Global Economic Impacts of Carbon Emission Reduction of Korea
Hyun Joon Chang1, Gyeong Lyeob Cho2, and Jaekyu Lim3
I. Introduction
Focusing on the Clean Development Mechanism (CDM), this paper analyzes the global economic impacts of the
participation of Korea in the global effort to reduce carbon emission. In order to do that, this paper develops a multi-sector
and multi-region CGE model with realistic implementation of “flexibility mechanisms”. Ignoring “supplementarity” and
“additionality” based on project based CDM, a previous work(Bernstein et al 1999) has treated CDM as a form of limited
global trading with a single world price for carbon emission in all countries. In order to focus on “supplementarity” and
“additionality” which is one of the key issues at the current climate change negotiation, however, we investigate various
scenarios, covering unrestricted and restricted CERs trading regimes. Furthermore, we investigate economic impacts of
project based CDM with/without transaction cost. Under each emission trading regime, such as no trading, trading among
Annex B countries, and full global trading, we allow Korea to be able to participate in trading and the CDM project like
Annex B countries. While each Annex B region is assigned emission limits for 2010 consistent with its obligation under the
Kyoto agreement, Korea is arbitrary assigned emission reduction targets with 30% against BAU in 2010.
Section II first explains the basic framework about CDM and provides brief description of the CGE model employed for
analysis. In Section III, the impacts of emission reduction by Annex B countries, under various situations regarding
emission trading and CDM, are analyzed by focusing on the changes of the marginal cost of abatement and welfare
represented by Hicksian Equivalent Variation in income. Under assumption of Korean participation in emission reduction,
Section IV analyses the impacts of emission reduction and compares the results with that generated in Section III. Finally,
Section V provides conclusions and policy implications.
II. Modeling the CDM
One of the most important provisions of the Kyoto Protocol is Article 12 offering the potential to generate benefits for
both developed and developing countries. The CDM allows non Annex B countries to benefit from project activities
resulting in certified emission reductions (CERs) which can be used by Annex B Parties to compliance with the Kyoto
Protocol. The CDM would allow Annex B countries to work with local development needs, and gain credits from such
actions. The CERs are created by certified project activities satisfying the criteria for "additionality" to ensure that CERS
represent actual reductions. The CDM is compatible with the concept of emission trading which is a market based
instrument aimed at providing flexibility and choice for achieving the most cost effectiveness compliance, since CERs could
ultimately be traded in such a system. Though being conceptually similar, the CDM shifted away from the concept of freely
global or bilateral trading towards a potentially more centralized and controlled form of project based crediting. Therefore,
1
President, Korea Energy Economics Institute, 665-1 Naeson-Dong, Euiwang-Si, Kyunggi_Do, Korea, 437-713;
[email protected]; Tel:+82-31-421-0681; Fax: +82-31-423-8984
2
3
Research Fellow, Korea Energy Economics Institute, [email protected]
Research Fellow, Korea Energy Economics Institute, [email protected],
the CDM would appear to have higher transaction costs than the emission trading mechanism. 4
The CDM is still to be defined: Article 12 states that CERs will only contribute to “part” of compliance. This kind of
“supplementarity” issue is currently being discussed in the FCCC negotiation. The European Union supports “limit or cap”,
ensuring that developed countries take some aggressive action at home to reduce emissions. The U.S. and the other
industrialized countries have opposed them. Advocates of quantitative limits argue that ensuring some minimal level of
domestic action in industrialized countries would have multiplier effects in terms of technological, institutional, and policy
innovations, which developing countries could then emulates (See Filho 1998; Dessus 1998; Pachauri 1998). On the other
hand, critics argue that limits on the Kyoto mechanism could harm substantially the overall efficiency of the emission
market, and dramatically increase the price of GHG emission trades (See Yellen 1998). 5
In order to investigate issues mentioned above, we develop the multi-region, multi-sector dynamic general equilibrium
model largely dependent on the MS-MRT model developed by Bernstein et al (1999). A limit on how much the CDM can be
used to meet reduction target would similar to on a trading quota. Thus, we set import quota for each Annex B country by
10% of reduction target. The CERs in this paper is assumed to be created by non-Annex B countries’ electric sector only.
