Analisis Hubungan Antara Energi, Ekonomi, Lingkungan Dan Sosial DG Sistem Energi Berkelanjutan

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ANALYSIS OF THE INTERRELATIONSHIP OF

ENERGY, ECONOMY, AND ENVIRONMENT:
A MODEL OF A SUSTAINABLE ENERGY FUTURE FOR KOREA
by
Kyung-Jin Boo
A dissertation submitted to the Faculty o f the University o f Delaware in

partial fulfillment o f the requirements for the degree o f Doctor o f Philosophy in Urban
Affairs and Public Policy
Summer 2000
Copyright 2000 Kyung-Jin Boo

A ll Rights Reserved
UMI Number 9998730
Copyright 2000 by
Boo, Kyung-Jin
All rights reserved.
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ANALYSIS OF THE INTERRELATIONSHIP OF

ENERGY, ECONOMY, AND ENVIRONMENT:
A MODEL OF A SUSTAINABLE ENERGY FUTURE FOR KOREA
by
Kyung-Jin Boo
Approved:
HWekrLu,
AJRaffel, Ph. 11ly
irecto ro f the School o f Urban Affairs and Public Policy
Approved:
_________________________________
Daniel Rich, Ph.D.
Dean of the Graduate College of Human Services, Education and
Public Policy
Approved:
Conrado M. Gempfesaw n, Ph.D.
Vice Provost for Academic Programs and Planning
I certify that I have read thi^ "dissertation and that in my opinion it meets
the academic and professional standard required by the University as a
dissertation for the degree o f Doctor o f Philosophy.
Signed:
a
Young-Doo Wang, Ph.D. j
Professor in cnarge o f dissertation
I certify that I have read this dissertation and that in m y opinion it meets
dissertationfOr\he degreb o f D octor o f Philosophy.
Signed:
John EtymeyPn.D.
7
Professor in charge Oi dissipation
I certify that I have read this dissertation and that in my opinion it meets
Signed:
William Latham HI, Ph.D.
Member o f dissertation committee
I certify that I have read this dissertation and that in my opinion it meets
Signed:
Eui-Soon Shin, Ph.D.
Member o f dissertation committee
ACKNOWLEDGMENTS
The intellectual journey I have taken during the Ph.D. program at the
Center for Energy and Environmental Policy (CEEP) has been a watershed event in
my life that has enriched me through exposure to new ideas and great minds o f various
backgrounds and disciplines. As a result, I am now quite different from the person I
used to be in terms o f academic achievement and ideology, and have gained a more
balanced perspective toward the world and life.
I am indebted to a number o f individuals who, in various ways, were
instrumental in the successful completion o f this dissertation. In particular, I would
like to express m y sincere thanks to Professor Wang for his insights, guidance and
encouragement at every stage in the development o f this doctoral thesis. I am also
deeply indebted to Professor John Byrne for introducing me to alternative discourses
in energy and environmental studies. His comprehensive knowledge inspired me
intellectually and enriched and broadened my worldview. His guidance was key to the
development o f the underlying theory o f my dissertation. I also wish to thank the other
members o f my committee, Professors William Latham and Eui-Soon Shin. Professor
Latham taught m e the econometric simulation modeling technique, which was the
basis o f the quantitative analytical methodology employed in this dissertation. He
provided ingenious tips whenever I encountered trouble with the econometric model.
Professor Eui-Soon Shin graciously accepted the burden o f becoming a committee
member when first asked to do so. His review o f and comments on my dissertation
was more than helpful. In addition, I would like to take this opportunity to recognize
iv
Chris Linn, a graduate student in CEEP, for his outstanding job as an editor o f my
dissertation draft.
This dissertation is dedicated to each member o f my beloved family for
their unbounded support and patience. Nothing can compensate the immeasurable
sacrifice m y mother, Im-Keun Shin made for her three sons since my fathers untimely
death. I hope that she is proud o f her sons for their achievements. My beloved wife,
Hyunduk has been in and out o f the U.S. every summer and winter break to support
me spiritually as well as financially. I only regret that she couldnt attend my disserta
tion defense as originally planned because o f an operation conducted just three weeks
before my defense. She has been the inspiration o f my life, including the time taken to
complete the dissertation. I will be forever, happily, in her debt. M y son, Chang-Yong
has been staying with me throughout this journey, witnessing the slow but steady pro
gress o f my dissertation. I feel sorry for not being a better father to him, taking the dis
sertation as an excuse. I hope he will understand my feelings someday in the future
when he is grown up and might be busy with his own doctoral dissertation.
Kyung-Jin Boo.
10 July, 2000
TABLE OF CONTENTS
LIST OF TABLES.................................................................................................................. x
LIST OF FIGURES............................................................................................................. xii
ABSTRACT........................................................................................................................ xiv
Chapter
1
INTRODUCTION...................................................................................................... 1
1.1. Identification o f Research Problems...............................................................1
1.2.
Purpose o f the Study........................................................................... 4
1.3.
Methodology........................................................................................ 6
1.4.
Organization o f the Dissertation........................................................ 9
THEORETICAL FRAMEW ORK..........................................................................11

2.1 Theories o f Sustainable Development..........................................................11
2.1.1 Economics Perspective..................................................................... 14
2.1.2 Ecological Perspective...................................................................... 17
2.1.3 Socio-political Perspective...............................................................19
2.1.4 Integrative Approaches.................................................................... 21
2.1.4.1 Ecological Economics Approach.................................... 23
2.1.4.2 Steady-State Economy......................................................24
2.1.4.3 M CA (Multi-Criteria Analysis)...................................... 25
2.1.4.4 Equity-Based Approach................................................... 26
2.2 A Global Perspective o f Sustainable Development: Evolution of a
Global Order................................................................................................... 31
2.2.1 Negotiation o f Global Environmental Issues.................................33
2.3 Sustainable Energy Development................................................................ 36
2.3.1 Sustainable Energy Development as a G oal..................................39
2.3.2 The Economic Dimension of a Sustainable Energy System
41
2.3.2.1 Energy Efficiency.............................................................41
2.3.2.2 Renewable Energy........................................................... 43
2.3.3 The Environmental Dimension o f Sustainable Energy
System ................................................................................................ 43
2.3.3.1 Diversified and Decentralized Energy System.............43
2.3.3.2 Social Cost-Based Energy Prices....................................44
2.3.4 Socio-Political Dimension o f Sustainable Energy Systems
44
vi
with permission of the copyright owner. Further reproduction prohibited without permission.
2.4
2.5
2.3.4.1 Deomocratic Energy System ........................................... 45

2.3.4.2 A n Equtiy-Based Energy System.....................................45
2.3.4.3 A n Energy Service Oriented System .............................. 48
Modeling Framework for a Sustainable Energy S ystem .......................... 48
Conclusion...................................................................................................... 51
SUSTAINABLE ENERGY DEVELOPMENT IN THE KOREAN

CO N TEX T............................................................................................................... 53
3.1 Overview o f Economic Situation in Korea.................................................. 54
3.2 Diagnosis o f the Korean Energy System..................................................... 56
3.2.1 Energy Demand by Fuel Type......................................................... 57
3.2.1.1 Petroleum........................................................................... 58
3.2.1.2 Coal: Anthracite and Bitum inous....................................59
3.2.1.3 Gas: LNG........................................................................... 59
3.2.1.4 Electricity........................................................................... 60
3.2.2 Energy Demand and Supply by Sector........................................... 61
3.2.2.1 Industrial Sector.................................................................62
3.2.2.2 Residential, Commercial, and the Public S ector...........63
3.2.2.3 Transportation Sector....................................................... 65
3.2.2.4 Energy Transformation Sector: Electricity and
District Heat....................................................................... 67
3.3 Korean Energy Policy.................................................................................... 71
3.3.1 Basic Framework o f the Current Energy Policy........................... 72
3.3.2 Energy Price and T a x ...................................................................... 74
3.3.3 Deregulation and Restructuring in Korean Energy Industry
77
3.3.4 Environmental Concern in the Korean Energy Policy..................78
3.3.4.1 Policies on Energy-Related A ir Pollutant
Emissions........................................................................... 79
3.3.4.2 Policies on Green-House Gas (GHG) Em issions
83
3.4 Sustainable Energy Development for K orea.............................................. 86
3.4.1 Emerging Environmental Awareness............................................. 86
3.4.2 External Pressure and Nuclear P ow er............................................ 87
3.4.3 Harmonization o f Energy and Environmental Policies................88
3.4.4 Internalization o f Social Costs.........................................................90
3.4.5 Towards a Sustainable Energy System...........................................92
3.5 Summary and Conclusion............................................................................. 93
POLICY SIMULATION M O D EL........................................................................ 95

4.1 Introduction....................................................................................................95
4.2 Reviews o f Simulation Modeling Techniques............................................96
4.2.1 System D ynam ics.............................................................................97
4.2.2 Input-Output (I-O) M odels..............................................................99
vii
4.2.3 Linear Programming Models........................................................ 101

4.2.4 Econometric Models...................................................................... 101
4.2.5 Hybrid Models............................................................................... 103
4.3 Development o f Econometric Simulation M odel................................... 105
4.3.1 Model Structure............................................................................. 106
4.3.2 Sectors............................................................................................ 108
4.3.3 Model Specification......................................................................I l l
4.3.3.1 Economic M odule......................................................... 113
4.3.3.2 Energy M odule...............................................................119
4.3.3.3 Environmental M odule..................................................123
4.3.3.4 Socio-Political M odule..................................................127
4.3.4 The D ata.........................................................................................129
4.4. Summary and Conclusion......................................................................... 130
5
MODEL ESTIMATION AND POLICY SIMULATION................................132

5.1 Estimation and Prediction......................................................................... 132
5.2 Forecasting.................................................................................................. 140
5.2.1 Assum ptions...................................................................................141
5.2.2 Simulated Projection: Reference C ase........................................ 144
5.2.2.1 Projection o f Economic Indicators...............................145
5.2.2.2 Projection o f Energy Demand and CO 2 E m issions.... 146
5.2.2.3 Projection o f Environmental Indicators....................... 149
5.3 Policy Sim ulation....................................................................................... 151
5.3.1 Policy Simulation Scenarios......................................................... 151
5.3.2 Policy Simulation R esults............................................................ 155
5.3.2.1 Impacts on Energy Demand.......................................... 156
5.3.2.2 Impacts on Environmental Variables........................... 162
5.3.2.3 Impacts on the Econom y.............................................. 165
5.3.2.4 Reinvestment o f Energy and Carbon T ax es................168
5.3.2.5 Induced Energy Efficiency Improvements.................. 169
5.3.2.6 Stabilization o f CO 2 Emissions at the Level o f
2000................................................................................. 171
5.4 Major F indings.......................................................................................... 174
5.5 Summary and Conclusion..........................................................................176
STRATEGIES FOR SUSTAINABLE ENERGY FUTURE IN KOREA

181
6.1. Introduction................................................................................................181
6.2. Transition toward a Sustainable Energy System ....................................181
6.2.1 Historical Evidence...................................................................... 183
6.2.2 The Next Energy Transition.........................................................187
6.2.2.1 Resources Constraints and Responses in Energy
Demand........................................................................... 187
6.3
6.4
6.5
6.6
7
6.2.2.2 Environmental Concerns................................................. 190

