Chapter 4. Tax Reform for Energy for Power Generation
C. Summary of simulation results
3. Considerations for energy tax reform
A. Investment in environmental control facilities for coal-fired power generators
As seen in Chapter 3, pollutant emissions from bituminous coal-fired thermal power plants account for the majority of all total emissions. Unlike general climate change that results from greenhouse gas emissions, environmental damage caused by air pollutants varies by region. Furthermore, the amount of air pollutants a power facility emits depends on the facility’s age and its ability to reduce pollutants. Table 4-8 shows the regional distribution, generating capacity, and year of construction of all the bituminous coal-fired thermal plants in Korea.
Korea has 46 thermal power generators that are fueled by bituminous coal, for a combined total generating capacity of 24.82 million kW. Chungnam Province has 24 generators with a total capacity of 12 million kW including eight Boryeong thermal generators, eight Taean thermal generators, and eight Dangjin thermal generators; the plants in this province account for about half of the total number of thermal power plants in Korea.
Gyeongnam Province has 14 generators with a total generation capacity of 9.08 million kW, including six Samcheonpo thermal generators and eight Hadong thermal generators. The Honam Thermal Plant in Jeonnam Province is the oldest bituminous coal-fired thermal plant in Korea and has two generators with a total generation capacity of 500,000 kW. The Yeongheung Thermal Plant in Incheon is the newest bituminous coal-fired thermal plant in Korea and has six operators with a total generation capacity of 5.08 million kW.
Table 4-8. Bituminous Coal-Fired Thermal Plants by Region Location Generator Date
completed
Capacity
(kW) Location Generator Date completed
Capacity (kW)
Goseong- gun, Gyeongnam
Samcheonpo
#1 Aug 1983 560,000
Dangjin- si, Chungnam
Dangjin
#1 Jun 1999 500,000
Dangjin
#2 Dec 1999 500,000
Samcheonpo
#2 Feb 1984 560,000
Dangjin
#3 Sep 2000 500,000
Samcheonpo Apr 1993 560,000
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#3
Dangjin
#4 Mar 2001 500,000
Samcheonpo
#4 Mar 1994 560,000
Dangjin
#5 Oct 2005 500,000
Samcheonpo
#5 Jul 1997 500,000
Dangjin
#6 Apr 2006 500,000
Samcheonpo
#6 Jan 1998 500,000
Dangjin
#7 Jun 2007 500,000
Subtotal 3,240,000
Dangjin
#8 Dec 2007 500,000
Hadong- gun, Gyeongnam
Hadong #1 Jul 1997 500,000
Subtotal 4,000,000
Hadong #2 Nov 1997 500,000
Boryeong- si, Chungnam
Boryeong
#1 Dec 1983 500,000
Hadong #3 Jul 1998 500,000
Boryeong
#2 Sep 1984 500,000
Hadong #4 Mar 1999 500,000
Boryeong
#3 Apr 1993 500,000
Hadong #5 Jul 2000 500,000
Boryeong Jun 1993 500,000
62 Hadong #6 Jul 2001 500,000
#4
Boryeong
#5 Dec 1993 500,000
Hadong #7 Dec 2008 500,000
Boryeong
#6 Apr 1994 500,000
Hadong #8 May 2009 500,000
Boryeong
#7 Jun 2008 500,000
Subtotal 4,000,000
Boryeong
#8 Dec 2008 500,000
Gyeongnam
Number of generators 14
Subtotal 4,000,000
Capacity 7,240,000
Taean- gun, Chungnam
Taean #1 Jun 1995 500,000
Ongjin-gun, Incheon
Yeongheung
#1 Jul 2004 800,000
Taean #2 Dec 1995 500,000 Yeongheung
#2 Nov 2004 800,000
Taean #3 Mar 1997 500,000 Yeongheung
#3 Jun 2008 870,000
Taean #4 Jul 1997 500,000 Yeongheung Dec 2008 870,000
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#4
Taean #5 Oct 2001 500,000 Yeongheung
#5 June 2014 870,000
Taean #6 May 2002 500,000 Yeongheung
#6 Nov 2014 870,000
Taean #7 Feb 2007 500,000
Subtotal 5,080,000
Taean#8 Aug 2007 500,000
Yeosu, Jeonnam
Honam #1 Mar 1985 250,000
Subtotal 4,000,000
Honam #2 Dec 1984 250,000
Chungnam
Number of generators 24
Subtotal 500,000
Capacity 12,000,000 Nationwide Number of generators: 46; electricity generation capacity: 24,820,000 kW
Source: Prepared by the author in reference to the Electric Power Statistics Information System (as of Oct 30, 2016).