The model in this paper divides the world into 13 regions. Each region has 16 industries including 5 energy sectors: crude
oil, refined products, coal, natural gas, and electricity. According to the Kyoto Protocol, we divide the region into two
different groups, Annex B with carbon reduction target and non-Annex B regions with no restrictions. Annex B region
consists of the U.S. (USA), the European Union of 15 countries (EUR), Japan (JPN), Eastern Europe (CEA), the Former
Soviet Union (FSU), and the other OECD countries (OOE). OOE contains major coal exporters: Australia, Canada, New
Zealand. We divide Non-Annex B region into 7 groups: Korea (KOR), China (CHN), India (IND), Brazil (BRA), rest of
Asia (ASI), Mexico and OPEC (MPC), and rest of world (ROW). In order to facilitate the impacts of participation of Korea
in the emission reduction effort, we treat KOR differently with the other non-Annex B countries. In this paper, KOR is
included into Annex B group if Korea is arbitrary assigned emission reduction targets, otherwise, it is included in nonAnnex B group.
Following the MS-MRT model, we calibrate the model to the benchmark year 1995. Then, it solves in 5-year intervals
spanning the period over 2000 – 2030 with assumption of perfect foresight ensuring that agents anticipate changes in future
prices and take these into account in saving and investment decisions. Unlike the theoretical model, numerical models can
only be solved for a finite number of periods. In order to approximate the infinite horizon choice, we impose a steady state
condition on capital accumulation in the last period of 2030.6
The model in this paper is benchmarking the model to the GTAP-EG data set constructed by the University of Colorado
at Boulder.7 The calibration methods in this paper are consistent with those in the MS-MRT model.8 Unlike the MS-MRT,
for Korea, we use the different reference level of GDP growth and energy consumption. For GDP and energy consumption
Extra review of projects to ensure that “additionality” and other conditions are fulfilled might increase transaction cost.
Some would also argue that the administrative burden of such limits would be far too high.
6 The numerical method of approximating the infinite horizon is in detail described by Rutherford et al (1998).
7 The GTAP-EG data set is created by combining the general Global Trade Analysis Project(GTAP) data base and OECD International
Energy Agency(IEA) statistics. The GTAP data show inconsistent picture of energy prices and quantities compared with reliable energy
statistic developed by IEA(see Rutherford and Paltsev 2000). In GTAP-EG data, therefore, the GTAP value data are changed in order to
have a consistent data set with energy prices and quantities in IEA statistics.
8 We use same values of the oil supply price elasticity, Armington elasticity, end-use demand elasticity, interfuel elasticity of substitution,
and the carbon-free backstop technology in the MS-MRT model. See Bernstein et al (1999)
4
5
of Korea forecasts, the model is calibrated to the values in <Table 1> projected by the Korea Energy Economics Institute.
<Table 1> GDP and Energy Consumption of Korea
2000
2005
2010
2015
2020
2025
2030
GDP
1995
(10 billion
US$, 10 EJ)
45.8
Growth Rate (%)
4.8
5.5
5.0
4.4
4.0
3.5
3.0
Coal
12.8
7.6
3.9
3.0
1.3
1.5
1.2
1.2
Refined Oil
46.6
2.3
3.1
2.7
1.9
1.5
0.7
0.7
Natural Gas
5.3
14.2
7.6
5.2
2.7
3.1
2.5
2.4
Source: Long-Term Energy Outlook and Strategy Development for the 21st Century in Korea, 2000, Korea Energy
Economics Institute
III. Impacts of the Kyoto Flexible Mechanisms
<Table 2> shows the carbon emission target of Annex B countries agreed at the Kyoto Protocol. The United States have
commitment to reduce GHG emissions to 7 percent below 1990 levels in the first commitment period (2008-2012), which is
projected for the United States to reduce emission by 585 million metric ton of Carbon (MMTC) of carbon in 2010. The last
two columns in <Table 2> show the CDM quotas imposed to Annex B countries. Under given assumption that only 10% of
emission reduction target can be achieved through CDM project(s), USA, JPN, and EUR are projected to reduce emissions
by 58.5MMTC, 10.1MMTC and 24.2MMTC respectively with CDM projects.
