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The differentiated impact of emissions trading system based on company size

Koo, Yoonmo, Lee, Yoonha, Kim, Yong-gun
Climate policy 2019 v.19 no.7 pp. 923-936
European Union, business enterprises, carbon markets, economic impact, energy, environmental policy, greenhouse gases, industry, models, California, South Korea
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.