Figure 4-8 – Figure 4-10 show the percentage of pollutant emissions (PM10, NOx, and SOx) in 2014 from bituminous coal by power plant region. According to the figures, the emission of air pollutants from plants in Chungnam Province (the Boryeong plant, Taean plant, and Dangjin plant) accounted for more than half of total emissions, accounting for 64% of particulate matter (PM10) emissions, 57% of nitro oxide (NOx) emissions, and 52% of sulfur oxide (SOx) emissions. Air pollutant emissions from plants in Gyeongnam Province were responsible for 25% of particulate matter (PM10) emissions, 36% of nitro oxide (NOx) emissions, and 36% of sulfur oxide (SOx) emissions. The Yeongheung Thermal Plant in Incheon Ongjin-gun, which produces 20% of
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the nation’s total bituminous coal-fired thermal power supply, emitted far fewer air pollutants than expected for its share of electricity generation, accounting for only 8% of particulate matter (PM10) emissions, 4% of nitro oxide (NOx) emissions, and 8% of sulfur oxide (SOx) emissions.
Figure 4-8. PM10 Emissions from Bituminous Coal-fired Power Generation Plants by Region in 2014
Source: Prepared by the author in reference to the 2014 Air Pollutant Emission Statistics provided by the National Air Pollutants Emission Service of the National Institute of Environmental Research (http://airemiss.nier.go.kr/, accessed on Sep 18, 2017).
원문 번역문
옹진군 보령시 당진시 태안군 여수시 고성군 하동군
Ongjin-gun Boryeong-si Dangjin-si Taean-gun Yeosu-si Goseong-gun Hadong-gun
Figure 4-9. NOx Emissions from Bituminous Coal-fired Power Generation Plants by Region in 2014
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Source: Prepared by the author in reference to the 2014 Air Pollutant Emission Statistics provided by the National Air Pollutants Emission Service of the National Institute of Environmental Research (http://airemiss.nier.go.kr/, accessed on Sep 18, 2017).
원문 번역문
옹진군 보령시 당진시 태안군 여수시 고성군 하동군
Ongjin-gun Boryeong-si Dangjin-si Taean-gun Yeosu-si Goseong-gun Hadong-gun
Figure 4-10. SOx Emissions from Bituminous Coal-fired Power Generation Plants by Region in 2014
Source: Prepared by the author in reference to the 2014 Air Pollutant Emissions Statistics provided by the National Air Pollutants Emission Service of National Institute of Environmental Research (http://airemiss.nier.go.kr/, accessed on Sep 18, 2017).
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원문 번역문
옹진군 보령시 당진시 태안군 여수시 고성군 하동군
Ongjin-gun Boryeong-si Dangjin-si Taean-gun Yeosu-si Goseong-gun Hadong-gun
Figure 4-11 shows the emission of air pollutants per unit of bituminous coal power generation by region in 2014. The Yeongheung Thermal Power Plant in Ongjin-gun in Incheon, which was built the most recently out of all the plants, emitted less air pollutants than plants in other regions. The Taean Thermal Plant in Chungnam Province produced the highest amount of PM10 and PM2.5 per unit of power generation. The Honam Thermal Power Plant in Yeosu-si, which is the oldest thermal plant in Korea, emitted the highest level of NOx and SOx per unit of power generation. As seen in Figure 4-11, air pollutant emissions per unit of power generation varied widely by plant.
Figure 4-11. Air Pollutant Emissions per Unit of Bituminous Coal-fired Electricity Generation by Region in 2014
Source: Prepared by the author in reference to the 2014 Air Pollutant Emissions Statistics provided by the National Air Pollutants Emission Service of the National Institute of Environmental Research (http://airemiss.nier.go.kr/, accessed on Sep 18, 2017) and Trends of Fuel Use for Electricity Generation provided by the Electricity Statistics Information System (https://epsis.kpx.or.kr/, accessed on September 19, 2017).