<Table 2> Carbon Emission Target for 2010 in Annex B Countries according to Kyoto Protocol
Emission
Emission
Reduction
1990(Million 2010(Million Target from
Metric Ton) Metric Ton)
1990(%)
USA
EUR
JPN
OOE
FSU
CEA
1417
1020
336
209
1095
271
1904
1181
417
277
866
259
-7
-8
-6
-1
0
-8
Reduction
Target from
2010(%)
-31
-20
-24
-25
26
-4
CDM Quotas
(Million Metric Ton)
10% of
100% of
reduction
reduction
target
target
58.5
585
24.2
242
10.1
101
35.0
70
0
0
4.5
9
III.1 Impacts of Emission Trading
Under independent abatement without emission trading, the marginal cost of abatement are projected to be US$527/MTC
(metric ton of carbon), US$297/MTC and US$270/MTC for Japan, the United States and the European Union respectively
(Table 3).9 As Bernstein et al. (1999) emphasized, the marginal cost of abatement varies depending on the pre-existing
energy price structure, the share of coal in total energy use, the amount of energy produced domestically, the required
9
Because the Former Soviet Union(FSU) can achieve the Kyoto emission target without any special policy and measures, its carbon tax
rate becomes “zero”.
amount of emission reduction and so on.10
<Table 3> Economic Impacts of Emission Trading without CDM (1995 US$/metric ton)
Permit Price
(1995 US$/Metric ton)
None
Annex B
Global
KOR
USA
EUR
JPN
OOE
FSU
CEA
CHN
IND
BRA
ASI
MPC
ROW
0
297
270
527
230
0
16
0
0
0
0
0
0
0
89
89
89
89
89
89
0
0
0
0
0
0
41
41
41
41
41
41
41
41
41
41
41
41
41
Hicksian Equivalent Variation in income
(% of present value consumption
None
Annex B
Global
0.37
-1.12
-0.42
-0.93
-1.34
-0.47
0.59
0.06
0.27
0.26
-0.07
-1.47
-0.41
0.30
-0.64
-0.17
-0.14
-0.90
6.22
1.41
0.05
0.14
0.16
-0.08
-0.84
-0.21
0.37
-0.33
-0.03
0.00
-0.63
2.38
0.49
0.21
0.17
0.05
-0.14
-0.90
-0.32
With emission trading between Annex B countries, the marginal cost of abatement (= the price of permit) in Annex B
countries is projected to decline to US$89/MTC in 2010. Under global emission trading, it is projected to decrease further to
US$41/MTC in 2010. The increased supply of permits in the market contributes to this further reduction under global
emission trading.
The emission reduction under Kyoto Protocol is project to deteriorate welfare level of every Annex B countries. In
contrast, non-Annex B countries such as South Korea and China tend to enjoy higher welfare level. Annex B countries
reduce their energy consumption to meet their emission reduction targets. This leads to lower energy prices in international
market. The production of energy intensive goods becomes more expensive in Annex B countries as emissions are penalized.
This leads to increased demand for energy intensive exports from non-Annex B countries (i.e. an improvement of
international competitiveness of energy intensive industries for non-Annex B countries). However, this positive effect for
non-Annex B countries is offset at some extent by the decreased Annex B demand for imported goods from non-Annex B
countries. Based these two contrasting effects, ASI, MPC, and ROW are projected to incur losses in welfare, while other
non-Annex B countries such as South Korea and China stands to gain. The main impacts on energy exporting countries
(MPC) including OPEC and Mexico are likely to arise from lower Annex B energy demand, resulting bigger negative
welfare impacts relative to Annex B countries.
The introduction of emission trading between Annex B countries is projected to reduce significantly the welfare cost to
Annex B countries of meeting their Kyoto commitments, while the welfare gain in non-Annex B countries is projected to be
lower than the case of independent abatement. The lower marginal cost of abatement in Annex B regions under Annex B
10
According to Bernstein et al.(1999), permit prices will be proportional to baseline energy prices but opposite case will be true for the
share of coal in total energy use. The permit price will have to be higher than in a country which is large dependent on imported energy.
emission trading reduces the competitive advantage gained in the production of energy intensive products by non-Annex B
over Annex B countries. This results in smaller export earnings from these products for non-Annex B countries with
emission trading compared with independent abatement. Otherwise, the lower marginal cost of abatement under emission
trading decreases the price of non-Annex B imports from Annex B countries and decreases the decline in non-Annex B
energy exports. On the whole, the introduction of Annex B emission trading reduces the cost of Annex B countries and the
gain of non-Annex B countries compared with independent abatement. In particular, FSU is projected to enjoy the
significant improvement of welfare level with Annex B emission trading through the sale of emission permits in the market.
