Environmental Tax Reform for Green Growth in Korea

Korea is recently debating the introduction of a carbon levy under its green growth strategy. The government set an ambitious goal of cutting greenhouse gas emissions by 30 percent below expected levels in 2020, and established the Framework Act on Green Growth in 2010 to meet the emission target and promote eco-friendly investment. The government is also preparing for a variety of measures of the green growth and will put those plans into action. This paper explores the design of a carbon tax scheme for green growth in Korea, focusing on issues related to the tax base, the tax rates, and the use of the revenues. It also shows that the economy-wide effects of a well-designed carbon tax scheme in Korea could be “positive” by making use of a number of other fiscal instruments in combination. According to this study, the appropriate size of carbon tax revenue would be about 10 trillion Won (approximately 1% of GDP) in Korea. Moreover, from experience in countries that have already implemented eco-tax reform in Europe, we may need a gradual phasing-in of the carbon taxation in broader tax reforms and enhance the use of a public information campaign for stronger incentives and political feasibilities. At the same time, it is also required to consider secondary instruments such as direct compensation payments, price support and tax deductions for unfair burdens of low-income households and more energy-vulnerable sectors. All those approaches might be offset of distributional consequences as mitigating the harmfulness of eco-motivated, new fiscal policies. Lastly, it is pretty obvious that the more we delay action, the more cost we pay. If we invest green technology in recent economic slowdown, we will have a global initiative that would make our economy more competitive in the long run.