6.2.2.3 Institutional Change..........................................................192
Energy Options for a Sustainable Future in Korea...................................193
6.3.1 Energy Efficiency and Conservation.............................................193
6.3.2 Fuel Switching.................................................................................194
6.3.3 New and Renewable Energy Sources............................................195
6.3.4 Integrated Resources Planning (IRP)............................................ 202
Barriers to the Transition towards a Sustainable Energy Future........... 203
Strategies o f Energy Transition for Korea................................................ 206
6.5.1 Reform Strategy.............................................................................. 207
6.5.2 Institutional Strategy.......................................................................208
6.5.2.1 Characteristics o f Energy Institution............................ 209
6.5.2.2 Removal o f Subsidies.....................................................211
6.5.2.3 Reconfiguration o f Markets and Government
Roles................................................................................ 213
6.5.2.4 Full Cost Pricing: Consideration o f Externalities
217
6.5.2.5 Efficiency vs. Equity.......................................................221
6.5.2.6 Democratic Participation in Energy-Related
Decision Making............................................................. 224
Summary and Conclusion...........................................................................227
CONCLUSION...................................................................................................... 231
7.1. Realities and Issues..................................................................................... 231
7.2. Theories....................................................................................................... 232
7.3 Results from Empirical Analysis: M odeling............................................234
7.4 Goalsand Strategies.....................................................................................235
7.5 Inventing the Future: Can Korea Choose Its Own Energy Future?
238
7.6 Suggestions for Future Research............................................................... 243
Appendix
A
B
MODEL SPECIFICATIONS.................................................................... 246

MAPES (MEAN ABSOLUTE PERCENTAGE ERRORS)................. 251
REFERENCE..................................................................................................................... 252
ix
LIST O F TABLES
Table 3.1
Major Socio-Economic Indicators in K orea.................................................55
Table 3.2
Major Energy Indicators.................................................................................56
Table 3.3
Primary Energy Consumption by Fuel T y p e................................................57
Table 3.4
Final Energy Demand by Sector....................................................................61
Table 3.5
Industrial Energy Consumption by Fuel Type............................................. 63
Table 3.6
Residential/Commercial/Others Energy Consumption............................... 64
Table 3.7
Fuel Consumption in the Transportation Sector..........................................66
Table 3.8
Number o f Vehicles by T y p e ........................................................................ 67
Table 3.9
Fuel Consumption for Power Generation.....................................................68
Table 3.10 KEPCO's Plan o f Power Plant Construction............................................... 70

Table 3.11
Price o f Petroleum Products and Taxes in K orea........................................75
Table 3.12 Air-Pollutant Emissions by Sector and Fuel Type in Korea (1997)......... 82
Table 3.13
CO2 Emissions from Energy Consumption in K orea................................. 85
Table 3.14 Taxes on Fuel Types....................................................................................... 90

Table 4.1
Subdivision o f Sectors.................................................................................. 110
Table 5.1
MAPE Distribution o f the Simulation M o d el........................................... 138
Table 5.2
MAPEs o f Selected Endogenous Variables................................................138
Table 5.3
Assumptions for Exogenous Variables in BAU Forecasting.................. 143
Table 5.4
Projected M ajor Economic Indicators........................................................ 145
Table 5.5
Energy Demand and CO2 Emissions Projection...................................... 148
Table 5.6
Projection o f Selected Environmental Indicators.................................... 149
Table 5.7
Energy Contents, CO 2 Emissions Factors and Tax Rates ($5/bbl

equivalent ta x )..............................................................................................153
Talbe 5.8
Scenarios Set-Up for Policy Sim ulations................................................. 154
Table 5.9
Impact o f Excise Tax on Primary Energy Consum ption........................ 158
Table 5.10
Impact o f Energy Tax on Primary Energy Consum ption....................... 159
Table 5.11
Impact o f Carbon Tax on Primary Energy Consumption.......................161
Table 5.12
Impacts o f Energy and Carbon Taxes on Environment in 2020.............163
Table 5.13
Impacts o f Energy and Carbon Taxes on the Economy.......................... 167
Table 5.14
Economic Benefits o f Carbon Tax Reinvestment ($10/bbl Carbon

Tax)................................................................................................................ 169
Table 5.15
Economic Benefits o f Carbon Tax Reinvestment ($10/bbl Carbon

Tax)................................................................................................................ 171
Table 5.16
Economic Impacts o f 2000 CO2 Stabilization ($20/bbl Carbon

Tax)................................................................................................................ 173
Table 5.17
Impacts o f Carbon Taxes on Energy Consumption.................................175
Table 6.1
New and Renewable Energy Potential in Korea......................................196
Table 6.2
Typology o f Decision-Making (DM) M odel...........................................227
xi
LIST OF FIGURES
Figure 2.1
Objective o f Environmentally Sustainable Development.........................26
Figure 2.2
CO 2 Parity in the Year 2050.........................................................................27
Figure 2.3
Economic Parity in the Year 2050............................................................... 28
Figure 2.4
Optimality, Sustainability, and Survivability.............................................30
Figure 2.5
Sustainable Energy Development................................................................ 40
Figure 2.6
Interactions o f Energy, Economy, Environment, and SocioPolitics.......................................................................................................... 50
Fgirue 3.1
Trend o f Energy Consumption by Fuel Type............................................. 58
Figure 3.2
Trend o f Share by Sector in Final Energy Consumption........................... 62
Figure 3.3
Emission Trend and Concentration o f Major Air-Pollutants....................80
Figure 3.4
Trend o f CO 2 Emissions from Energy Consumption................................ 85
Figure 4.1
General Scheme o f Simulation M odel......................................................108
Figure 4.2
Economic M odule.......................................................................................114
Figure 4.3
Energy M odule............................................................................................120
Figure 4.4
Environmental Module............................................................................... 125
Figure 4.5
Socio-Political Module............................................................................... 128
Figure 5.1
Actual and Predicted Values o f Selected Economic Variables.............. 135
Figure 5.2
Actual and Predicted Values o f Energy Variables.................................. 136
Figure 5.3
Actual and Predicted Values o f Environmental Variables......................137
Figure 5.4
Energy Demand and CO2 Emissions Projection..................................... 148
Figure 5.5
Forecasted Emissions and Air Q uality...................................................... 150
Figure 5.6
Impacts o f Excise Tax on Primary Energy Consum ption....................... 157
Figure 5.7
Impacts o f Energy Tax on Primary Energy Demand................................159
Figure 5.8
Impacts o f Carbon Tax on Total Primary Energy Dem and.....................161
Figure 5.9
Impacts o f Taxes on SO 2 , NOx, and C O ................................................... 162
Figure 5.10 Economic Impacts o f Energy and Carbon T axes..................................... 166

Figure 5.11 CO 2 Stabilization Impacts on the Econom y..............................................173
Figure 6.1
Institutions Influencing Sustainable Energy System ............................... 210
Figure 6.2
Dynamics o f Energy Market Structures....................................................216
Figure 6.3
Institutional Strategy for Sustainable Energy Future............................... 229
ABSTRACT
The primary purpose o f this dissertation is to provide the groundwork for a
sustainable energy future in Korea. For this purpose, a conceptual framework of sus
tainable energy development was developed to provide a deeper understanding of
interrelationships between energy, the economy, and the environment (E3). Based on
this theoretical work, an empirical simulation model was developed to investigate the
ways in which E3 interact.
This dissertation attempts to develop a unified concept o f sustainable
energy development by surveying multiple efforts to integrate various definitions of
sustainability. Sustainable energy development should be built on the basis o f three
principles: ecological carrying capacity, economic efficiency, and socio-political
equity. Ecological carrying capacity delineates the earths resource constraints as well
as its ability to assimilate wastes. Socio-political equity implies an equitable distri
bution o f the benefits and costs of energy consumption and an equitable distribution of
environmental burdens. Economic efficiency dictates efficient allocation o f scarce
resources.
The simulation model is composed o f three modules: an energy module,
an environmental module and an economic module. Because the model is grounded
on economic structural behaviorism, the dynamic nature o f the current economy is
effectively depicted and simulated through manipulating exogenous policy variables.
This macro-economic model is used to simulate six major policy intervention scenar
ios. Major findings from these policy simulations were: 1) carbon taxes are the most
effective means o f reducing air-pollutant emissions; 2) sustainable energy develop

ment can be achieved through reinvestment o f carbon taxes into energy efficiency and
renewable energy programs; and 3) carbon taxes would increase a nations welfare if
reinvested in relevant areas.
The policy simulation model, because it is based on neoclassical econ
omics, has limitations such that it cannot fully account for socio-political realities
(inter- and intra-generational equity) which are core feature o f sustainability. Thus,
alternative approaches based on qualitative analysis, such as the multi-criteria ap
proach, will be required to complement the current policy simulation model.
xv
Chapter 1
INTRODUCTION
1.1
Identification o f Research Problem

The question o f linkages between fossil fuel use and environmental
degradation has gained increasing attention over the past three decades. Energy and
environmental policy makers have worked together in the formulation and implement
ation o f policies to arrest rates o f air pollution caused by excessive consumption of
fossil fuels. The environmental effects of energy use, however, have much broader
implications for society as a whole and have spurred the study o f sustainable energy
development. The energy-environment nexus was an area o f intense debate at the
United Nations Conference on Environment and Development (UNCED) in 1992 and
1997. In Agenda 21, Chapter 9 (UNCED, 1992), it was agreed that current patterns o f
production and utilization o f energy cannot be sustained, and that one o f the ways o f
promoting sustainable development is to reduce adverse effects on the atmosphere
from the energy sector.
Sustainability in energy development has been approached from diverse
perspectives such as economic (Daly, 1992, 1981; Peet, 1992), ecological (Odum,
1968; Capra, 1983), and technological perspectives (Lovins, 1977; Goldemberg,
1988). Although each approach reflects its own worldview and valuation o f nature,
individuals, and society, they are similar in approaching current environmental
problems from a systems view. A systems view presumes interactive relationships
among energy, economic, and environmental systems, the so-called E3. The main
stream E3 systems view is a dramatic improvement over purely economic methods o f
analysis, but its omission o f social and political realities limits its ability to capture the
full complexity o f real-world interactions.
More recently, socio-political concerns such as equitable energy consump
tion and environmental justice have been incorporated into the E3 discourse (Byrne et
al., 1998; UNDP, 1995; Munasinghe, 1994). As a result o f this expanded view, it is
now realized that socio-political reforms are required as a precondition for the transi
tion toward a sustainable energy system. Moreover, this view requires us to overcome
narrow neoclassical economic theories which are inadequate for understanding the
holistic and integrated nature of sustainability (Daneke, 1995). The major concern o f
this approach is to maintain the stability o f social and cultural systems, while simul
taneously insuring sustainable use o f resources.
Sustainability issues began to be discussed in a global context as a result
o f several initiatives o f the United Nations. Global environmental issues at an early
stage were limited to the problems o f trans-boundary pollution such as acid rain and
oil spills, which require bilateral agreements between adjacent countries. Beginning in
the 1970s, several major academic works regarding global environmental problems
such as the Club o f Romes Limits to Growth (Meadows et al., 1972) turned our
attention to global sustainability.1 The Brundtland Commissions report, Our
1 Dennis Meadows was a student o f Jay W. Forrester, a professor at MIT, who devel
oped the idea o f systems dynamics in the early 1960s. Extrapolating the trend o f the
existing growth rates in major variables such as population and consumption o f natural
resources, Meadows simulated ecosystem into the fixture. His conclusion was that
humanity would reach the material limit o f several key resources by the mid-twentyfirst century and exhaust the "carrying capacity" o f the earth. It was the first global
simulation analysis by computer.
Common Future (1987) made the concept o f sustainable development a key inter
national issue. The report has since been a role model for sustainable development in
the global context. Its primary contribution to the discourse o f sustainable develop
ment has been the identification o f inequity between generations and classes as one of
the key variables in solving the current global environmental problems.
Another persistent issue that has characterized the global environmental
debate has been the wide separation in the political and economic priorities o f devel
oped and developing nations, commonly referred to as the North-South divide. Both
sides, while agreeing to the seriousness o f global environmental problems such as
ozone depletion, climate change, and the loss o f biodiversity, have different ideas
regarding the causes and solutions o f these problems. Nowhere is this more evident
than with respect to the debate over climate change. For example, the North blames
rapid population growth in the South for intensifying climate change, whereas the
South blames the lavish lifestyles o f the North.
As part o f the effort to expand the E3 discourse, many quantitative models
have been developed to simulate the interactive character o f resource-environment
problems at the global and regional scale. The computer simulation model developed
by Meadows et al. in their monumental work, The Limits to Growth (1972), was the
first global empirical model to tackle the E3 issues. Since then, many modeling tech
niques have been developed to interpret and simulate the interrelationships between
energy, the economy, and the environment. Major techniques employed for this
purpose include the input-output method, linear programming, macro-economic sim
ulations, and the computable general equilibrium model (Donnelly, 1987; Bunn and
Larson, 1997). Each technique has its strengths and limitations in dealing with the
interactions between energy, the economy, and the environment. However, on the
whole, these models have made a great contribution in identifying the interdependent
nature o f the so-called E3 and providing a firm basis for the evaluation o f policies that
are proposed to promote sustainable development.
These empirical approaches, however, fail to incorporate socio-political
issues, such as equity and justice, into their quantitative calculations o f energy con
sumption and environmental costs. The socio-political dimension o f sustainability is
no less important than the three Es. Despite much discussion, there is only a poor
quantitative understanding o f the socio-political dimension o f the energy-economyenvironment nexus. Compared to the interaction of the three E s, there have been few
formal, or empirical, analyses o f how a sustainable energy system would affect the
socio-political structure o f a society.
1.2
Purpose o f the Study

