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Increasing Global Climate Ambition and Implications for Korea Trade policy, Environmental policy

Author Jin-Young Moon, Soo Hyun Oh, Youngseok Park, Sunghee Lee, and Eunmi Kim Language Korean Date 2020.12.30

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   Since the adoption of the Paris Agreement in 2015, the international community has been heeding the urgency of responding to climate change and calling for wider and more decisive actions to mitigate GHG emissions. In particular, 2020 is the year set for review of the nationally determined contributions (NDC) previously submitted by each Party of the Paris Agreement, and for submitting long-term low greenhouse gas emission development strategies (LEDS). In addition, many countries are seeking a sustainable economic recovery plan that reflects climate change and environmental considerations to overcome COVID-19. Also, as major greenhouse gas emitters participate in the declaration of carbon neutrality vision and EU plans to introduce carbon border tax, the issue of greenhouse gas reduction is expected to affect not only domestic economic and industrial policies, but also diplomatic and international trade sectors. Accordingly, this research was carried out to present our policy recommendations by analyzing measures to strengthen greenhouse gas reduction targets and the economic impact of the EU's Carbon Border Adjustment Mechanism (CBAM). 
   Chapter 2 covers recent discussions in the international community on transition to a low-carbon economy and carbon neutrality, and government policies related to GHG reduction in EU, USA, China, Japan and Korea are reviewed. In order to promote the European Green Deal to achieve carbon neutrality in the region by 2050, the EU has established action plans for each sector such as industry, power generation, resource circular economy, and transportation, while also making considerations for financial aid and support for the vulnerable. In the case of the United States, which has been pursuing a rather conservative environmental policy under the Trump administration, as Joe Biden has been elected in the 2020 presidential election, significant changes are expected in policies to respond to climate change. China, the largest greenhouse gas emitter, has shown a somewhat inconsistent policy stance in regulating fossil fuels, but the country also proposes achieving carbon neutrality until 2060. Japan has also announced carbon neutrality by 2050. Korea recently presented the vision of the Green New Deal as part of the Korean New Deal and plans to realize net zero by 2050.
   Chapter 3 examines the status of greenhouse gas emissions in major countries, and analyzes the characteristics of carbon dioxide emissions embodied in international trade, mainly in the EU and Korea. We have found that mainly developed countries were net importers of carbon dioxide embodied in trade as of 2015, while many Asian countries excluding Japan were net exporters. Based on the OECD’s emissions and trade data, we have estimated additional costs assuming that the EU imposes a tax of 30 euros (36 dollars) per ton of carbon dioxide embodied in imported goods from non-EU countries. These results can be considered equivalent to the costs of imposing a certain percentage of tariffs. Among the EU’s major trading partner countries, India would be required to pay extra costs equivalent to the highest tariff rate of 4.6% while China would be faced with the largest cost of over 11.9 billion dollars in scale with a tariff rate of 2.6%. Korea would be charged the same cost as the 1.9% tariff rate. Indeed, the impact of introducing carbon border tariffs or carbon taxes limited to imported goods will be determined by various factors such as the structure of global value chain between countries. Therefore, it is necessary to prepare countermeasures based on the results of objective research.
   The theoretical model in Chapter 4 assumed a political system with a democratic decision-making process. Specifically, this model assumes that there are two groups of economic actors ‒ Group F (Fossil fuels) and Group R (Renewable energy) in the economy under the democratic political system. The difference between these groups is their own production technology, assuming that the Group F has a fossil fuel-based production technology and the Group R has a renewable energy-based production technology. We found that economic actors with fossil fuel-based production technology prefer a relatively low carbon tax rate to those with renewable energy-based production technology. This model derives the political economy equilibrium of a carbon tax policy by analyzing the endogenous decision process of the policy through a political economy approach in which two groups engage in political competition within a macroeconomic model.
   At the end of 2019, the EU announced a blueprint called the European Green Deal to actively respond to climate change, including the introduction of thr CBAM. A public survey was conducted to collect opinions, with the aim of submitting legislation of this mechanism by the first half of 2021. It was found that the EU is considering three implementation plans: the first is to apply a carbon tax to imported goods and products within the EU, the second is to impose carbon customs duties only on imported goods in the form of tariffs, and the third is to apply the EU Emission Trading System (ETS) to goods imported into the EU. In this context, Chapter 5 analyzes the economic impact of the introduction of the CBAM on the trade patterns of Korea and other major trading countries. We used the Computable General Equilibrium (CGE) model with GTAP data, and estimated the impact of imposing taxes derived in Chapter 3 on specific industries in the form of tariffs. Our approach also considered the possibility that the carbon border tax would be preferentially applied to industries such as cement and steel with high carbon emissions. As a result, we found that exports from major trading countries to the EU declined significantly as the EU’s own production increased for industries that imposed a carbon border. In particular, China, India, and Russia, which have high unit carbon emissions, saw the largest decrease in exports to the EU.