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원문 번역문
발전량 Power generation
(우) (Right side)
옹진군 보령시 당진시 태안군 여수시 고성군 하동군
Ongjin-gun Boryeong-si Dangjin-si Taean-gun Yeosu-si Goseong-gun Hadong-gun
In December 2016, the government announced plans to close down old coal-fired power plants and invest in environmental control facilities at coal-fired power plants in order to reduce particulate matter emissions. By the year 2030, the government will close down 10 old coal-fired power generators, replace the environmental control facilities of 43 coal-fired power generators, and invest KRW 11.6 trillion in environmental control facilities for 20 new coal-fired power generators still under construction.43 Table 4-9 outlines the government’s plans to invest in environmental control facilities by year, and Table 4-10 details the plan to close down old generators.
Table 4-9. Investment Plan for Coal-fired Power Plants by Year
(Unit: hundreds of million KRW) 2016 2017 2018 2019–
2025
2026–
2030 Total Removal of old coal power
plants (10 generators) 816 100 1,116 2,032
Existing facilities
(43 generators)
Facilities to be improved (Phase 1)
425 1,135 619 2,179
Facilities to be replaced (Phase 2)
5,270 56,870 32,570 94,710
Additional investment in coal power plants currently
under construction (20 generators)
8,313 8,353 16,666
43 Press release (Dec 27, 2016) by the Ministry of Trade, Industry, and Energy stating, “The government will reduce the emission of air pollutants such as particulate matter by coal-fired power plants by 50%.”
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Total 441 1,968 6,007 58,005 32,596 98,921 Source: Press release of the Ministry of Trade, Industry, and Energy (Dec 27, 2016, p.
2).
Table 4-10. Plan to Close Down Old Coal-fired Power Plants Generator Capacity Period Action plan Type of
fuel Seocheon #1,2
(Chungnam Seocheon)
400 MW Sept 2018 Close Anthracite Samcheonpo
#1,2 (Gyeongnam
Goseong)
1,120 MW Dec 2020 Close Bituminous coal Honam #1,2
(Jeonnam Yeosu)
500 MW Jan 2021 Close Anthracite Boryeong #1,2
(Chungnam Boryeong)
1,000 MW Dec 2015 Close Bituminous coal Yeongdong # 1,2
(Gangwon Gangneung)
325 MW
June 2017 (#1 generator)
Sept 2020 (#2 generator)
Close (convert to
biomass fuel)
Anthracite
Source: Press release by the Ministry of Trade, Industry, and Energy (Dec 27, 2016, p. 2), partially modified by the author.
Emissions of air pollutants such as PM10, NOx, and SOx vary widely depending on the specific environmental control facilities and capabilities of each power plant. Tax levels for power generation are determined by the amount of pollutants per unit of power generation, and this depends heavily on the environmental control facilities of the relevant power plant. Therefore, an energy tax system should be designed that reflects the environmental control capacities of each power plant.
B. Greenhouse gas emissions trading system
The emissions trading system, along with environmental tax, uses market mechanisms to reduce emissions.
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Korea’s greenhouse gas emissions trading system has been in operation since 2015 and is a core policy instrument for the reduction of greenhouse gas. The greenhouse gas emissions trading system allocates allowances (also called permits) to each company. Companies are allowed to emit greenhouse gases within their designated allowances/permits, and trade allowance shortages or surpluses with other companies.44 During the first stage of system implementation (2015–2017), allowances were allotted free of charge, but in the second stage (2018–
2020), 3% of allowances are being sold to companies. In the third stage (2021–2025), 10% of allowances will be sold to them.45 Since power generation operators are already subject to the emissions trading system, it is important that tax hikes on energy for power generation be introduced without placing an additional burden on operators. European countries that have introduced a carbon tax and operate an emissions trading system have implemented the two systems in such a way that it does not place a double burden on power generation operators.