This dissertation has two major purposes: 1) to build a conceptual frame
work of a sustainable energy system that integrates energy, economic, environmental,

and socio-political dimensions of sustainability; and 2) to develop a policy simulation
model for Korea based on the conceptual framework. This methodology will be used
to identify the impacts o f policy tools to achieve a sustainable energy future in Korea.
Firstly, this dissertation will conceptualize a sustainable energy system.
Currently, sustainability has been defined in as many ways as there are academic
disciplines. This multiplicity o f definitions causes so much confusion that its meaning
has become obfuscated, hi this regard, it would be valuable to draw a clear-cut and
unambiguous definition o f sustainability by synthesizing recent works. In this theo
retical effort, an operational definition o f sustainable energy development will be
suggested, based on a survey o f the dominant theories o f sustainable development. The

development of this definition will also require an in-depth analysis o f socio-political
dimension to better understand, and get a clearer picture of, sustainability in terms o f
energy development. From a socio-political viewpoint, a sustainable energy system is
characterized by intergenerational, interregional, and interclass justice.
As the second goal set by this dissertation, an empirical simulation model
will be developed to support the theoretical framework established in the first part. An
empirical model is not only necessary for supporting the conceptual framework o f
sustainable energy development, but it also provides a simple but realistic understand
ing o f the relationship among policies, institutions, and social patterns. In recognition
o f these needs, a number o f simulation models (KEEI,2 1998; Jung and Hahn, 1998;
Kwak, 1995; Jung and Yoo, 1994) have been developed which integrate energy, the
economy, and the environment in the Korean context. However, the interactions
between energy and the environment have not been fully reflected in their models.
The analytical focus o f these models is mostly directed on just one aspect o f environ
mental degradation such as global warming. Thus, it is virtually impossible to
describe the overall relationship between energy and the environment in these models.
In contrast, the model developed in this dissertation takes into consideration not only
global wanning, but also air-quality problems caused by energy consumption. This
approach allows a broader understanding o f the energy-environment nexus.
This dissertation also intends to build a more comprehensive simulation
model by including socio-political concerns along with purely economic, energy, and
environmental concerns. Socio-political structure is seen as a key component in this
2 Korea Energy Economics Institute.
simulation model as indicated by the theoretical framework. However, this intention

was left unfulfilled due to insufficient data related to socio-political structure, such as
income distribution and environmental indices. If socio-political concerns were
integrated into the model developed in this dissertation, it would generate essential
information for policy-makers to promote environmental and social sustainability in
society.
1.3
Methodology
It is generally accepted that the establishment o f a sustainable energy
system requires a multi-disciplinary approach, including economics, ecology, and

socio-politics. Following such a mainstream approach, this dissertation will examine
these three dimensions o f sustainability on equal terms. Socio-political structure will
form the overarching context in constructing a theoretical framework o f this dissert
ation.
In order to build a theoretical framework for sustainable energy develop
ment, the dissertation will survey the literature on the dominant theories o f sustain
ability. Several scholars (Byrne, 1996, 1989, 1983; Flavin, 1996, 1994; Munasinghe,
1996; Lovins, 1977) address sustainability in terms o f energy development. The com
monalities among these authors will be identified based on an analysis o f their
theories. These common denominators will be used to develop an operational
definition o f sustainability that addresses energy, economic, environmental, and socio
political concerns.
To create an empirical model o f a sustainable energy system requires a
clear-cut, operational definition o f sustainability. A couple o f scholars attempted to
develop an operational definition o f sustainability by developing a list o f the indices.
Daly (1993) developed the Index o f Sustainable Economic Welfare (ISEW) by syn
thesizing the works o f Zolatas (1981) and Nordhaus and Tobin (1972). Noormans
(1995) and Pezzeys (1992) works probably were the first serious analytical works that
analyzed sustainability concepts and suggested a model for a sustainable development
path, based on an operational definition o f sustainability. They built a general model
depicting stocks and flows o f economic and environmental variables such as capital,
labor and natural resources.3
The methodology in this dissertation basically adopts an eclectic approach
o f neo-classical economics and alternative approaches. Pezzeys analysis (1992) of
sustainable development concepts provides a good example o f this approach. As he
explained, his approach uses neoclassical economic concepts in the context o f intraand inter-generational equity. Furthermore, his integrated concept o f optimality,
sustainability, and survivability is more relevant to the Newly Industrialized Countries
(NICs) such as South Korea, Taiwan, Hong-Kong, and Malaysia in a practical sense.
Based on Pezzeys theoretical framework o f sustainability, this dissertation will
attempt to build an empirical model o f sustainable energy development for Korea.
In the second part, the dissertation attempts to build a simulation model.
Though most empirical models have been developed based on the input-output tech
nique or linear programming, this dissertation will employ an econometric simulation
model as a basic evaluation tool. There are only a few interactive economic-energyenvironmental models that use econometric techniques. The estimation o f regression
3 Pezzey admitted that the assumptions in his models are far from realistic; no
numbers appear; results are only generalized suggestions; one cannot say, based on
this model, whether the development path in a certain country is sustainable, and if
not, what policies should be taken to make development sustainable (1992: 2).
equations that are relevant from the energy, economic, and environmental perspective
is difficult, while mathematical calibration o f relationship among the key factors is
relatively easy. Modeling techniques other than the econometric model are mostly
constructed using mathematical relationships, ignoring any central behavioral notions,
and economic parameters such as prices, income, tax, etc. In contrast, an econometric
model can describe the economic behavioral relationships between major macroeconomic variables, such as prices, income, taxes and GNP. Because an econometric
model is free from a mathematical specification, it shows more flexibility in model
building.
Few attempts have been made in developing econometric simultaneousequation models in the energy and environmental fields, due to limited data avail
ability and poor data quality.4 Despite these restrictions, a number o f simultaneousequation models have been developed to simulate the interrelationship of the three Es
(Italianer, 1986; Mori, 1992). hi this dissertation, an econometric simultaneousequation model that uses endogenous and exogenous variables to describe the
interdependence o f the energy-economic-environmental system will be composed.
4 A good number o f simultaneous-equation models have been developed that are

modestly successful at describing regional as well as national economies. This
method, nonetheless, poses several problems in estimating equations that belong to a
system o f relations as well as with the analysis and interpretation o f such systems. In
particular, when a relation is part o f a system, some regressors are typically stochastic
and correlated with the regression disturbance term. In this case the ordinary least
squares (OLS) estimators of the regression coefficients are inconsistent and other
methods such as indirect least squares (ILS) and two-stage least squares (TSLS) are
devised to provide consistent estimates. In addition, simultaneous equation models
require a database o f good quality. Moreover, econometric simulation models are
criticized as not robust enough to analyze periods o f rapid structural change (Bun and
Larson, 1997).
The model consists o f three modules: economic, energy, and environment

al modules. Each module is composed o f identities as well as stochastic equations,
totaling 35 stochastic equations and 89 identities. To test the predictive accuracy and
robustness o f the model, mean absolute percentage error (MAPE) is employed as a
backcasting technique. Version 3 o f EVierws was the modeling software program
chosen for this effort.5 Several policy simulations will be conducted with the model to
evaluate the impacts o f three types o f taxes excise taxes, energy taxes, and carbon
taxes on key variables. In addition to these policy simulations, the impacts o f energy
and carbon taxes on the economy will be evaluated in the case o f reinvestment o f
carbon taxes into energy efficiency improvements and renewable energy R&D and
dissemination programs.
1.4
Organization of the Dissertation

The dissertation is divided into two basic parts. Part One which is com
prised o f chapters two and three, is concerned with conceptualizing the general theory
o f sustainable energy development, with emphasis placed on the socio-political dimen
sion o f sustainability. Part Two, which comprises chapters four, five, and six, is
devoted to developing a general simulation model to illustrate the interrelationship of
the three Es and socio-political structure, and to quantify the impacts o f various
policies on the possible evolution o f a sustainable energy system.
5 Eviews is a new version o f a set o f tools for manipulating time series data originally
developed in the Time Series Processor (TSP) software for large computers. The
immediate predecessor o f Eviews was MicroTSP, first released in 1981. Eviews
provides sophisticated data analysis, regression, and forecasting tools on Windowbased computers. It is a most useful development tool for economists.
Chapter 2 discusses the conceptual framework o f sustainable energy

development. Here, concepts and operational definitions o f sustainability will be
analyzed. This analysis will consider sustainability generally as well as sustainability
within the context o f the energy problem. Mainstream discourses on sustainability
will be evaluated through an examination o f alternative perspectives. Part o f this
chapter will provide an historical examination o f energy transitions. This historical
analysis will provide insights into the transition from conventional to sustainable
energy systems. Chapter 3 examines the Korean energy system as a case study for
empirical analysis. It first describes the current Korean energy system and discusses
possible strategies for a transition to a sustainable energy system, suggesting what
must be done to accomplish this task.
Chapter 4 develops a simulation model to show the interactions between
energy, the economy, and the environment. Several techniques for simulation model
building will be reviewed, including input-output models, econometric simultaneous
models, linear programming, and computable general equilibrium models. This dis
sertation chose an econometric simultaneous regression model for its analysis. The
final simulation model developed for this dissertation was structured with three
modules: an energy, an economic, and an environmental module. Chapter 5 conducts
and evaluates a policy simulation to provide policy tools for developing a sustainable
energy system. Chapter 6 discusses the possible transition to a sustainable energy
system in Korea. This discussion will be based on the insights gained from the theo
retical framework constructed in Part One and from the empirical analysis provided by
the simulation model. A summary and the policy implications of this dissertation are
provided in the concluding chapter.
10
Chapter 2
THEORETICAL FRAMEWORK
The key issue to be addressed in this chapter is a definition o f sustain
ability. Firstly, a brief review o f theories o f sustainable development will be presented
in order to understand the core concept o f sustainable energy development. Secondly,
a conceptual framework of sustainable energy development will be discussed. At the
end o f the discussion an appropriate theoretical model o f sustainability in energy de
velopment will be suggested, providing the basic framework for developing a sim
ulation model for a sustainable energy system. The discussion will also include an
issue o f energy transition and a discussion o f the socio-political dimension o f the
sustainable energy system.
2.1
Theories o f Sustainable Development