In the case of global emission trading participated by both Annex B and non-Annex B countries, non-Annex B countries
selling the emission permits are projected to experience the welfare improvement. On the other hand, because of the
reduction of income from the sale of emission permits to other countries, the welfare level of FSU is projected to be lower
than the case of Annex-B emission trading.
III.2 Impacts of Clean Development Mechanism (CDM)
III.2.1 Impacts of CDM without Restriction
Assume that Annex B countries (= investor countries) except FSU obtain CERs through CDM projects, by undertaking
emission abatements in non-Annex B countries (= host countries). This section ignores transaction, monitoring and
compliance costs and assumes no restriction on the amount of emissions abated through CDM projects. It also allows CDM
in conjunction with an international emission trading. Under this circumstance, since the price of CERs generated from
CDM is lower than the marginal carbon tax rate under independent abatement and the price of permit under an international
emission trading, the emission abatement with CDM will be more cost effective than with independent abatement and
emission trading. In this case, the emission abatement with CDM projects will be expanded. As a result, without restriction
on CDM, the price of CERs from CDM, the marginal carbon tax rate under independent abatement and the price of permits
from emission trading will be equalized eventually. The trade in CERs from CDM in conjunction with emission trading is
projected to lead to a decline in the marginal cost of abatement compared with emission trading in the absence of CDM. The
projected marginal costs of abatement in <Table 4> and <Table 3> also support this argument.
Korea is projected to export CERs by 16.9MMTC to Annex B countries (Table 4). The United States is projected to abate
emission by 152MMTC through CDM projects which is approximately 26% in total amount for emission reduction required
by the United States’ Kyoto commitment. For Japan where tends to pay the highest marginal cost of abatement in Annex B
regions, the reduction of emission by 60% through CDM in total emission reduction is projected to be most cost effective.
For central eastern Europe (CEA) where its marginal cost of abatement is low, on the other hand, the emission abatement
with only domestic policies and measures is projected to be more cost effective than using the Kyoto flexible mechanisms
such as CDM and emission trading.
<Table 4> Optimal CERs under CDM Project without any Restriction
Carbon Permit Trading
Transaction cost
None
No
Carbon Tax*
(US$/Metric ton)
Price of CERs
(US$/Metric ton)
Trading Permit Price
(US$/Metric ton)
166
KOR
CHN
IND
BRA
ASI
MPC
ROW
Total
16.9
146.7
44.4
1.3
12.4
20.9
35.4
277.9
USA
EUR
JPN
OOE
CEA
Total
USA
EUR
JPN
OOE
CEA
Annex B
No
166
65
166
65
CERs Export ( Million Metric ton)
Global
No
29
13.8
13.6
78.7
72.7
22.3
19.0
1.2
1.2
7.4
7.1
10.7
11.4
19.9
20.4
154
145.3
CERs Import( Million Metric ton)
152.0
95.3
136.8
53.6
24.5
8.5
61.0
24.5
0.0
11.3
9.7
0.0
0.0
0.0
0.0
277.9
154
145.3
Optimal Ration of CDM to Reduction Target
0.26
0.16
0.23
0.22
0.10
0.04
0.60
0.24
0.00
0.16
0.14
0.00
0.00
0.00
0.00
Note: The domestic carbon tax rate for CEA is 17$/metric ton in non-trading system.
<Table 5> shows the trade balance of CERs under CDM without restriction. Korea, following China and India in terms of
the amount of CERs, is projected to host CDM projects. Without emission trading, the United States and Japan are projected
to generated CERs by 13.9MMTC and 2.7MMTC respectively through CDM investment to South Korean electricity sector.
The introduction of CDM with Annex B emission trading is projected to reduce the marginal cost of abatement to 65$/MTC,
which is lower by US$24/MMT than emission trading without CDM. The total amount of traded CERs is projected to be
154MMTC, which is lower than the case of independent abatement with CDM. The United States is projected to achieve the
cost-effectiveness by reducing 16% of total emission reduction with CDM and the remains with emission trading. It is
interesting result that, with global emission trading, Japan and other OECD countries (OOE) are projected to achieve the
cost-effectiveness without participation in CDM projects.
In the independent abatement case, the CDM makes all of countries in the world be better off compared with the case in
the absence of the CDM (Table 3, Table 6). The reason for this result is that Annex B countries benefit from lower marginal
abatement cost and non-Annex B countries benefit from the sales of CERs. In this case, therefore, the CDM tends to offer a
“win-win” opportunity to both Annex B and non Annex B countries.