For example, Denmark and Sweden have exempted or lessened the carbon tax for businesses participating in the emissions trading system. Finland, on the other hand, allocates allowances free of charge and does not have a separate policy to reduce taxes.46
Table 4-11. Dual Emissions Trading and Carbon Tax Systems in Major Countries Number of
participating companies
Share of ETS out of total emissions*
Connection to a carbon tax
Finland 535 59%
•Levying of carbon tax for ETS participants, but free allocation of ETS allowances (NREL, 2009)
Sweden 499 29%
•Reduction of carbon tax for ETS participants (Manok Kang et al., 2011)
Denmark 357 45% • ETS participants exempt from
carbon tax (NERI, 2006)
Norway 51 10%
• Limited operation of ETS to focus on the carbon tax-led reduction of greenhouse gas
Note: * Based on emissions in 2002.
Source: NREL (2009). The Use of Economic Instruments in Nordic and Baltic
44 Related ministries (2017), National Emissions Allocation Plan (draft), p.1.
45 Ministry of Economy and Finance (2017), The 2nd Plan (draft) for the Emissions Trading System, p.21.
46 Taeheon Kim (2012), “A study of the impact of the cost of introducing a carbon tax in the energy tax system.” pp.58–59.
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Environmental Policy 2001-2005 (as cited in Taeheon Kim (2012)).
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Chapter 5. Conclusion
Currently, Korea’s energy tax system does not properly reflect the social costs associated with environmental pollution and climate change, and taxes levied on energy sources do not have consistent standards, thereby distorting energy supply and demand and damaging the environment. In other words, the root of Korea’s energy supply and demand imbalance is the distortion of relative energy prices under the current tax system—which does not properly reflect the external costs of power generation. This study estimates the social costs of energy for power generation and derives logical proposals for energy tax reform.
The scenarios for tax reform for power generation fuels proposed in this study were based on modifying taxes on bituminous coal, using the tax levels for LNG as a baseline. Since the external costs of using LNG are already greater than its current tax level, scenarios involving a tax decrease were not considered. Furthermore, since tax hikes on power generation fuels lead to increased electricity prices, which affects the national economy in terms of products prices and industrial competitiveness, it was a policy priority to adjust relative prices between the two energy sources (LNG and bituminous coal) while minimizing any negative economic impact. In light of economic considerations, scenarios were not proposed that called for taxes equivalent to the estimated external costs of LNG and/or bituminous coal.47 Also, the power generation sector in Korea currently operates a greenhouse gas emissions trading system to reduce greenhouse gases. Hence, an appropriate energy tax must take into consideration the emissions trading system and other policy instruments such as direct regulation. This paper considered the aforementioned factors and established scenarios for raising taxes on bituminous coal used for power generation, based on the current tax level of LNG. This was done in order to reflect the external costs of air pollutants and greenhouse gas emissions in the price of power generation fuels.
The findings of this study were as follows. First, the estimated environmental damage costs associated with power generation fuels made it necessary to raise the tax on bituminous coal. The environmental costs of bituminous coal per unit (kg) due to air pollutants and greenhouse gas emissions were estimated at 78–88% those of LNG. Based on current taxes for LNG, an appropriate tax for bituminous coal is KRW 66–74/kg, much higher than its current tax level of KRW 30/kg.
Second, tax adjustments for bituminous coal used for power generation, in conjunction with the emissions trading system, can be an important means of reducing greenhouse gas emissions. Tax hikes on bituminous coal for power generation decrease electricity demands, which in turn reduce the consumption of fuels for power
47 The most suitable environmental tax in a ‘second-best world’ in which taxes exist may be lower than the Pigouvian tax.
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generation, ultimately reducing greenhouse gas emissions. The percentage of greenhouse gas reductions was 1.3%
in Scenario 1 and 3.3% in Scenario 4. This shows that the proposed tax reform for bituminous coal can significantly reduce greenhouse gas emissions as well as air pollutant emissions. As seen in Scenario 1, even a relatively small tax hike on bituminous coal can reduce the nation’s total greenhouse gas emissions by over 1%.