Since the term sustainable development officially appeared in the report o f
the Brundtland Commission, Our Common Future, in 1987, it has become a standard
element in major environment-related discourses.6 However, sustainability remains a
vague, catch-all concept. Despite numerous efforts in refining the definition, the term
sustainable development is still ambiguous and in need of clarification. Sustainabil
ity has been interpreted in different contexts, depending upon different worldviews or
6 The concept o f sustainability was first coined by Barbara Ward for her report to the
1972 Stockholm Conference on the Human Environment. When Ward used it, sustain
able had a much simpler meaning than now: something is sustainable when it is
capable o f being maintained on an indefinite basis (Porritt, 1993: 25).
11
ideologies. These ideologies pose different valuation o f the relationship between

current and future generations, as well as the relationship between hum an beings and
nature (Noorman, 1995). This is the crux o f the problem o f sustainable development,
and perhaps the main reason why there has been great acceptance o f it in principle, but
less concrete actions to put it into practice. Many of those with the power to effect the
necessary changes have the least motivation to alter the status quo th at gave them that
power (Schmidheiny, 1992; as quoted by Daneke, 1995).
Concerned with the ambiguity o f the concept o f sustainable development,
world-renowned thinkers and organizations have worked on the operational concept
ualization o f sustainable development. Herman Daly (1991) and P orritt (1993) were
probably the first scholars to correct the abused concept o f sustainabilfty. They
challenged the concept o f sustainable growth, arguing that economic grow th is
physically limited by the earth ecosystem that is finite, not growing, a n d materially
closed. Therefore, according to his reasoning, sustainable development is possible
only if it is not associated with growth. A similar approach was taken in the World
Bank's World Development Report (1992). The World Banks current work in this
area is designed not to generate a general theory o f sustainability, but rather to focus
on key conceptual issues with potentially important operational implications, hi line
with such an effort, the UNDP is working on the develop-ment o f Sustainable Devel
opment Indices (SDI), on which the sustainability o f a development project and the
economic performance in a country can be evaluated. Besides these institutional
efforts, a number of independent scholars have suggested the conceptual framework o f
sustainability in various ways.
12
There are at least three mainstream perspectives o f sustainable develop

m ent based on various academic disciplines such as economics, ecology, and socio
logy.7 The WCED's definition o f sustainable energy development gives us a point of
departure to discuss three aspects o f sustainability.8 The Commission considered
sustainable development to be a process o f interaction between three sub-systems
within the society: the ecological system (exploitation o f resources), the economic
system (investment and technological development), and the socio-cultural system
(institutional changes) (Noorman, 1995). Each subsystem poses different goals for
sustainability and different approaches to meet them. In order to resolve the confusion
and draw an unambiguous and clear-cut operational definition o f sustainability, it is
necessary to integrate the viewpoints o f these disciplines (Munasinghe, 1994 and
1996). Differences in the approach are grounded in the different valuation o f nature
and environment. Understanding the underlying theory o f each discipline can help
avoid an unnecessary conflict that obstructs interdisciplinary communication and
cooperation. What follows is a brief description o f each approach.
7 M ode o f human existence is determined by three spheres: an economic sphere
(modes o f production), a social sphere (social regulation), and the biosphere
(ecological regulation). These three spheres, Jean-Claude Debeir et al. (1991) argued,
account for all human activities. The authors contended that no species, let alone the
human species, can escape the laws o f nature. The human activities analyzed by
economics (production, exchange, consumption) constitute only one sphere o f human
practice with its own regulators (in capitalist society: the market, prices, and so on),
itself a component o f a broader social sphere (civil society, the state, ideologies). But
economic sphere significantly affects the broader universe o f inanimate and living
m atter which encompasses economics and extends far beyond it.
8 . . . In essence, sustainable development is a process of change in which the exploit
ation o f resources, the direction of investments, the orientation of technological
development, and institutional change are all in harmony and enhance both current and
future potential to meet human needs and aspiration (WCED, 1987: 46).
13
2.1.1
Economics Perspective
The economic approach to sustainability is based on the Hicks-Lindahl
concept o f the maximum flow o f income that could be generated while at least maint
aining the stock o f assets (or capital) which yields these benefits (Solow, 1986; Maler,
1990; Daly, 1989. 1994).9 There is an underlying concept o f optimality and economic
efficiency applied to the use o f scarce resources. Problems o f interpretation arise in
identifying the kinds o f capital to be maintained (e.g., manufactured, natural and
human capital) and their substitutability, as well as in valuing these assets, particularly
ecological resources. The issues o f uncertainty, irreversibility and catastrophic
collapse pose additional difficulties (Pearce and Turner, 1990).
Economists use methods to seek to maximize human welfare within the
constraints o f existing capital stock and technologies. Until recently, economics
viewed the economic system as a closed and complete system isolated from nature.
Economists recognized only the use value o f nature. Nature was seen as a provider of
material resources and a sink for wastes from economic activities and little else. The
earth is inert and passive and therefore legitimately exploitable. Scarcity problems of
limited resources, they argue, can be solved through substitution, technology develop
ment, and the price mechanism (Hotelling, 1931; Solow, 1986; Dasgupta, 1979;
Maler, 1990; Nordhaus, 1991).10 This idea o f sustainability could lead todays
9 It is unreasonable to treat capital consumption as income. The world-renowned
economist J. R. Hicks pointed out that income is the maximum amount a person or
society can consume over some period o f time and still be as well off at the end as at
the beginning. Capital m ust not be run down in order to keep income constant
(1948:72). Eficksian income is by definition sustainable in an economical sense.
10 They proposed the optimal depletion policy for resources that are inexhaustible but
available in various grades and at various costs. Costs are assumed to increase with
cumulative extraction up to a point, but then to remain constant as a backstop supply
14
generation not to worry about the carrying capacity o f the earth and only pass on to the
next generation an aggregate capital stock no less than the one enjoyed currently.
Such reasoning is egoistic, linear, instrumental and rational (Gladwin et al., 1995).
As environmental problems have become globalized, economists are
relearning the importance o f natural capital. A new breed o f economic thought
(Hawken and Lovins, 1999; Norgaard, 1994; Daly, 1990; Georgescu-Roegen, 1971;
Boulding, 1968) has emerged by challenging the traditional basic assumptions of
efficiency, market rationality, etc. They argued that our earth, not the economy, is a
closed system within which nature is nothing but a limited subsystem. This alternative
view o f economics has focused its attention on the interactions between energy,
economy, and the environment. This perspective has recently been recognized in a
new branch o f economics, namely, ecological economics.
Over the past two decades existing economic principles have continued to
be modified and extended to encompass environmental and social valuations o f nature
which had not often been reflected in market transactions. Such concepts as economic
optimization and efficient resource allocation are not easy to apply to some environ
mental and social objectives. This limitation necessitates development o f numerous
direct and indirect market valuation methods such as multi-criteria analysis, contin
gency valuation methods (CVM), and hedonic value methods (Dixon et al., 1994).
Environmental impacts o f projects are now routinely regarded as cost elements o f costbenefit analysis. These externalities are often difficult to measure in physical and
monetary terms.
is reached. According to their model, resources o f the lowest grade or the highest cost
will eventually be extracted from sources such as crystal rocks or deep-sea beds.
15
Economic analysis o f environmental impacts, however, has been limited

to the microeconomic level. More recently, environmental economists have begun to
analyze macroeconomic impacts o f environmentally related policies at the sectoral or
national levels. Economy-wide policies have a significant effect on the natural
resources base, but the complicated interactions are not w ell understood. Many
aspects o f macroeconomic policy are based on the standard system o f national
accounts. To incorporate neglected environmental impacts into GNP and other related
measures o f income and output, the national accounts system should be environment
ally adjusted. A start has been made through satellite accounts containing environ
mental data that will supplement traditional standard national accounts (Costanza,
1991).
hi the late 1980s, a new area o f interdisciplinary study emerged with the
name ecological economics. As is implied by the name, it is a broad, ecological,
interdisciplinary, and holistic view o f the problem o f studying and managing our
natural resources. It is intended to be a new approach to both ecology and economics
that recognizes the need to make economics more cognizant o f ecological impacts and
dependencies; the need to make ecology more sensitive to economic forces, incentives,
and constraints; and the need to treat integrated economic-ecologic systems with a
common (but diverse) set o f conceptual and analytical tools (Costanza, 1989).
Costanza (1997) contended that the services of ecological systems and the natural
capital stocks that produce them are critical to the functioning o f the Earths lifesupport system. The economies o f the Earth, he continued to argue, would come to a
holt without the ecosystem services. Despite extreme difficulties and uncertainties in
evaluating the ecosystem services, he attempted to estimate the incremental or margin-
16
al value o f ecosystem services, based on published studies and a few original calcul
ations.11
2.1.2
Ecological Perspective
Ecologists stress preservation o f the integrity o f ecological subsystems as
being critical for the overall stability o f the global system. Some argue for the preserv
ation o f all ecosystems, although others aim at a more modest goal o f maintaining the
resilience and dynamic adaptability o f natural life-support systems. The units o f
account are physical, not monetary, and the prevailing disciplines are biology, geology,
chemistry, and the natural sciences generally.
The ecological worldview is based on the concept o f carrying capacity
(Meadows et al., 1992 and 1972). This perspective utilizes science-based estimates o f
limits in the capacity o f ecosystems to be stressed beyond which irreversible degrad
ation occurs in order to set ceilings on human activities. A soio-political version o f
ecology, called deep ecology or social ecology (Bookchin, 1986; Naess, 1973) has
also been promoted in which human domination over nature is rejected in favor o f a
biological egalitarianism. A systems theory o f life and evolution that is fundament-
11 According to Constanzas calculation, the value (most o f which is outside the

