The economic impact and employment effect of energy transition policy in Korea

Abstract

The international concern about the climate crisis is increasing, and efforts to achieve the 1.5°C pathway have been continued even in the recent global energy crisis. Many countries established the NDC (Nationally determined contribution) containing the roadmaps and are striving to realize them. In line with this, Korea also presented NDC to the international community in 2015. Also, in 2021, Korea updated the NDC upgrading of the greenhouse gas (GHGs) reduction goal to 40% compared to 2018. The energy transition is one of the main driving forces to mitigate the climate crisis used in many countries. The energy transition direction is from fossil fuels to renewable energy, and many governments have tried to support this deployment of the renewable industry. However, for sustainable development, we also have to consider the energy transition's economic aspect together. In particular, understanding the ripple effect of the policy is essential for effective implementation. In this context, this study assesses the economic impact of the energy transition. The power generation industry is the main field of the energy transition as the top priority for GHGs reduction. According to the energy transition, the fossil generation industry decreased as the amount of increasing renewable. This study examines the economic impact of generation mix changes. For this, we used input-output analysis that has strength in reflecting the transaction relation between industries. We need the detailed input-output table containing each generation sector separately to investigate the impact of the mix changes. However, the official input-output table published by the Bank of Korea has a generation sector with nuclear, thermal power, and renewable generation. Therefore, we develop the table with the sector separation process before analysis. We modified the input-output table in 2019 into the separated generation sector: coal, LNG, nuclear, solar PV, and wind. Also, to confirm the economic effect of the energy transition policy in Korea, we estimated a future table using policy scenarios. Because the electricity demand is controlled by the government's basic electricity generation plan in Korea, the policy scenario could reflect the information about the energy transition direction in each generation source. Using the target generation goal in electricity policies, we estimated a future table and quantified the economic inducement effect of each scenario. The economic inducement analysis results show in coefficient and monetary value. Nuclear (0.8354) and wind (0.7655) are higher than the entire industry average (0.7450) in value-added inducement coefficient, and only wind (7.05 people per billion KRW) is above average in labor inducement coefficient. The monetary value tendency is also similar to these results. In the base scenario, the NDC with the high increase in renewable shows the most significant effect. However, the NDC reacts sensitively to the increase in the cost of coal and LNG generation in value-added effect. The 10th basic scenario is relatively more stable than NDC in the value-added. These results imply that the additional cost of fossil electricity diminishes the inducement effect, and nuclear has the potential as an alternative to renewable electricity, especially in the value-added aspect. The second analysis uses a macroeconomic model that reflects ETS (Emission Trading Scheme) in Korea, a dynamic stochastic general equilibrium model. We set two types of energy and added carbon reduction technology to the emission term. Also, we consider the substitution relationship between two energies using the constant elasticity of the substitution function. Using this model, we investigated the dynamic effect of five exogenous shocks (total factor productivity technology, carbon reduction technology, price of each energy, and carbon permit price) on GDP, labor, and emissions. The impulse response function results imply that carbon reduction technology would be the option for the conventional energy industry rather than ETS. The environment variable response is higher in carbon reduction technology shock, with a similar response in economic variables. Also, if the free allocation rate of carbon permits decreases faster than the current plan, it would have an environmental effect. However, this effect can potentially become adverse in the energy transition structure. Thus, the faster auctioning of allowance policy has to be implemented by monitoring the energy transition.