Chapter 4. Tax Reform for Energy for Power Generation
1. Analytic model
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5 Lumber, paper, printing 83–98
6 Chemical products 111–139
7 Non-metal minerals 140–156
8 Metal products 157–191
9 Machinery & equipment 192–213
10 Electric and electronic
devices 214–248
11 Transport equipment 249–262
12 Other manufacturing
products 263–273
13 Construction 287–301
14 Transportation 304–317
15 Services 281–286, 302, 303, 318–384
16 Coal 26, 27, 99, 100
17 Petroleum for transport 102, 103, 105
18 Other fuels 104, 106, 107
19 Non-energy products 101, 108–110
20 Gas 279
21 Electricity 274–277
22 Crude oil 28
23 Natural gas 29
24 Renewable energy 278
The non-energy sector includes agriculture, forestry, fishery, mining, food and beverages, textiles and leather, lumber and paper, chemical products, non-metal mineral products, metal products, machinery and equipment, electric and electronic devices, transport equipment, other manufacturing products, construction, transportation, and services.
For this study, energy classification was based on energy use, and coal was not divided further into anthracite and bituminous coal. In 2010, the consumption of anthracite for power generation was less than 1% that of
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bituminous coal35, and thus this research did not differentiate between the coal types, but rather combined anthracite and bituminous coal under the single term ‘coal.’ Petroleum was divided into petroleum products used for transportation, non-energy products used as raw materials for industry, and other fuels. Electricity included hydroelectric power, thermal power, nuclear power, and private power stations according to the 2010 Inter- industry Relation Table. Crude oil and natural gas are not used in the consumption sector, but are only used as production input.
The research model adopted by this study is comprised of the household sector, production sector, government sector, and overseas sector and makes various assumptions related to consumers and producers.36 The structure of the household sector is as shown in Table 4-2 and Figure 4-1. Households must possess capital and labor, and engage in consumption and leisure in order to maximize their utility as representative consumers. Each household’s choice of leisure determines labor supply. In the model, in order to maximize utility ( ), representative consumers employ a five-step process to select their consumption goods and leisure products/services. Choices are made by using functions in each of the steps listed below, which are as follows:
(consumption of composite goods), (leisure), CE (composite energy goods), CN (composite non-energy goods), ( (consumption goods), CFL (composite fuel goods), CPG (composite petroleum-gas goods), CEL (electricity), CCL (coal), CPT (petroleum), and CNG (gas). The consumption function of each stage can be classified as one of the following function types: the constant elasticity of substitution production function (CES), Leontief function, or Cobb-Douglas function.
Table 4-2. Structure of the Household Sector Used in This Model
Consumption function Function type
U ( , ) CES
(CN, CE) Leontief
CN (C1, C2, …, C12, C14, C15, C17, C19, C24) Cobb-Douglas
CE (CFL, CEL) CES
CFL (CPG, CCL) CES
CPG (CPT, CNG) CES
35 2016 Yearbook of Energy Statistics, p.348.
36 For more information on model assumptions and formulas, please refer to Taeheon Kim (2012).
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U= utility, =consumption composite goods
= leisure, CN=composite non-energy goods
CE= composite energy goods, =consumption goods
CFL= composite fuel goods, CEL=electricity CPG= composite petroleum-gas goods, CCL=coal
CPT= petroleum, CNG=gas
Source: Prepared by the author using the modified work of Taeheon Kim (2012, p.63).
Figure 4-1. Structure of the Household Sector Used in This Model
Enterprises in the production sector create goods and services by using materials, labor, and capital to maximize profits, and are ‘price-takers’ that do not earn any additional profit in a perfectly competitive market.37 For all industries in the production sector, it is assumed that price determines the movement of labor and capital, and therefore, the same values for capital and labor have been applied throughout the entire sector.38
The structure and type of functions for the production sector can be seen in Table 4-3 and Figure 4-2. Production for each industry stage is determined by the following function variables: , (composite capital-labor-energy goods), (composite intermediate input goods), (intermediate input), (composite capital-labor goods),
(composite fuel-electricity goods), (composite fuel goods), (composite petroleum-gas goods), (capital), (labor), (electricity), (coal), (petroleum), and (gas). Production functions for
37 Taeheon Kim (2012), Korea Energy Economics Institute, p. 60.
38 Taeheon Kim (2012), Korea Energy Economics Institute, p. 60.
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each stage can be classified as Leontief or CES production functions. Due to the diverse types of renewable energy currently available39, it is difficult to establish a direct substitution relationship between renewable and other energy sources. As such, renewable energy was treated as an intermediate input ( ) instead of establishing a direct substitution relationship between other energy sources.
This model assumes a small open economy in which domestic demands are incompletely converted into export demands and domestic goods are incompletely substituted by import goods. Meanwhile, direct and indirect taxes, including energy tax, are supposed as the source of government finance, and the government is the assumed executor of financial expenditures.
This paper assumes that, in its entirety, the tax revenue from proposed tax reforms on power generation fuels will be used for transfer payments.
Table 4-3. Structure of the Production Sector Used in This Model
Production function Function type
Leontief Leontief CES CES CES CES CES Key)
I or j =1, …, 24: sector number,
= total production, =composite intermediate input goods
=composite capital-labor-energy goods =intermediate inputs
=composite capital-labor goods = labor
= capital =composite fuel-electricity goods
=composite fuel goods =composite petroleum-gas goods
=electricity = coal
=petroleum =gas
Source: Prepared by the author using the modified work of Taeheon Kim (2012,
39 Renewable energy includes all types of energy produced using wastes and biofuels as well as solar and wind power.
50 p.69).
Figure 4-2. Structure of the Production Sector Used in This Model