market) o f 17 ecosystem services for 16 biomass is estimated to be in the range o f US$
16-54 trillion per year, with an average o f US$33 trillion per year. Because o f the
nature o f the uncertainties, this must be considered a minimum estimate. Global gross
national product total is around US$18 trillion per year (Costanza et al., 1997. The
Value o f the W orlds Eco-system Services and Natural Capital. Nature, Vol. 387
May 15, 1997: 253-360)
17
ally different from the classical neo-Darwinian theory has been proposed by several
scholars o f various disciplines (Prigogine, 1984; Capra, 1982; Jantsch, 1980).12
According to this view, the premise that human beings occupy a privileged
place in nature is rejected. Human beings are only a part o f nature, both onto logically
and phylogenetically, unseparated from the rest o f nature. Non-human nature has
intrinsic value, independent o f human values and human consciousness, which places
limits on the extent o f human prerogatives to use and alter it. The most significant
consequence o f continuing economic growth is the depletion o f the planet's earth's
natural resources. If the current pattern o f undifferentiated growth is continued, the
carrying capacity o f the earth soon will be overshot. Some extremists argued that the
current human population size and its material demands already exceed their righteous
share o f resource allocation. Thus, to slow down the rapid depletion of our resources,
the abandonment o f the idea o f continuing economic growth would not suffice. In
addition, worldwide population control should be seriously considered (Capra, 1982).
The optimum human population, according to Daly and Erlich's calculation is in the
range o f 1.5 to 2 billion people.13
12 The classical neo-Darwinian theory sees evolution as moving toward an equilibrium
state, with organisms adapting themselves ever more perfectly to their environment.
According to the systems view, evolution operates far from equilibrium and unfolds
through the interplay o f adaptation and creation. Moreover, systems theory takes into
account that the environment is, itself, a living system capable o f adaptation and
evolution. Thus, the focus shifts from the evolution o f an organism to the co-evolution
o f organism plus environment. The consideration o f such mutual adaptation and co
evolution was neglected in the classical view, which has tended to concentrate on
linear, sequential processes and to ignore transactional phenomenon that are mutually
conditioning and going on simultaneously (Capra, 1982).
13 This calculation is based on the global net primary product o f photosynthesis (NPP).
The economy cannot grow beyond the NPP since it is the highest form o f energy
available. NPP is actually decreased with economic growth because such growth
18
Ultimately, growth makes humanity and the rest o f nature poorer, not
richer in this view. The achievement o f human security, dignity, and satisfaction can
only be reached through steady-state economics (Daly, 1991), material sufficiency, and
biospherical equality. Poverty is to be dealt with via redistribution o f wealth and
natural capital it to be preserved and enhanced. The current rates of energy and
material consumption would have to be reduced in order to observe the carrying
capacities o f ecosystem both on local and global scales.
2.1.3
Socio-Political Perspective
The socio-political approach emphasizes that the key actors are human
beings, whose patterns o f social organization are crucial for devising viable solutions
for achieving sustainable development. Indeed, evidence is mounting that failure to
pay sufficient attention to social factors in the development process is seriously
jeopardizing the effectiveness o f various development programs and projects. The
current proponents o f socio-political sustainability include many environment-related
NGOs and the United Nations.
The environment is threatened by human beings, including both local and
distant resources users. Sustainable development relies substantially upon social
action, especially at the level o f local people, individual firms and local governments,
but also concerns social structures at national and global scales. In other words, the
sociological approach puts social action and social structure at the center o f efforts to
reduces global photosynthesis and leads to lower heat-energy (entropy). Forty percent
o f this NPP is preempted by activities o f human beings which transform land and
displace photosynthesis with entropy. Based on this logic, and a premise that everyone
leads a decent life as contemporary Americans, it is concluded that the earth can
support up to 2 billion people (Daly, 1993).
19
explain current unsustainable tendencies. Many who espouse this approach argue that
the exploitation o f the earth's limited resources occurs because o f a deeply unequal
world economic system that actually reproduces social injustice (Mellor, 1993). From
this point o f view, sustainable development requires social justice. Unsustainability,
thus, is regarded as socially constructed that is, social and economic arrangements
create current patterns o f overstressed ecosystems unable to sustain diverse habitats
and organisms, as well as patterns o f unequal wealth and power. If sustainable devel
opment is to be realized, change in social structure is necessary from this perspective.
The socio-political approach urges us to build a new order in the relation
ship between nature and humans; between rich and poor; between central and periph
eral regions; and between current and future generations.14 It recognizes people as the
instruments and beneficiaries, as well as the victims, o f all development activities.
Furthermore, unless we keep foremost in our minds the need to continue to improve
the welfare o f people, environmental programs will certainly fail (Munasinghe, 1996).
The poor, in particular, are the most vulnerable, but the least prepared, victims of
environmental damage. And yet they are blamed for much o f the damage on the basis
o f their short-term necessities, ignorance, and lack o f resources. From this perspec
tive, we need to build the capacity to regulate economic and social interactions in
14 Jean-Claude Debeir et al. (1991) effectively addressed the inequity between rich and
poor countries by pointing out two sides o f energy crises:
. . . Potentially more damaging, a new threat to the ecological balance o f the entire
planet has highlighted the two major aspects o f the crisis: scarcity is leading whole
regions o f Africa, Asia and Latin America to destroy their biological capital
particularly forests; while over-consumption in Europe and Japan threatens the same
forest spaces with deadly pollution (136).
20
support o f an equitable society, which, in turn, will lead to environmentally sustainable

futures.
Incorporation of socio-political change into an agenda for sustainable
development demands competent social analysis and creative planning. Social
analysis needs to identify elements that can build a social organization committed to
sustain-able development. The elements o f social organization typically include the
social actors themselves and institutional arrangements, and the prevailing cultural
systems o f resource entitlement ownership and custodianship; authority systems and
enforcement mechanisms; and value and belief systems. Based on socio-political
analysis, institutions and policy instruments can be designed to mobilize and coordi
nate social resources on behalf o f sustainability.
The socio-political approach delves into the local commons problems in
relation to global commons. It is concerned with the monopolized management o f the
global commons by regimes o f unequal wealth and power. It proposes that reclaiming
local and global commons is needed and will depend upon the restoration of commu
nity power to regulate the competitive rushes o f global economic development (The
Ecologist, 1993).
2.1.4
Integrative Approaches
The three perspectives discussed above provide basic tools to operation
alize the concept o f sustainable energy development. Any single approach, however,
is not sufficient in addressing the current complex of environmental problems. While
economists, ecologists, and sociologists agree on the seriousness o f current environ
mental problems, their approaches to solve them are quite different. That's because
they do not see these problems through the same set o f conceptual lenses. Addition-
21
ally, their scope is bounded by academic disciplines to which they belong. Each inter
prets the same concerns through its own lens.
In response to a call for a unifying theory, many attempts have been made
to integrate three dimensions o f sustainability. Actually, the Brundtland/WCED report
o f 1987, Our Common Future, sought to integrate various concepts o f sustainable
development, including dimensions o f ecological carrying capacity and social equity.
Ecological economics (Costanza, 1991; and Norgaard, 1992), as a new way o f econ
omic thinking, has attempted to integrate economical and ecological approaches.
Herman Daly (1991) has suggested a steady-state economy as a strategy for sustainable
development. This concept combines carrying capacity with economic efficiency.
Munasinghe (1996) has attempted to integrate several approaches based on the tech
niques o f multi-criteria analysis (MCA). Pezzey (1992) has defined an operational
concept o f sustainability and developed several models o f development based on a
merging o f ecological and neoclassical economic methodologies. Byme et al. (1998)
have argued for an equity-based sustainability in which economic, ecological, and
socio-political dimensions are joined together. Klass Jan Noorman (1995) has pro
posed a sustainability model (ECCO: Enhancement of Capital Creation Options) that
is built on the concept o f the natural capital accounting methodology.15
15 ECCO (Enhancement o f Capital Creation Options) was presented as a modeling

approach to depict the divergence between natural capital and human made capital and
the rate at which human capital can be created from natural capital. ECCO, according
to Noorman, can be applied to study the long-term effects o f changing energy and
material use, changing production and consumption patterns and the dynamics of the
feedback mechanisms o f environmental and economic parameters. He applied the
ECCO model to the Netherlands economy to examine its physical development
potential.
22
What follows are discussions o f several approaches to integrate the

sustainable development, focusing on the core concept o f each approach.
2.1.4.1
Ecological Economics Approach

Ecological economics approach to sustainability is distinctive from other
integrated approaches in that it seeks to harmonize between traditional economic

approach (very weak sustainability) and ecological approach (very strong sustain
ability). It attempts to find a w ay in which a long-term, stable physical relationship
with our environment is ensured, h i other words, this approach is based on a political
economy o f sustainability in which the best o f biophysical systems thinking and
economic thinking are brought together, working cooperatively (Peet, 1992). Rather
than regarding economic and ecological goals as being in conflict, ecological approach
attempts to solve the disparity between these two approaches by hierarchical integra
tion.
Ecological economics pursues a prioritized approach to sustainability.
First o f all, it defines the carrying capacity o f the planet earth in terms o f resources
base and environmental limits. It then raises the ethical and moral questions o f our
responsibility for equitable distribution in resources allocation. Only after the eco
logical and ethical questions are resolved, economical efficiency in resources alloc
ation can be addressed (Norgaard and Howarth, 1992). In addition to this sequential
approach, it requires socio-economic institution that ensures all those issues to be
properly served.
Because ecological economics starts its argument in the perspective o f
ecological stewardship (very strong sustainability), its policy priority for sustainability
is on the ecological imperative. Although ecological economics still needs old
23
analytical tools mostly developed by economics, these tools should be used in new
- ways dictated by emerging conditions. Economic tools will be vitally important in
developing policies for transition to a sustainable future. Since no other institutions
are available to replace the existing socio-economic institutions, they can be re-usable
by modification (Daly, 1991). Here, price mechanism is still seen as an effective way
to internalize estimates o f the value o f externalities. For example, full fuel cost on
energy analysis can evaluate many primary energy demands and pollution conse
quences o f economic activity.
2.1.4.2
Steady-State Economy
Steady-state economy, proposed by Daly as part o f the movement toward
an ecological economics, is an approach that calls for paradigmatic revolution. It rests

on the premise that the ecosystem has its carrying capacity with respect to every
species, including human beings. Any productive system loses the capacity to regen
erate itself i f it is over-exploited (Porrit, 1993). This view was succinctly summarized
by Herman Daly:
. . . Todays newly emerging paradigm (steady state, sustainable devel
opment), however, begins with physical parameters (a finite world,
complex ecological interrelations, the laws o f thermodynamcis) and
inquires how the nonphysical variables o f technology, preferences,
distribution, and lifestyles can be brought into feasible and just equili
brium with the complex biophysical system o f which we are a part.
The physical quantitative magnitudes are what is given, and the non
physical qualitative patterns o f life become variables. This emerging
paradigm is more like classical than neoclassical economics in that
adjustment is by qualitative development, not quantitative growth
(Daly, 1996: 4).
In this approach, if an inequitable distribution o f resource use exists, it is
seen as precipitating the process o f overshooting carrying capacity. If all other
24
countries, including the Third World, emulate the American lifestyle, the total demand
for resources begins to exceed the sustainable yield o f ecosystems and they start
consuming the resources base itself (Porrit, 1993), as the U.S. has done (requiring a
disproportionate share o f global resources to maintain its lifestyles). Solutions to this
problem suggested by Herman Daly (1991) include population control and redistri
bution o f income. He has contended that only a steady-state economy in which
population and the stock o f human-made capital are maintained at a constant level
with minimal throughput o f material and energy can be sustained.
2.1.4.3
MCA (Multi-Criteria Analysis)

Munasinghes multi-criteria approach (1996) integrates three dimensions
o f sustainability in terms o f objectives (Figure 2.1). Munasinghe treats these three

dimensions as having equal weight. Listed as social objectives are empowerment/
participation, social mobility/social cohesion, cultural identity, and institutional devel
opment. Empowerment is fundamental to sustainable development, with an emphasis
on autonomy in the decision-making o f territorially organized communities and local
self-reliance (but not autarky) (Friedmann, 1992). Participation is also an important
objective to sustainable development since it relates to direct democracy and experi
ential social learning. Social mobility and social cohesion describe processes of
change and order that together provide collective confidence in social trends. While
democratic participation is closely related to social mobility, social cohesion is more
relevant to cultural identity. And, all these objectives are not viable without institu
tional development.
25
Social Objectives
Empowerment/Participation
Social Mobility/Cohesion
Cultural Identity
Institutional Development
Ecological Objectives
Ecosystem Integrity
Carrying Capacity
Biodiversity
Global Issues
Economic Objectivt
Growth
Efficiency
Equity
(Source: World Bank, 1996)

