Status of Energy Taxation and Analysis of Issue-Specific Effects
Published on 29 November 2019
Published by Property & Consumption Tax Analysis Division of the Estimates and Tax Analysis Department
The transition towards a low-carbon economy via economic growth and the improvement of environmental pollution has become a key concern in the global economy. Energy taxation plays a vital role by serving as a corrective tax through associated pricing and tax incentives towards inducing a transition towards green energy, bearing the environmental burden of energy usage and preventing the over-usage of energy. Major economies throughout the world are continuing to adjust their energy tax system to promote a low-carbon economy. A case in point is major European countries, which have been pursuing Environmental Tax Reform (ETR) since the 1990s. The ETR is an eco-friendly tax reform that shifts taxation from items that do not impact the environment to items that have an impact on the environment, with the aim of improving the environment, employment and economic growth. Korea also implemented tax rate adjustments from 2001 to 2007 in the form of the 1st and 2nd Energy Taxation Reform, which involved relatively higher price hikes for diesel and LPG (butane) than for gasoline. In addition, as issues such as the imbalance in power supply and demand as well as the need for environmental improvement emerged in 2014, a tax on bituminous coal for power generation was introduced, expanding the scope of energy taxation beyond transport fuels to the power generation sector.
In this report, an analysis is conducted of such global trends regarding energy taxation as well as of domestic issues – mainly those proposed by legislators of the 19th and 20th National Assembly – by using NABO’s self-developed tax simulation model (TAXSIM). Through the proposals made by legislators, four main issues – the removal of the kerosene tax, a higher heavy oil tax, a carbon tax and an electricity tax – in addition to those reflecting global trends (the relative price adjustment of transport fuels) and issues reflecting outstanding domestic issues such as fine dust particles (incorporating the cost of air pollution), were analyzed via the model.
The analysis concluded that households’ purchasing costs of both energy and non-energy sources have increased due to the direct and indirect input structure of energy in industry. In particular, the incorporation of a carbon tax and pollution costs led to increased non-energy purchasing costs in households, whereas equity among households was somewhat renewed via the removal of the kerosene tax and the relative price adjustment of transport fuels. The impact on industry price competitiveness varied by issue, with businesses using high amounts of energy being the most affected in this regard. The removal of the kerosene tax strengthened the price competitiveness of food and lodging businesses as well as the agricultural and fisheries industries. The improvement in environmental pollution had a strong effect when a tax was imposed across all energy sources such as through a carbon tax or by incorporating the cost of pollution. Conclusions can vary depending on how energy taxation is structured. Therefore, energy taxation should be reviewed as part of a policy mix in which environmental goals are coupled with growth objectives. A comprehensive review should be made regarding the provision of policy support towards reducing the tax burden of households while improving equity; providing policy support towards reducing the tax burden imposed on industry while strengthening the price competitiveness of energy usage; and providing policy support towards securing new growth drivers by creating new energy industries.