In response to increasing awareness surrounding climate change, efforts have been made across the globe to reduce greenhouse gas emissions and to adjust for higher NDC (nationally determined criterion). EU, United States, Japan and many other countries have declared carbon neutrality goals and submitted higher 2030 NDCs. South Korea has also declared carbon neutrality by 2050 and is currently in discussion to raise the 2030 NDC. In concurrence, discussions concerning the Carbon Border Adjustment Mechanism have arose and are applying pressure to adjust and improve the current carbon pricing mechanism.

Korea's current energy tax system has been criticized for being unbalanced across different industrial sectors and fuel types, and for failing to account for enough external cost. Hence, discussions have been ongoing concerning how to improve the existing energy tax system and the carbon pricing mechanism. Implementation of the carbon tax has been sought as an effective way to apply external cost to the tax rate while allowing flexible usage of the tax revenue to fund various policies.

This study addresses key issues of concern surrounding the carbon tax when the carbon tax will be implemented. In addition to the carbon tax, ETS (emission trading system)―another type of carbon pricing mechanism―is already in force in South Korea. Hence, this report has considered how the ETS may be combined in the process of choosing the carbon tax rate and the range of which the tax will be applied. The short run considers selecting the tax payer and the tax rate while having fixed the ETS participant and the allowance amount. The medium-long run holistically considers ETS participant, allowance amount, and the carbon tax rate in the decision-making process. We developed a theoretical model to analyze the optimal carbon pricing policy in this setup with multiple carbon pricing mechanisms. This model includes a government that seeks to adjust carbon pricing policy to maximize social welfare, and individuals that adjust fossil fuel and renewable energy usage to maximize their profits.

One key issue that arises in choosing the range of the carbon tax―while considering how to combine the ETS and the carbon tax―is whether to apply the tax to ETS participants. In this study, the effects of applying carbon tax to ETS participants were first, a decrease in allowance price that offsets the effect of applying the carbon tax―hence failing to make additional emission reduction―and second, a reduced emission trading market size. Considering that countries that have both ETS and carbon tax in force mostly exempt ETS participants from carbon tax or provide full refund, it is reasonable to separate carbon tax participants from ETS participants.

In addition, looking at the adequate ETS allowance price―based on ETS allowance amount―shows that the carbon tax rate and the expected price of ETS allowance becomes equal in optimal situation. Therefore, when implementing the carbon tax, we may adjust the carbon tax rate based on the ETS allowance price which already takes into account the external environmental cost and emission reduction cost. Here, we propose providing a tax rate plan for a certain period to reduce price uncertainty, thereby reinforcing the price signal of the carbon tax. On the other hand, if the ETS in place is not fully functioning, then the ETS total allowance amount and the ratio of freely-allocated allowance to auctioned allowance may be adjusted or the ETS itself may need to be improvised. Additionally, differentiating carbon tax with respect to industry and fuel type―based on emission reduction cost―does not appear appropriate in general. However, we do propose differentiating carbon tax to industries and fuel usages that may be subject to additional costs such as reduced competitiveness or regressive tax.

In this research, a survey experiment was conducted to analyze ways to use carbon tax revenue and changes in reception after receiving appropriate information. Analysis was performed on tax revenue usages including reduction of existing taxes, lump-sum transfers to households, and investments into green projects. To improve reception, information provided included details of carbon tax with emphasis on either its economic value or its environmental value.

The analysis of tax revenue usage shows that in the full sample, lump-sum transfer method appears to reduce reception in general. Categorizing based on perception of climate change shows that reduction of existing taxes may have positive effect on reception when individual does not perceive climage change as a serious issue. On the other hand, when individual perceives climate change as a serious issue, tax revenue usages other than investments into green projects showed negative effects on reception.

Providing information improved reception in the short run regardless of information type. Also, differences in reception remained constant even after efforts to improve reception such as providing information. This implies that in the stages of designing and implementing the carbon tax, differences in reception based on tax revenue usage should be taken into account. Additionally, tax revenue usage and providing information further improves reception when their implications are consistent.

Preface
Executive Summary

Chapter 1 Introduction

Chapter 2 Necessity of Introducing a Carbon Tax
　Section 1 Increasing Need for Greenhouse Gas Reduction
　Section 2 Necessity of Improving the Energy Tax System
　Section 3 Advantages of Introducing a Carbon Tax
　Section 4 Carbon Tax and Emission Trading System

Chapter 3 Scope of Taxation and Tax Rate
　Section 1 Policy Combination with the Emission Trading System
　Section 2 Theoretical Model
　Section 3 Partial Equilibrium Analysis

Chapter 4 Utilization of Tax Revenue and Social Acceptance
　Section 1 General Concerns About Introducing a Carbon Tax
　Section 2 Categorization of Tax Revenue Utilization Methods
　Section 3 Review of Previous Studies
　Section 4 Design of the Survey Experiment
　Section 5 Analysis Results

Chapter 5 Conclusion and Policy Implications
　Section 1 Policy Implications on Scope of Taxation and Tax Rate
　Section 2 Policy Implications on Tax Revenue Utilization and Acceptance

References
Appendix
ABSTRACT