Figure 2.1
Objecitves o f Environmentally Sustainable Development
The economic dimension places high priorities on growth, efficiency, and

equity as its objectives. This is expectable since a core theme of most economic theo
ries is the maximization o f human welfare within the constraints of existing capital
stock and technologies. Unless population growth can be kept at zero level, economic
growth will be inevitable as a result of the need to meet the increasing demand for
man-made capital. Growth also enables governments to tax and raise resources for
environmental protection. Therefore, the task o f sustainability is to allocate given
resources in an efficient and equitable way, which not triggering irreparable harm.
2.1.4.4
Equity-Based Approach
Another new approach to sustainability is the equity-based approach. This
approach addresses sustainability in terms of equity between classes, regions, and

generations. Such a basis o f equity assumes that all human beings have equal status in
26
their interactions with the global commons and therefore no human being is to be
entitled to use it more intensively than another. Sustainable development in terms o f
equity has been analyzed in the bottom-up approach in relation to global climate
change (Byrne et al., 1998). Recognizing that the problem o f global climate change
links the issues o f energy utilization, economic development, environmental degrad
ation and social equity on a planetary scale, the bottom-up approach explores energy
supply and demand alternatives at a microeconomic level and compares the costs o f
alternatives for the mitigation o f GHG emissions.
C02
Em ission
(tons per
capita)
High Incom e
Sustainable
Emission Rate
U pper- Middle In com e
L ow er Incom e
Lower-Middle Income
P resent
Figure 2.2
2050
CO 2 Parity in the Year 2050

Source: Byrne et al. An Equity-Based Bottom-Up Policy Response to Global
Climate Change. Energy Policy. Vol.26. No. 4. 1998. Pp. 315-343.
27
High Income
(A nnual G row th R ate: 0.5% )
GNP
per
capita
Upper-Middle Income
(A nnual G row th R ate: 3.1% )
Low Income
(Annual Growth R ate: 6.9% )
Lower-Middle Income
(A nnual Growth R ate: 4.9% )
Present
Figure 2.3
2050
Economic Parity in the Year 2050

(Souice:Ibid)
Equity Approach based on Neo-Classical Economics

Pezzey (1992) has built a sustainable development model based on the
operationalization o f sustainability in a manner that is consistent with neo-classical
economics. He also proposed sustainable resource use and sustainable growth in terms
of neo-classical economic analysis, to examine why free market mechanism may not
achieve sustainability, and to explain how policy interventions may help or hinder the
achievement o f sustainability. He proposed a number o f simple models o f the econ
omy and the environment to explore several different definitions o f sustainability. He
argued that such modeling exercises might help clarify conceptual thinking about sus
tainable development.
28
One o f his significant contributions is found in his definitions of: opti

mality, survivability, and sustainability. P ezze/s formal distinctions between these
three concepts o f development are:
OPTIMAL W(t) maximizes
W {t)e 5,dt (PRESENT VALUE)
SURVIVAL W(t) is such that W >
for all time
SUSTAINABLE W(t) is such that - W > 0 for all time

dt
where W(t) denotes the collective welfare o f humanity at time t. The graphic illustra
tion o f these three mathematical expressions o f three concepts o f development path is
provided in Figure 2.4.
The three models described above are generally concerned with identify
ing the various paths o f economic growth in the context o f assumed fixed stocks o f
exhaustible resources and stocks o f renewable resources. The first model implies a
growth path that maximizes the present value o f future streams o f consumption, i.e.
the discounted value o f future flows o f consumption per head. Such optimality is
interpreted as consistent with unsustainable growth path because the present value of
irreplaceable resources many be high, triggering short-term use and long-term degrad
ation. The present value o f the path, however, may be greater (even if it is not survivable for future generations) than slower development paths. The second model
shows a survival growth path in which a minimum level o f economic activities to meet
basic needs such as food, shelter, clean air and water is maintained. The last model
indicates a sustainable path that is interpreted as constant or increasing per capita wel
fare levels over time, which could be achieved through suitable interventions which
reduce the rate at which natural assets are depleted.
29
Welfare
W
Path might well be OPTIMAL
B u t is NOT SUSTAINABLE
A nd also NOT SURVTVABLE
Wmin
Welfare
W
Av
Path might well be OPTIMAL

B u t is NOT SUSTAINABLE
Although it is SURVIVABLE
Wmin
Welfare
W
Path might w e ll be NON-OPTIMAL
B u t is SUSTAINABLE
A nd SURVTVABLE
Wmin
Figure 2.4
Optimality, sustainability, and survivability
The noticeable result from Pezzeys analysis is that, i f non-renewable

resource inputs are essential, then, inadequate technical progress and open access to
30
environmental resources may be the key factors that cause unsustainability. Govern
mental intervention, in the form o f resource conservation subsidies or depletion taxes,
he contends, is shown both to correct the open access problem and to improve sustain
ability; conversely, government subsidies for resource depletion aimed at encouraging
development will harm sustainability. But improving sustainability by slowing down
resource depletion also m ay mean lower initial levels o f consumption and utility.
Pezzey suggested that if market dynamics alone cannot achieve sustain
ability, a separate explicit sustainability policy is necessary. It is clear at least at the
system level that aggregate constraints (either economic or regulatory) m ay be neces
sary in controlling the depletion o f resources critical for sustainability. Such con
straints raise the prices o f resources to the level o f inducing the required conservation
efforts throughout the system. Such efforts are equivalent to inter-generational com
pensation investments. A good example o f this kind o f process is the international
agreement known as the Montreal Protocol, 1990 to reduce the consumption o f chlorofluorocarbons (CFCs) which was determined as a culprit o f damage to the ozone layer.
2.2
A Global Perspective of Sustainable Development: Evolution o f a Global

Order
Environmental issues have globalized and responses to them in the form
o f several initiatives led by UN organizations have likewise become global. Since its
establishment, the UN has supported research on environmentally related matters.
Global environmental issues in the 1950s and the 1960s were directed primarily
specifically defined ecological problems, such as the prevention o f certain types o f
pollution or the conservation o f specific species o f wildlife. A broader perspective on
environmental matters did not emerge until the 1990s- One catalyst was the publi-
31
cation o f the influential and controversial book, The Lim its to Growth, which argued
for an end to growth in population and industrial production within 100 years in order
to moderate environmentally harmful trends (Meadows et al., 1972). Until the early
1970s, in the world economic order dominated by the Bretton Woods system (World
Bank, IMF, GATT), environmental issues were secondary to the central socio-econ
omic developmental issues.
Entering the 1970s, there was a wave o f environment movements led by
NGOs in Europe and North America. Major environmental issues o f special attention
at that time were the dispersion o f pesticides through ecosystems, acid rain, and oil
spills o f wrecked supertankers. It was in this decade that environmental problems
began to be seen from a systems viewpoint. Increasing seriousness desertification and
deforestration trends led to a call for United Nations Conference on the Human Envi
ronment (held in Stockholm in 1972). Later in the same year, the United Nations
Environment Program was established, which was to be a focal point for UN programs
on the environment.
The book, The Lim its to Growth (Meadows et al., 1972) provided a theo
retical and empirical rationale for capping economic development based on mass pro
duction and consumption. It was this issue on which there arose the divergence o f
views between North and South. Though they also were concerned that Earth's re
sources are finite and rapidly depleted and degraded, Southern developing countries
were skeptical about the solutions proposed by the North. In response to the North's
view that rapidly growing population in the developing countries causes environmental
degradation, the South argued that the lavish lifestyles o f the developed countries were
more devastating to the global environment.
32
It was not until the publication o f Our Common Future by the World
Commission on Environment and Development (widely known as Brundtland Com
mission) report (1987) that global environmental issues triggered international dis
cussion.16 This report provided a wide range o f analytical frameworks for the later
Earth Summit in Rio de Janeiro in 1992. The Brundtland Commission's report argued
that environmental priorities could not be achieved without at the same time reducing
poverty through sustainable economic growth in the developing countries and address
ing inequities between rich and poor countries in the consumption o f the planet's
limited resources. It was the first global approach to sustainable development to be
proposed by the UN.
2.2.1
Negotiation of Global Environmental Issues

At the Rio Summit, whose main agenda was climate change, Agenda 21
(the Summits plan o f action) and a series o f major international treaties on climate
change, biodiversity, and protection of tropical rain forests were adopted. This was
followed by the creation o f the Commission on Sustainable Development (CSD) to
implement Agenda 21. The CSD has devoted much o f its attention to reviewing the
reports submitted by countries on the steps they have taken to implement Agenda 21.
16 Until the mid-1980s, in most countries, environmental policy had been focused on
domestic action. The most obvious threats were at home and, in any case, in the
context o f the Cold War any serious international cooperation to deal with global
pollution issues such as global warming and damaging ozone layer seemed unlikely
(Anderson, 1998). But attitudes began to change around 1985, as scientific evidence
identified for serious damage to the ozone layer that reduces solar ultraviolet radiation
that can cause skin cancer. In response, the Montreal Protocol was adopted in 1987 to
restrict, and eventually ban altogether, the production o f chlorofluorocarbons (CFCs)
which were regarded as culprit in damaging the ozone layer.
33
The CSD has provided an open forum for continuing discussions among governments,
international organizations, and NGOs on how to implement Agenda 21. In addition,
the CSD has a target to develop a set o f internationally acceptable indicators o f sus
tainable development that can be used to systematically track progress being made
globally and regionally (Vig and Axelrod, 1999).
Climate change, better known as global warming, is a newcomer to the
international political agenda, having emerged as a major policy issue only in the late
1980s. But scientists have been working on the question for decades. Scientific
evidence indicates that the concentration o f CO 2 in the atmosphere has been rising
steadily for 200 years. The bulk o f the increase in this concentration can be traced to
human activity. The models reviewed by the Intergovernmental Panel on Climate
Change (IPCC) 2,500 scientists from all over the world indicate that human
activity has led to surface warming (IPCC, 1996). U.S. public attention on the subject
was drawn with the testimony o f James Hansens, director o f the National Aeronautics
and Space Administration's Institute for Space Studies, that rising global surface
temperature was related to the burning o f fossil fuels.
The Rio summit (1992) had initially set the aim o f lowering emissions to
1990 levels by the year 2000 for the so-called Annex I countries those o f North
America, Europe (including the economies in transition o f the former Soviet bloc),
Japan and Oceania. However, it was clear that few, if any, countries would achieve
that goal. Five years later, at the United Nations-sponsored negotiations held in
Kyoto, Japan, (December 1997), delegates from all nations reached agreement on an
historic protocol to control greenhouse gases to protect the common global
34
atmosphere.17 It was a victory for its advocates in the sense that it represented a solid
consensus o f the 159 governments represented at the conference. In the following year
(1998), another conference on global climate change was held in Buenos Aires to
discuss implementation o f the Kyoto Protocol and set the deadline o f 2000 for their
implementation.
A Global Environment Facility (GEF) was established by the initiative o f
the World Bank in 1990 to provide funds to developing countries for environmental
projects that would have global benefits. GEF funds are focused on four major areas:
protection o f the stratospheric ozone layer, limiting greenhouse gases, preservation o f
biodiversity, and protection o f international waters. Developed countries sponsored
the GEF as a means to avoid the inefficiencies o f establishing a separate fund for each
major environmental treaty. Such assistance would give developing countries an
incentive to embark on projects that would benefit the larger community o f nations.
Thus, a framework has been laid in which governments and other agencies
will be able to pressure each other to maintain a high level o f commitment to sustain
able economic development (Anderson, 1998). Four key outcomes worth mentioning
are the establishment o f new international institutions, national reporting measures,
17 The Kyoto Protocol includes emissions targets and timetables for Annex I nations
and market-based measures for meeting those targets. The Protocol makes a down
payment on the meaningful participation o f developing countries, but more needs to be
done in this area. Securing meaningful developing country participation remains a
core U.S. goal.
The Protocol, if ratified, would commit nations to roll back emissions o f six green
house gases (CO 2 , CH4, NOx, CFCs, etc.) below 1990 levels. Under the Protocol, the
United States would be required to reduce its greenhouse gas emissions by seven
percent below 1990 levels, while [North America,]Europe and Japan would make cuts
o f eight percent and nine percent, respectively. Developing countries are exempt from
the emissions ceilings for the time being.
35
financial mechanisms, and heightened public and non-governmental organization par

ticipation. The first two areas are said to be a success, whereas the last two are ques
tionable. Participation o f the public and non-governmental organizations is not well
channeled to convey alternative perspectives, according to some (Shiva, 1993;
McCormick, 1996). The problem, coupled with lack o f finance, is likely to inhibit the
effective implementation o f the UNCED policy strategy (Agenda 21) in the short- to
medium- term. The threat to global sustainability is not yet perceived to be severe
enough for an ethic o f international environmental cooperation to become established.
2.3
Sustainable Energy Development

