Analysis of the Effect of Korea's Environmentally Harmful Subsidy Reform in the Electric Power Sector : Mainly on its Industrial Cross-subsidies Reform

우리나라 전력부문의 환경유해보조금 개편 효과분석 : 산업용 교차보조금 개편을 중심으로

  • 강만옥 (한국환경정책.평가연구원 기후변화연구실) ;
  • 황욱 (경북대학교 경제통상학부)
  • Received : 2009.09.30
  • Accepted : 2010.03.08
  • Published : 2010.03.30


Since the Republic of Korea is highly dependent on fossil fuels despite high oil prices, it urgently needs to renew its economic and social system to cut carbon emissions and achieve green growth. Therefore, reforming or eliminating subsidies related to the use of fossil fuels is a timely and oppropriate policy recommendation for Korea. It would be a win-win deal for Korean society as it would not only reduce the use of environmentally harmful fossil fuels but also enhance economic efficiency. In particular, cross-subsidies for industrial, agricultural and night thermal-storage power services make up more than 80 percent of all subsidies provided to the entire electric power industry sector of Korea. Of these cross-subsidies, this paper analyzes the electricity subsidy for industries, which takes up the largest share (about KRW 1.6583 trillion yearly), among the environmentally harmful subsidies in the electric power sector. Thus, the paper focuses on the analysis of ripple effect anticipated when this is reformed. To examine the effects of this subsidy reform, price elasticities were estimated using the ARDL (autoregressive distributed lag) model and quarterly data from 1990 to 2007. The main results of this study show that 1) annual energy demand for electric power in the industrial sector would drop by 12,475,930MWh and 2) $CO_2$ emissions would plummet by 2,644,897 tons per year if the subsidy were reformed. We can deduct from this that the abolition of environmentally harmful subsidies in the electric power sector in the Republic of Korea would considerably contribute to $CO_2$ emissions abatement in the country.