<Table5> Balance for CERs under CDM without any Restriction (Million Metric Ton)
USA
None Trading
EUR
JPN
OOE
Total
KOR
13.9
0.0
2.7
0.2
16.9
CHN
65.6
45.6
30.6
4.9
146.7
IND
25.5
5.5
10.7
2.7
44.4
BRA
1.0
0.0
0.0
0.3
1.3
ASI
9.3
0.0
2.7
0.4
12.4
MPC
14.2
0.0
5.6
1.2
20.9
ROW
22.6
2.6
8.6
1.6
35.4
Total
152.0
53.6
61.0
11.3
277.9
IND
19.0
0.0
0.0
0.0
19.0
BRA
1.2
0.0
0.0
0.0
1.2
ASI
7.1
0.0
0.0
0.0
7.1
MPC
11.4
0.0
0.0
0.0
11.4
ROW
20.4
0.0
0.0
0.0
20.4
Total
136.8
8.5
0.0
0.0
145.3
<Table 6> Impacts of CDM without any Restriction on Hicksian Equivalent Variation in income
(% of present value consumption)
Carbon Permit Trading
Transaction cost
None
No
Annex B
No
Global
No
KOR
USA
EUR
JPN
OOE
FSU
CEA
CHN
IND
BRA
ASI
MPC
ROW
0.76
-0.96
-0.32
-0.31
-1.27
-0.33
0.42
1.00
1.75
0.22
0.12
-0.74
-0.03
0.37
-0.52
-0.12
-0.08
-0.79
4.15
0.90
0.19
0.44
0.14
-0.07
-0.63
-0.15
0.34
-0.25
-0.02
0.01
-0.50
1.53
0.28
0.17
0.27
0.05
-0.10
-0.65
-0.23
Under Annex B trading with CDM, the welfare of every country except FSU and CEA is projected to be higher than
Annex B trading without CDM, partly because developing countries such as South Korea and China earn extra income from
the sale of CERs (Table 6). Since the introduction of CDM decreases the price of permits, the welfare levels of FSU and
CEA where sell the permits in the market without participation in CDM are projected to decline compared with the case of
Annex B trading without CDM. Under global emission trading, however, the introduction of CDM is projected to decrease
the welfare of South Korea and China relative to the case without CDM, while Annex B countries except FSU and CEA
enjoy the improvement of welfare level. This result is mainly caused by a decline of the permit price, allowing Annex B
countries to purchase permits at lower costs and reducing income of South Korea and China earned from the sale of permits.
<Table 7> Optimal CDM Project with Transaction Cost
Carbon Permit Trading
Transaction Cost
(US$/Metric Ton)
Carbon Tax*
(US$/Metric ton)
Price of CERs
(US$/Metric ton)
Trading Permit Price
(US$/Metric ton)
KOR
CHN
IND
BRA
ASI
MPC
ROW
USA
EUR
JPN
OOE
CEA
USA
EUR
JPN
OOE
CEA
None
25
Annex B
25
Global
25
174
174
71
174
71
34
CERs Export ( Million Metric ton)
16.6
11.4
11.5
136.1
57.1
53.4
41.0
16.0
13.4
1.3
1.1
1.1
11.6
5.7
5.5
19.4
7.4
8.7
33.4
13.7
15.2
CERs Import( Million Metric ton)
141.1
55.6
94.3
48.9
20.8
11.1
59.7
21.2
0.9
9.8
14.9
2.5
0.0
0.0
0.0
Optimal Ration of CDM to Reduction Target
0.25
0.13
0.00
0.21
0.09
0.00
0.59
0.23
0.00
0.15
0.13
0.00
0.00
0.00
0.00
Note: The domestic carbon tax rate for CEA is 17$/metric ton in non-trading system.
III.2.2 Impacts of CDM with Transaction Cost
The introduction of transaction cost (US$25/MTC) accompanied with CDM projects is projected to increase the price of
CERs and then to shrink CDM activities. The introduction of transaction cost is projected to increase the price of CERs
from US$65/MTC to US$71/MTC and to reduce the traded amount of CERs (Table 7). Since the price of CERs including
the transaction cost is lower than or equal to the marginal carbon tax rate and the permit price without CDM, however, the
CDM projects is still attractive scheme to achieve emission reduction targets of Annex B countries. The lower price of
CERs in <Table 7> than the marginal carbon tax rate and the permit price in <Table 3> implies that CDM is still attractive
under the current set of transaction cost at US$25/MMT.