The last three decades o f efforts to formulate a theory o f sustainable devel
opment has stimulated a paradigmatic shift in development planning and environment

al management. Even if the concept is still a work in progress, sustainable develop
ment has become a widely accepted norm for the evaluation o f existing policy and the
design o f new strategies. One key area for the international sustainable development
agenda has been energy. Jose Goldemberg (1988) was one o f the first scholars to
clarify the concept o f sustainable energy development.
Thus, it appears that the energy problem can be turned into a powerful
and positive force for improving the human condition on this globe.
Instead o f being the destabilizing force that it is today, energy can
become an instrument for contributing to the achievement o f a sustain
able world. (1988: 3).
Goldemberg et al. argued that the conventional approach to the energy problem is un
sustainable because it primarily focuses on the provision o f cheap energy supplies,
neglecting the long-term environmental consequences o f continued use o f fossil fuels
(especially the problem o f climate change discussed earlier). Strategies for sustainable
36
energy system should be built on equity, economic efficiency, and environmental

soundness. They adopted an "end-use methodology" for the energy problem .18
Sustainable energy development is now a key area o f the United Nations Development
Plan (UNDP)s recent initiatives for sustainable human development. This is under
standable since developing countries need energy-services to evolve and expand in
support o f their development. And, the production and consumption o f energy has a
tremendous impact on economics, the environment and industrial development.
Energy should, therefore, be taken into account in any development strategy.
(Goldemberg and Johansson, 1995)
The current patterns o f energy production, distribution and consumption
are not sustainable in terms o f resource allocation, environmental impacts, and equity.
If this pattern continues, the carrying capacity o f the environment would be overshot in
the foreseeable fixture (Daly, 1991; Ehrlich and Ehrlich, 1981). Thus, the way we pro
duce and use energy should be reconsidered. M inor adjustments to the current energy
system will not be enough to curb this trend, according to Goldemberg et al, 1988;
Lovins and Lovins, 1991; and others. Instead, a shift away from business-as-usual is
needed. A num ber o f ideas have been proposed for an effective transition to a sus
tainable energy system. What follows is the highlight o f several eminent scholars
arguments.
18 In the end-use framework, the level o f energy use is not assumed to be an indicator o f human welfare. Instead, inputs o f energy are regarded only as means to the end o f
providing a wide range o f energy services such as fighting, cooking, comfortable space
conditions, transport services, etc. Understanding the human needs which energy
serves and exploring more effective ways o f directing energy resources towards the
satisfaction o f these needs become the important tasks in end-use-oriented energy
analysis (Goldemberg et al., 1988).
37
Lovins (1977) perhaps was the first to suggest a practical yet comprehen
sive approach toward achieving a sustainable energy system.19 He argued that two
energy paths are open to us; one is a soft path and the other is a hard path. The hard
path relies on rapid expansion o f centralized high technologies to increase supplies o f
energy, especially in the form o f electricity. The soft path combines a prompt and
serious commitment to efficient use o f energy, rapid development o f renewable energy
sources matched in scale and in energy quality to end use needs, and the use o f special
transitional fossil fuel technologies (mainly those using natural gas). He argued that
the hard path is destined to fail because o f its inherent flaws in assuming limitless
resources and endless technology development.
More recently, sustainable energy development has proposed by a number
o f scholars (Goldemberg, 1988; Holdren, 1990; Flavin, 1994; Peet, 1992; Byme et al.,
1992; and Noorman, 1995). The main thread o f their argument is the recognition o f
energy as an important element in overall sustainable development. They also support
the idea o f building a sustainable energy system based on energy efficiency and renew
able energy sources.
The discourse o f sustainable energy development shifts its emphasis from
resource constraints to equity, environmental and service needs. Sustainable energy
development seeks to reconstruct the energy system in a manner that can serve aims o f
distributive justice (equitable distribution o f benefits and costs) and environmental
19 Emory Lovins made the best articulation, so far, o f the impact o f energy efficiency
and conservation on primary energy use. He made his point by arguing that the US
annual primary energy forecast o f 163 quadrillion (1015) BTU for the year 2000 could
be reduced to about 100 quadrillion BTU by resorting to sustainable energy develop
ment through efficient energy conservation and end-use technologies (which he called
soft energy technology paths).
38
balance in concert with the efficient allocation o f resources. Indeed, failure to pay
attention to social and environmental factors has become a serious drawback of energy
development projects.
Sustainable energy development as a project for equitable, efficient, envi
ronmentally sound use o f energy requires an integrated approach o f economic, ecolo
gical, and socio-political perspectives. Correspondingly, a sustainable energy analysis
requires a multi-criteria approach involving economics, ecology, and socio-political
analysis. Goal o f sustainable energy development (SED) is to maximize welfare,
while maintaining the total stock o f ecosystem. As Robert Costanza (1997) and
Herman Daly (1991, 1996) argued, carrying capacity o f the Earths ecosystem sets
limits on resources consumption rate o f natural resources and waste streams from
human activities (for example, capping CO 2 emissions at levels consistent with cli
mate stability). Evaluation o f this carrying capacity should be followed by consid
eration o f another important criterion, social equity which defines equitable distri
bution o f scarce ecosystem services. Based on these two ecological and social criteria,
econ-omic efficiency criterion can be properly measured. Econometric methods are
applied to evaluate the impact o f alternative policies to achieve a goal o f sustainable
energy development.
2.3.1
Sustainable Energy Development as a Goal

The primary objective o f sustainable energy development is to maximize
welfare, while maintaining or increasing the stock o f economic, ecological and socio
cultural assets over time (to ensure the sustainability o f income and intergenerational
equity), and providing a safety net to meet the basic needs and protect the poor
(thereby advancing intragenerational equity) (Munasinghe, 1996). As specified in the
39
previous section, three aspects o f sustainable development (economic, ecological, and

social) should be taken into account in the design o f a sustainable energy system.
Concepts o f sustainable energy systems can be derived from the three
perspectives o f sustainability. The economic principle o f efficiency and preservation
o f a natural resource base dictates that sustainable energy system should be efficiency/
renewable energy-focussed. The ecological principle calls for diversified and decen
tralized energy systems and social cost-based energy prices that include environmental
impacts. The social principle requires that a sustainable energy system should be
equity-based and service-oriented. This conceptualization is illustrated in Figure 2.5.
Economic Principle
C oncepts of
Sustainability
Figure 2. 5
Economic Dimension
- Efficiency
- Preservation of
resource base
- Efficiency-based
- Renewable-oriented
Ecological Principle
Environmental Dimension
Carrying capacity
- Biodiversity
Diversified/Decentralized
- Social cost-based price
Social Principle
Socio-Political Dimension
- Equity
- G overnance
- Social
empowerment
- Democratic
- Equity-based
- Service-oriented
Sustainable Energy Development
40
Sustainable
Energy System
2.3.2
The Economic Dimension o f a Sustainable Energy System

The two economic principles o f sustainability efficiency and preser
vation o f a natural resource base provide the foundation for an emphasis on energy
efficiency and renewable energy. Sustainability in energy production and use can be
achieved in two major ways: improvement in energy efficiency and development o f
renewable energy technologies that allow energy services to be provided without harm
to the environment or depletion o f the natural resource base. Energy efficiency is
technically and economically oriented and typically would not require major change in
an energy system. On the other hand, renewable energy development and diffusion
requires basic changes in the mode o f energy production and consumption.
2.3.2.1
Energy Efficiency
Energy efficiency is one o f the most widely advocated methods o f reduc
ing air-pollution as well as energy consumption. Energy efficiency utilizes improve

ments in energy management, as measured by the amount o f energy needed to supply
services to society. It means an energy system that shifts from quantity base to quality
base, where the environmental impacts o f energy consumption can be m inimized.
Energy efficiency improvements engender substantial benefits in virtually all spheres
o f development: economic, socio-political, environmental, technological, and planning
(Byme and Rich, 1992).
Among the myriad o f conflicting viewpoints about energy and environ
mental options, one axiom seems to command widespread and consistent support: the
fastest, cheapest, and surest w ay to ease energys environmental damage is to increase
the efficiency with which energy is produced, transported, and used. Energy efficiency
is a resource that can be m ined to produce energy services o f the quality and quantity
41
that people want with less resource use and less environmental impact. In this regard,
improving energy efficiency is vital to the future o f all countries, and especially to
developing countries, due to its comparatively lower long-term cost.
Energy efficiency can be achieved in two ways: changing lifestyles and
technical fixes (Lovins, 1977). Lifestyle or behavior changes can be voluntary or
compulsory. Voluntary initiatives are made by changes in personal values. Com
pulsory initiatives include rationing by price, mandatory curtailments, or gentler
inducements. Such social changes include carpooling, smaller cars, mass transit,
bicycles, walking, opening windows, dressing to suit the weather, and extensively
recycling materials. Secondly, technical fixes include thermal insulation, heat pumps,
more efficient furnaces and car engines. According to Lovins (1977), energy
efficiency can be cost-effectively improved by a factor o f at least three or four with
only technical fixes.
Such technical fixes, however, can lead to a new problem. Rather than
reducing energy consumption, efficiency benefits can induce more consumption
simply due to considerable reduction in energy cost.20 Thus, permanent energy
savings from technical fixes could not be realized without parallel behavioral changes.
In addition to this controversy, this phenomenon is closely related to the equity issue in
energy consumption, which will be discussed in the section on the socio-political
dimension.
20 An effect that can significantly reduce the impact o f an energy conservation
program is the so-called rebound or take-back effect, in which customers increase
use o f energy in response to lower electricity bills resulting from efficient energy enduse devices. For example, a study by Rogers (1989) found that homes participating in
the air conditioner rebate program o f a U.S. utility actually increased their energy
consumption.
42
2.3.2.2
Renewable Energy
Whereas energy efficiency is a major tool in demand side management
(DSM), renewable energy can be seen as a main supply source in maintaining a sus
tainable energy development. If, as an economic principle o f sustainability, an energy
system is to be expected to provide services at least cost while also preserving national
resources, including common resources such as the atmosphere, then a sustainable
energy system would involve competition for investments in renewable energy devel
opment. These investments would secure services in a manner that minimizing
consumer cost without reducing the total resources base. For example, the exploit
ation o f oil reserves may be part o f a sustainable energy system i f investments in
alternative energy sources and in energy conservation occur at substitution rates that
offset the loss in this non-renewable resource. In this way, the welfare of future
generations are not threatened by the exhaustion o f fossil energy reserves (Daly, 1996).
Sustainability is thus tied to long-run resource states and includes inter-generational
effects.
2.3.3
2.3.3.1
The Environmental Dimension of Sustainable Energy Systems