   Chapter 6 presents the basic strategies and policy recommendations for effective response to the introduction of the carbon border adjustment system by partner countries including the EU, and to realize Korea’s low-carbon transition and carbon-neutral goals. First, it is necessary to support low-carbon transition efforts in industries that are highly dependent on fossil fuels and are vulnerable to emission regulations. To do this, sufficient discussions with stakeholders have to be preceded. Sharing domestic and foreign policy trends and persuading the industries to reduce emissions are also required. For example, tax incentives can influence companies’ decisions, encouraging them to change their existing diesel trucks to hydrogen electric trucks. It is also necessary to support retraining and re-employment of workers in fossil fuel-related industries.
   Second, in order to respond to climate change, it is also important to support low-carbon technological innovation. The development of these technologies normally takes a long period of more than 10 years, so the slower the investment takes place, the slower the transition proceeds to a low-carbon economy, which may eventually result in a greater financial burden. Therefore, it is necessary to consider practical ways for the private sector that can lead industries to pursue the innovation of low-carbon technologies. Policies providing subsidies, or imposing revenue taxes on the use of existing GHG emission technologies could be considered.
   Third, monitoring and response measures for the carbon border adjustment system should also be prepared. There is a need to continuously monitor regulatory trends in major countries, and promote exchange and cooperation with overseas research institutes. Above all, it is necessary to discuss various policies to prepare countermeasures for the EU’s carbon border adjustment system. The purposes of introducing this system seem to be not only to reduce emissions, but also to protect its domestic enterprises and secure financial resources for the European economic recovery. From Korea’s perspective, efforts to obtain exemption are needed by presenting the effectiveness of its environmental norms and regulations. At the same time, Korea could also consider a more aggressive position of taking similar measures against the EU. It is necessary to establish environmental and trade policies while considering that other partners can introduce carbon border adjustment measures. 
   Fourth, the private sector needs to expand voluntary efforts to mitigate emissions and environmentally sustainable investment. It is clear that the paradigm shift towards a low-carbon economy is an irreversible global trend. The prevalent outlook is that clean energy generation costs will continue to decline, and that fossil fuel regulations and investment restrictions will continue. Business models or corporate activities aimed at reducing carbon emissions are becoming an important condition in evaluating financial value of the company as well as corporate social responsibility. Global companies are already expanding their investments to achieve their own net zero targets or renewable energy use targets, and are changing new business models to suit the low-carbon economy paradigm. Therefore, it will be necessary for Korean industries to make self-sustaining efforts to develop new business models through technological innovation and investment, and to rebuild competitiveness as a responsible global company. As part of these efforts, mainstream considerations for climate change and GHG reduction must be incorporated into the decision-making process of companies.
   Lastly, it is necessary to actively participate in international cooperation from the viewpoint of not only reducing greenhouse gas emissions but also responding to climate change. First, at the level of the government or local governments, policy exchange and cooperation with other countries can be carried out on whether a mitigation target is appropriate, whether all necessary policy measures are considered and how to monitor the achievement of the target. In addition, as the transition to a low-carbon economy requires a comprehensive shift across all areas of society, climate change issues should be set as the main agenda in multilateral consultation system as well as a consultative body specialized in climate change. It is also important for the private sector, which encompasses business, academia, and civil society, to study success cases by utilizing global networks, and to proactively identify and respond to related technologies and policy trends in the international community.
   This study is meaningful in that it preemptively analyzed the CBAM issue raised by the EU while analyzing the recent efforts of the international community to respond to climate change and reduce emissions. However, we expect a more elaborate analysis could be derived when reflecting the EU’s final decision and factoring in segmented industrial items. In addition, conformity of a carbon border tax with WTO norms and a further analysis of the possibility of introducing a carbon border tax in countries and regions outside the EU will also be needed.

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