III.2.3 Impacts of CDM with Quota
In this section, the assumption is made that the amount of emission reduced by CDM is restricted quantitatively at a
certain level by quota. The less CDM projects, therefore, will be conducted relative to the case of no restriction, creating the
gap between the prices of CERs offered by host countries to receive and by investor countries to pay.
<Figure 1> explains how the price of CERs is reached to an equilibrium level. Sw0 and Dw0 represent the total supply of
and the demand for CERs respectively, without quantitative restriction on CDM projects, while Da0 expresses the demand
curve of investor country A for CERs. Without the restriction, therefore, the traded amount and price of CERs are
*
determined at qw* 0 and pw
0 respectively. If the quantitative restriction is imposed (qa1 for country A and qw1 in total),
however, the demand curves bend to Dw_lmts and Da_lmts, changing the equilibrium points to pw1 and qw1. The price of CERs
will reach to pa1. As the investor country A is allowed to purchase qa1 by paying at pw1, however, the country A can gain the
rent corresponding to the area pa1 pw1ba. On the other hand, the host countries in aggregate will gain the area pw1bcf
generated from the CDM projects with only country A and the area pw1ecf created from the projects with all investor
countries.
<Figure 1> World Market of CERs
<Figure 2> Marginal Cost of Abatement for Country A
In <Figure 2>, the demand curves for emission permits, without CDM (D0), with restricted CDM (D1) and with unrestricted
CDM (D2) are given. Without CDM, because country A should reduce emission ( q 0* ) within the national boundary, the
marginal cost of abatement is determined at p0* . Without restriction on CDM projects, country A can reduce emissions with
both CDM projects ( q 2* q 0* ) and domestic abatement ( q 2* ). In this case, the marginal cost of abatement falls to p2* .
However, if the quantitative restriction on CDM projects is imposed, the amount of emissions to be reduced domestically
and the marginal cost of abatement will increase to q1 and p1 respectively.
Under independent abatement without CDM, the marginal cost of abatement in the United States (USA) is projected to be
US$297/MTC ( p0* ) in <Table 3>. However, the marginal cost is projected to decline to US$166/MTC ( p2* ) in <Table 4>
and US$199/MTC (p1) in <Table 8> when CDM is allowed without and with restriction respectively. Without restriction on
*
*
CDM, in addition, the price of CERs traded in international market ( pw
0 ) will be equal to US$166/MTC ( p2 ) which is the
marginal cost of abatement in the United States.
<Table 8> Price of CERs in CDM with quota Restriction (US$/Metric ton)
KOR
USA
EUR
JPN
OOE
FSU
CEA
CHN
IND
BRA
ASI
MPC
ROW
None Trading
Annex B Trading
Global Trading
No Transaction Cost
No Transaction Cost
No Transaction Cost
Ratio of CDM to Reduction
Target(quota)
0.1
Willing- Willing- Domestic
ness to ness to Carbon
sell per pay per tax rate
metric
metric
per
ton of
ton of
metric
CERs
CERs
ton
41
199
240
178
220
486
528
149
191
16
41
41
41
41
41
41
Ratio of CDM to Reduction Ratio of CDM to Reduction
Target(quota)
Target(quota)
0.1
0.1
Willing- Willing- Price of Willing- Willing- Price of
ness to ness to Trading ness to ness to Trading
sell per pay per Permit sell per pay per Permit
metric
metric
metric
metric
ton of
ton of
ton of
ton of
CERs
CERs
CERs
CERs
40
3
35
33
73
32
35
33
73
32
35
33
73
32
35
33
73
32
35
73
35
33
73
32
35
40
3
35
40
3
35
40
3
35
40
3
35
40
3
35
40
3
35
If the restriction on CDM is imposed under emission trading scheme, the amount of abated emission through CDM will
be reduced. This will lead to an increase of the demand for and the price of permits compared with the case of no restriction.