Third, a tax hike on bituminous coal decreases the GDP and increases prices. The greater the tax on bituminous coal, the more the GDP fell, and the more prices rose. In Scenario 1, which levied an additional individual consumption tax of KRW 17/kg on bituminous coal, the GDP was reduced by 0.08%. In Scenario 4, in which an additional tax of KRW 44/kg was levied on bituminous coal, the GDP decreased by 0.21%, suggesting that Scenario 4 places a significant burden on the economy.
Fourth, tax hikes on bituminous coal used for power generation can help internalize external costs, enhancing industrial efficiency. The proposed tax hikes on bituminous coal for power generation decrease the overall demand for coal and electricity. As seen in Scenario 4, the demand for coal and electricity dropped by 5.1%, and 2.5%, respectively. The reduced demand for electricity triggers a decreased demand for other fuels for power generation, including LNG. As such, a tax hike on bituminous coal internalizes its external costs, enhancing the efficiency of resources allocation and thus preventing excessive investments in the energy industry.
Policy implications and suggestions regarding energy tax reform are as follows. First, since an energy tax hike impedes economic growth, a gradual increase is advised. According to estimates using the CGE model, implementing energy tax reform as a means of reflecting the environmental costs of bituminous coal for power generation decreases the nation’s economic growth rate by 0.1–0.2%. The greater the tax hike on bituminous coal, the greater the decrease of the country’s GDP. Hence, a gradual tax increase is suggested to offset this negative impact on the economy.
Second, tax rates for power generation fuels need to be determined by considering all existing policy instruments reflecting externality. Since various policy instruments—such as direct regulation, the emissions trading system, and the energy tax system—are used to internalize environmental costs, a comprehensive review of all policy instruments must be made in order to avoid placing an excessive burden on any one entity. In Korea, the government has announced plans to invest in the environmental control facilities of bituminous coal-fired thermal power plants; this is an important consideration when determining an environmental tax on bituminous coal for power generation. Air pollutant emissions vary widely depending on the functioning of the environmental control facilities of each power plant. As seen in Chapter 4, air pollutant emissions per unit of power generation differ considerably by power plant. Since any environmental tax on fuels used for power generation must be based on the amount of air pollutants emitted, an appropriate tax level depends highly on the environmental control
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capabilities of each plant. As part of efforts to reduce particulate matter, the government plans to close down old coal-fired power plants and invest in the environmental control facilities of newer coal-fired plants. In the case of a tax hike on bituminous coal, these plans should be taken into consideration, and a policy-like tax refund may be necessary to encourage further investments in environmental control facilities for bituminous coal-fired power plants.
Third, a so-called ‘external cost assessment committee’ for tax reform on power generation fuels needs to be established. Estimated external costs act as a basis for levying taxes on energy sources, but the estimated costs can vary greatly depending on the assumptions and estimation methods used. Therefore, in order to ensure objectivity and transparency in measuring external costs, a committee of experts is needed.
Fourth, tax revenue from energy tax reform needs to be spent on the distribution of renewable energy and the supply of eco-friendly facilities. As the purpose of energy tax reform is to enhance energy supply and demand and reduce air pollutants, it is important to use the revenue from such a tax to fulfill the purpose of the tax. The main purpose of Environmental Tax Reform (ETR) in European countries is to improve the environment and correct distortions in economic structure caused by tax distortions. That is, ETR in Europe is aimed at securing tax revenue through environment-friendly tax reform, and increasing economic efficiency by reducing the distorted income tax rate. In Europe, a revenue-neutral tax reform system with high political acceptability was adopted. In Korea, however, energy tax reform aims largely to correct distortions in energy supply and demand and to improve the atmospheric environment. As such, instead of a revenue-neutral energy tax reform that uses tax revenue to reduce income tax, tax revenue should be spent to full the specific purpose of the energy tax itself, such as for the distribution of renewable energy or eco-friendly facilities. However, mechanisms are needed to ensure transparency and efficiency in promoting renewable energy in this way.
This paper presents directions for energy tax reform that reflect social costs and helps strike a balance between improving the environment and meeting Korea’s economic needs. This research concludes that energy tax reform in the power generation sector is one of the most important policies to improve Korea’s energy supply and demand, enhance efficiency in resources allocation, improve the atmospheric environment, and reduce greenhouse gas emissions.