Implementation of the Tradable Pollution Permits Scheme and its Impacts on Regional Economies : A Case Study of Korea

Abstract

This paper attempts to construct a simple multi-region environmental computable general equilibrium model to analyze the impacts of the trade pollution permit scheme (TPPS) implementation on the economies of two Korean regions - the Seoul Metropolitan Region and the rest of nation. Three TPPS implementation systems are examined. The premise for each system is that the Seoul Metropolitan Region should reduce current SOx emissions by 5%. Through the first system, pollution permits are allocated by the auctioning system. The second involves allocation of pollution permits by the grandfathering system based on pollutants generated from sectors. In the third method, pollution permits are also allocated by the grandfathering system but based on pollutants emitted from sectors. The impacts of each systemon the Korean economy are specifically analyzed using the model constructed in this paper and evaluated in terms of environmental costs, gross regional domestic product, gross domestic product, and compensating variation. The paper suggests that the grandfathering allocation system is preferable to the auctioning system in Koreaand that allocation of pollution permits among sectors should be based upon the pollutant emitted method. Finally, the paper demonstrates that the TPPS can be a so-called ‘win-win’policy which means that it can enhance the environmental quality without sacrificing the economic development.