The simulation results in <Table 8> are also consistent with this argument. The price of permits is projected to be
US$73/MTC and US$35/MTC under Annex B and global emission trading respectively. These prices are higher, by
US$8/MTC and US$6/MTC, relative to the case of no restriction on CDM (Table 4). Under Annex B emission trading,
Annex B countries can utilize both emission trading and CDM for emission abatement, while non-Annex B can only sell
CERs generated from CDM. Therefore, the willingness of non-Annex B countries to sell CERs (US$40/MTC) is projected
to be higher than the willingness of Annex B countries to pay for CERs (US$33/MTC). Because both Annex B and nonAnnex B countries can participate in both emission trading and CDM under global emission trading, however, the
willingness of non-Annex B countries to sell CERs (US$3/MTC) is projected to be lower than the willingness of Annex B
countries to pay for CERs (US$32/MTC), as the case of independent abatement.
IV. Impacts of Participation of Korea
IV.1 Participation of Korea in Emission Trading as Annex B
Assume that Korea agrees to reduce its GHG emission as Annex B countries and reduces emissions by 30% relative to
the business-as-usual (BAU) in 2010. The marginal cost of abatement for Korea is projected to be US$238/MTC under
independent abatement (Table 9). The participation of Korea is projected to increase the marginal cost of abatement for
Annex B countries. The welfare of Korea is projected to deteriorate by 0.85% relative to BAU, while it was projected to
improve by 0.37% relative to BAU (Table 3) without participation in emission reduction. However, the welfare levels of
Annex B countries except other OECD countries (OOE) are projected to improve with the participation of Korea. It
<Table 9> Impacts of Participation of Korean in Emission Trading (1995 US$/metric ton)
Permit Price
(1995 US$/Metric ton)
None
Annex B +
Global
Korea
KOR
USA
EUR
JPN
OOE
FSU
CEA
CHN
IND
BRA
ASI
MPC
ROW
238
299
274
527
234
0
16
0
0
0
0
0
0
94
94
94
94
94
94
94
0
0
0
0
0
0
45
45
45
45
45
45
45
45
45
45
45
45
45
Hicksian Equivalent Variation in income
(% of present value consumption
None
Annex B +
Global
Korea
-0.85
-1.11
-0.41
-0.91
-1.40
-0.50
0.66
0.05
0.30
0.28
-0.10
-1.65
-0.44
-0.53
-0.66
-0.17
-0.14
-0.95
6.61
1.55
0.05
0.16
0.17
-0.10
-0.96
-0.23
-0.19
-0.36
-0.04
0.00
-0.68
2.67
0.57
0.26
0.21
0.06
-0.14
-0.97
-0.34
is mainly led by an improvement of the terms of trade in Annex B countries and a deterioration of it in Korea. The decline
of welfare in OOE including Australia and Canada is mainly caused by the substantial decrease of coal export from OOE to
Korea.
With Annex B emission trading, the marginal cost of abatement in Korea is projected to increase by US$5/MTC relative
to the case without participation of Korea in emission reduction. In the case of global emission trading, it is projected to
increase by US$4/MTC. The introduction of emission trading is projected to increase the welfare of Korea relative to the
case of independent abatement and to decrease compared with the case without participation in emission reduction. On the
other hand, because the participation of Korea in emission reduction increases the price of permits, the welfare levels of
Annex B countries are projected to deteriorate relative to the case without participation of Korea.
<Table 10> Optimal CDM Project under Participation of Korea
Carbon Permit Trading
Transaction cost
None
No
Annex B
No
Carbon Tax* (US$/MTC)
Price of CERs (US$/MTC)
Trading Permit Price
(US$/MTC)
175
175
71
CHN
IND
BRA
ASI
MPC
ROW
Total
KOR
USA
EUR
JPN
OOE
CEA
Total
KOR
USA
EUR
JPN
OOE
CEA
Global
No
175
71
33
CERs Export ( Million Metric ton)
150.8
83.6
79.9
45.9
23.9
20.9
1.3
1.2
1.2
12.6
7.7
7.5
21.5
11.3
12.4
36.3
21.3
22.4
268.4
148.9
144.3
CERs Import( Million Metric ton)
8.6
13.7
0.8
140.3
66.5
117.8
49.5
26.4
24.2
60.0
29.4
0.8
9.9
13.0
0.7
0.0
0.0
0.0
268.4
148.9
144.3
Optimal Ratio of CDM to Reduction Target
0.13
0.21
0.01
0.24
0.11
0.20
0.20
0.11
0.10
0.59
0.29
0.01
0.14
0.18
0.01
0.00
0.00
0.00
Note: The domestic carbon tax rate for CEA is 17$/metric ton in non-trading system.
