energy transition by reversing the merit order of bituminous coal and LNG generation, the tax rate of bituminous coal must be more than twice that of LNG. Moreover, to achieve an eco-friendly generation mix through tax reform, the external costs of the environment by fuel source should be accurately estimated and efficient taxation that can adequately reflect these external costs of the environment while considering tax fairness, neutrality and simplicity should be established.

Suggested Citation

  • Sung-Jin Cho & Yoon Kyung Kim, 2020. "Tax Reform for the Energy Transition in Korea’s Power Generation Sector," Energies, MDPI, vol. 13(19), pages 1-15, October.
  • Handle: RePEc:gam:jeners:v:13:y:2020:i:19:p:5233-:d:425018
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    References listed on IDEAS

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    1. Freire-González, Jaume & Puig-Ventosa, Ignasi, 2019. "Reformulating taxes for an energy transition," Energy Economics, Elsevier, vol. 78(C), pages 312-323.
    2. Baumol,William J. & Oates,Wallace E., 1988. "The Theory of Environmental Policy," Cambridge Books, Cambridge University Press, number 9780521322249, September.
    3. Lawrence H. Goulder & Ian W. H. Parry, 2008. "Instrument Choice in Environmental Policy," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 2(2), pages 152-174, Summer.
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    Cited by:

    1. Ji-Whan Kim & Yoon-Kyung Kim, 2021. "Induced Effects of Environmentally Friendly Generations in Korea," Sustainability, MDPI, vol. 13(8), pages 1-16, April.

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