The differentiated impact of emissions trading system based on company size

ABSTRACT

Most countries implementing an emissions trading system (ETS), such as EU member states, California in the US, or South Korea, are generally targeting large sized companies, which consume energy above a specific threshold. However, previous studies using computable general equilibrium (CGE) models have analyzed climate policies without considering company size. This may have led to inaccurate results because the impacts of climate policy would differ depending on the coverage of regulated companies. Accordingly, this study examines the environmental and economic impacts of greenhouse gas emission reduction policies, assuming policy results vary by firm size, as covered by the Korean emission trading system. To this end, a CGE model with a separate social accounting matrix based on company size is used to compare three scenarios that reflect different types of carbon pricing methods. The results show that greenhouse gases will be reduced to a lower extent and utility will decrease more if mitigation policies are only imposed to large companies.

Key policy insights

• Carbon pricing policies should consider the different impacts on companies of different sizes and industry sectors.

• Without considering the different sizes of companies covered by an ETS, the expected carbon price and its economic impact will be underestimated.

• Small and medium-sized companies will face more negative impacts than large companies in some industry sectors under an ETS, even if the mitigation burden is only faced by large companies.

KEYWORDS:

• Carbon tax
• SMEs
• computable general equilibrium
• climate policy
• greenhouse gas emissions

Acknowledgements

This research is based on a research report, titled ‘A Study on Quantitative Analysis of Climate Policies in Korea’, issued by Korea Environment Institute (2016). Also, we thank the anonymous reviewers whose comments have greatly improved this manuscript.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 Out of 602 companies, the greenhouse gas emissions of large companies account for 90% of the total emission covered by the K-ETS.

2 Countries are categorized into 13 groups: ANZ (Australia and New Zealand), CAN (Canada), CHN (China), EUR (Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Lithuania, and Luxemburg), IND (India), JPN (Japan), KOR (Korea), LAF (Mexico, Brazil, Chile, Columbia, Ecuador, Argentina, Peru, Bolivia, Uruguay, Costa Rica, Senegal, Central Africa, Ethiopia, Mozambique, Uganda, Zambia, and Tanzania), MEA (Egypt and Middle East countries), OEU (Rest of EU), RUS (Russia), SEA (Pakistan, Thailand, Singapore, Malaysia, Indonesia, Philippines, Vietnam, Bangladesh, and Myanmar), and USA.

3 In 2010, SMEs were defined as having fewer than 300 employees.

4 Each intermediate input flow proportion has been determined and rebalanced using the RAS method (Stone, 1961).

Additional information

Funding

This research was funded by the Korea Ministry of Environment as Climate Change Correspondence R&D Program (2014001300001).