IV.2 Participation of Korea in CDM Project as Investor
The participation of Korea in emission reduction implies that Korea becomes investor of CDM projects. In this case, the
total amount of CERs supplied by non-Annex B countries except Korea will be lower than the case without participation of
Korea, increasing the price of CERs and reducing the traded amount of CERs. The participation of Korea in emission
reduction and CDM projects, therefore, are projected to increase the marginal carbon tax rate and the permit prices to
US$175/MTC, US$71/MTC and US$33/MTC in the case of independent abatement, Annex B emission trading and global
emission trading respectively (Table 10). Without emission trading, Korea is projected to reduce 13% in total amount of
emission reduction with investment to CDM projects in China, India and ROW. In particular, Korea generates CERs by
4.6MMTC and 2.2MMTC with CDM investment to China and India respectively. The increase in price of CERs is projected
to increase the supply of CERs from CDM host countries and to reduce the demand from CDM investor countries. As a
result, the traded amount of CERs will decrease and the market of CDM projects will shrink.
Under participation of Korea in emission reduction, the participation of Korea in CDM projects as an investor is projected
to improve welfare of every country relative the case without participation of Korea in CDM (Table 9 and Table 11). Korea
is also projected to enjoy the reduced extent of deterioration in welfare level. Without participation in CDM and emission
trading, for example, the welfare level of Korea is projected to deteriorate by 0.85% relative to BAU (Table 9). However,
the participation of Korea in CDM is projected to deteriorate the welfare level by 0.8% relative to BAU (Table 11).
The participation of Korea in emission reduction and CDM is projected to deteriorate welfare of Annex B countries except
FSU and CEA and to improve it of every non-Annex B country, relative to the case without participation of Korea in
emission reduction
(Table 6 and Table 11). The negative impact on Annex B countries with the participation of Korea in
CDM is caused by the increased demand of Korea for CERs, pushing up the price of CERs and then leading Annex B
countries to pay more costs in purchasing a given amount of CERs.
<Table 11> Impacts of CDM with Korea as Investor on Hicksian Equivalent Variation in income
(% of present value consumption)
Carbon Permit Trading
Transaction cost
None
No
Annex B
No
Global
No
KOR
USA
EUR
JPN
OOE
FSU
CEA
CHN
IND
BRA
ASI
MPC
ROW
-0.80
-0.98
-0.31
-0.31
-1.32
-0.36
0.48
1.08
1.92
0.25
0.12
-0.91
-0.04
-0.43
-0.54
-0.12
-0.08
-0.84
4.59
1.04
0.22
0.51
0.16
-0.08
-0.74
-0.17
-0.13
-0.27
-0.02
0.01
-0.55
1.77
0.34
0.24
0.33
0.05
-0.10
-0.71
-0.24
V. Conclusions
In this paper, we investigate the global impacts of the participation of Korea in the global effort to reduce GHG emissions.
When Korea is assigned emission target without the CDM, the terms of trade deteriorate for most Annex B countries
because of higher price of energy intensive goods imported from Korea and because of lower demand for exports to Korea.
Being a nation with little resource endowment that has to import more than 95% of energy consumption, furthermore,
emission limit in Korea will drive down demand for imported energy. Therefore, OOE including Australia and Canada that
export large amount of coal to Korea are dramatically worse off due to emission reduction of Korea.
We also investigate the economic impacts of the limits on CDM, called “supplementarity”, which is one of key issues in
the current climate change negotiation led by UNFCCC. Since the limits on CDM increase the amount of abated emission at
home or through emission trading, the marginal abatement cost or permit price rises compared with the case of no restriction.
Therefore, the welfare gain from the CDM with limits is reduced for both Annex B and non-Annex B countries.
The participation of Korea in emission reduction increases the price of CERs and reduces the traded amount of CERs.
The participation of Korea in emission reduction and CDM projects, therefore, are projected to increase the marginal carbon
tax rate and the traded permit prices. The participation of Korea in emission reduction and CDM will deteriorate welfare of
Annex B countries except FSU but improve it of every non-Annex B country, relative to the case without participation of
Korea in emission reduction. This negative impact on Annex B countries is caused by the increased demand of Korea for
CERs, pushing up the price of CERs and then leading Annex B countries to pay more costs in purchasing a given amount of
CERs.
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