Diversified and decentralized energy systems
The ecological principles o f carrying capacity and biodiversity underpin
the environmental dimension o f sustainable energy systems. A diversified and decent

ralized energy system offers end-users a full range o f choices while also serving the
aims o f ecological sustainability (Lovins, 1977). Renewable energy and energy effi
ciency offer modular-type energy systems that do not require industry or settlement
patterns that are large in scale and likely to stretch ecosystem beyond their carrying
capacities. Lovins (1977)calls these options soft technologies because of their less
43
damaging ecological implications against industrial clustering and urbanization that

has been precipitated by centralized energy system.
2.3.3.2
Social Cost-Based Energy Prices

An environmentally sustainable energy system would internalize external
costs in energy pricing. In this way, energy options compete on a social rather than
merely private cost basis; and consequently, environmental damage would be reduced
to a minimum. Since markets work efficiently w hen decision-makers bear all benefits
and costs o f their actions, the internalization o f externalities serves long-run efficiency
as well as ecological goals.
However, agreeing on the existence o f externalities from energy use is one
thing, and estimating the exact external costs is another. As economists, agronomists,
biologists and others become aware of the vast environmental consequences o f energy
choices, they point out that energy markets fail to include the cost of environmental
externalities in fuel prices (Byrne and Rich, 1983; Peet, 1992; and Hohmeyer, 1992).
Such costs are extremely difficult to determine. Estimates from different studies often
prove incomparable. Most vexing, some studies reckon the cost of preventing envi
ronmental damage, while others attempt to tally the cost o f the damage itself. Often,
neither alternative seems quite satisfactory.
2.3.4
Socio-Political Dimension of Sustainable Energy Systems

From a socio-political standpoint, three factors are important for energy
sustainability: 1) the system should reinforce democratic aims o f society; 2) it should

provide energy services equitably; and 3) it should seek a service orientation that
44
allows the design and evolution o f the energy system to be determined by social rather
than simply technical considerations. Each o f these is discussed below.
2.3.4.1
Democratic Energy Systems

Diversified and decentralized energy system can reinforce the pluralism
essential to a democratic society. Conventional energy system is supply-oriented,

planned and managed by technocrat power elite. It is also characterized by top-down
and authoritative energy regime in which only one-way decision-making central gov
ernment prevails. In contrast, sustainable energy system (SED) is decentralized and
democratic system in which public participation o f diverse interests including local
residents and grassroots environmentalists are encouraged. Lovins pointed out:
While soft technologies give everyone the costs and benefits o f the
energy system he or she chooses, centralized systems inequitably
allocate benefits to suburbanites and social costs to politically weaker
rural agrarians. Siting big energy systems pits central authority against
local autonomy in an increasingly divisive and wasteful form o f
centrifugal politics that is already proving one o f the most potent
constraints on expansion. (1977: 55)
Soft technologies here indicate energy efficiency and renewable energy technologies.
These technologies are for decentralized and locally distributed system in which local
community has a voice in energy decision making. In addition, local community has
choice o f energy sources which is consistent with the conditions and needs o f the area
involved, with attention given to the adequate and rational use o f the natural resources
(Redclift, 1987).
2.3.4.2
An Equity-Based Energy System

A sustainable energy system must not only improve the quality o f life; it
must also promote a more equitable pattern o f development, hi this respect, sustain-
45
ability in the social context needs to embody equity. Here, equity is interpreted in two
ways: intragenerational equity (between regions o r income classes) and intergenerational equity (between present and future generations).21
Sustainable development as an initiative moves the concept from an
insightful w ay o f thinking to a mode of social practice (Byrne et al., 1998). hi postWorld W ar H period, the nations widened a gap between rich and poor. The average
per capita income o f the poor countries has steadily decreased over the several decades
whereas that o f the rich countries has been increasing. A recent estimate shows that
the per capita income gap between the richest and the poorest countries was widened
sixfold between 1970 and 1985 (World Bank, 1999) 22 The WCED, believing that
poverty is a m ajor cause o f environmental degradation, summoned the scientific, tech
nological, business, and political leadership o f our era to eliminate absolute poverty
and to establish an explicit strategy to achieve parity in economic development by the
middle o f the 21st century (WCED, 1987).
It is necessary to operationalize equity in terms o f environmental costs and
benefits because effectiveness o f a policy preconditions maximum participation, which
21 As defined by the WCED, Sustainable development is development that meets the

needs o f the present without compromising the ability o f future generations to meet
their own needs (1987: 8). It contains within it two key concepts; ecological balance
and social equity. Ecological balance recognizes the carrying capacity o f the planet
earth. The commitment to equity includes the concept o f fairness between present and
future generations (intergenerational), as well as between poor and rich people in the
present (intragenerational).
22 Between 1970 and 1995 average per capita GDP o f the middle third has dropped
from 12.5 to 11.4 percent o f the richest third and that o f the poorest third from 3.1 to
1.9 percent. In fact, rich countries have been growing faster than poor countries since
the Industrial Revolution in the mid-nineteenth century.
46
in turn depends on consensus on the concept equity. Applying the Rawlsian princi
ple,23 Solomon and Ahuja (1991) suggested a concept o f benefit/burden concordance
(more popularly known as the polluter-pays principle, which requires those who
benefit or have benefited from an activity such as generating GHGs to bear propor
tional burdens. Carbon emissions rights, according to them, can be allocated by three
criteria: 1) equal allocation among all countries; 2) allocation in proportion to land
area; 3) allocation in some proportion to current emissions. Each alternative has its
drawback and brings up controversial debates. The most equitable way of allocation is
based on a nations historical per capita carbon emissions, or natural debt.
Expanding on the argument developed above, Byme et al. (1998)
proposed an equity- and sustainability-based strategy. First, sustainable limits o f GHG
emis-sions should be estimated to stabilize CHG concentrations at the present level;
then, equity considerations are addressed by apportioning GHG emissions across
nations based on population. This strategy rests on the premise that no human being
or no society is entitled to use the biosphere more intensively than another to pursue its
developmental goal. Regression model based on Kaya identity (Yamaji et al., 1991)
was constructed and estimated to operationalize their proposal, which sets GHG parity
and economic parity in the year 2050 (see Figures 2.2 and 2.3).
23 John Rawls argued that all social primary goods are to be distributed equally unless
an unequal distribution o f any or all o f these goods is to the advantage o f the least
favored (John Rawls. 1971. A Theory o f Justice. Harvard University Press,
Cambridge, MA).
47
2.3.4.3
An Energy Services Oriented System

A sustainable energy system is focused on qualitative rather than merely
quantitative energy development and is based on environmentally benign renewable

energy sources that minimize environmental problems. Because energy use is not a
goal in itself but rather a means o f maintaining and improving the quality o f life, we
also need to relate these end uses to human needs. Pointing out a weakness o f the
conventional approaches that are too narrowly focused on the requirements o f the
energy system itself, Goldemberg (1988) proposed an idea o f end-use energy strategies
and policies designed to satisfy broad social goals.
Improving end-use energy services eventually leads to significant im
provement in the physical quality o f life. This is directly related to the choice o f
energy as a carrier o f service as well as energy efficiency improvement. W hat matters
in end-use energy is that service energy carriers supply not only technical efficiency
but respond to quality and service expectations o f consumers and enable communities
to change energy architectures. In this regard, consumer and policy choices together
determine the technical character o f the system (rather than the reverse, as occurs in
conventional electric monopoly systems).
2.4
Modeling Framework for a Sustainable Energy System

The preceding discussion has sought to describe the dimensions o f sus
tainable energy system based on generally accepted principles o f sustainability in the

research literature. Such an application o f the sustainability concept to energy system
development provides a deeper and wider understanding o f sustainable development.
Discussion now turns to the challenge o f modeling a sustainable energy
system. Practical and operational sustainable development indices (SDI) agreed upon
48
by economists need to be brought together and screened in order to build a quantitative

model, although determining the necessary and sufficient conditions for achieving sus
tainable development is a complicated task (Turner, 1993). Sustainable development
in the model developed for this dissertation is defined as non-declining per capita
consumption (Pearce and Turner, 1990; Pezzey 1992; Maler 1991) that is based on a
production system which meets the economic, ecological and sociological criteria
described above.
As Pezzey (1992) has pointed out, a market-based economic model, even
if it is possible to some extent to incorporate environmental externalities, has some
limitations to fully reflect ecological and social considerations. Market-based tools
require that property rights or other forms o f exclusive ownership be established over
environmental domains. This raises many problems o f ethics and o f power and is a
source o f deep concern for many resources (Turner, 1993). This dilemma would be
partially resolved if the property right, ownership o f the environmental resources or the
commons, were presumably ascribed to the public (government or communal collect
ive identity). Pezzey (1992) recommends that government intervention in the form of
conservation subsidies or depletion taxes can be developed both to correct the tragedy
o f the commons and to improve sustainability. Moreover, he argues that politically
difficult short-term sacrifices may be needed to reach sustainable development paths.24
Unfortunately, Pezzeys formulation examines energy-economy-environment interactions without due consideration o f socio-political aspects. As was
discussed in the previous section, socio-political issues are critical in designing
24 Pezzey, John. Sustainable Developemnt Concepts: An Economic Analysis. World

Bank. 1992. (See Section 7/Appendix 3).
49
sustainable energy systems. In addition to how energy is used and for what purpose,
the issue o f equity in energy consumption patterns should be brought to light. It is
because energy per se is not a goal, but a means to achieve the goals o f society such as
equity, economic efficiency, environmental justice, long-term viability (Goldemberg,
1995), that socio-political dimensions must also be modeled.
Linkage I
ENVIRONMEN
ENERGY
Equity
SOCIO
POLITICS
Linkage
Equity
Linkage III
ECONOMY
Figure 2.6
Interactions of Energy, Economy, Environment, and Socio-Politics
Inclusion o f the socio-political dimension will eventually serve to enrich

the concept o f sustainable energy development. While different disciplines suggest
different solutions to the question o f sustainability, a socio-political approach enables
integration o f various perspectives o f sustainable energy development. As shown in
50
Figure 2.6, the socio-political dimension plays a key role in integrating the three 'E's.
It seeks to maintain the stability o f social and political systems while delivering
services in an economically and ecologically sustainable manner. In this modeling
framework, equity is a linchpin in each dimension. The specific variables used in the
model for this dissertation are discussed at length in Chapter 4.
2.5
Conclusion
In this chapter, a conceptual framework and operational definition o f
sustainability in terms o f energy systems are discussed. Three dimensions o f sustain

able energy system are evolved based on the research literature. As a prerequisite to a
better understanding o f sustainable energy systems, substantial space was allotted for
discussion o f the concept o f sustainability in general. Three perspectives o f sustain
ability-econom ic, ecological, and sociological are used to provide a platform for
sustainable energy development.
Sustainable energy development is attainable if it realizes several basic
criteria: diversity and decentralization, an efficiency and renewable resource orient
ation, social cost-based pricing, a service orientation, democratic choice and, most
importantly, equity. These criteria are grouped into three dimensions: economy,
environment, and socio-politics. In this dissertation, energy is modeled as an impor
tant instrument in realizing these goals. Based on the theoretical approach described
above, this dissertation suggests a new nexus between energy, environment, and
economy in which socio-political structure plays a pivotal role. This dissertation,
following Pezzeys argument and methodology, attempts to analyze the sustainable
energy system by modifying the conventional macro-economic model to incorporate
51
the ecological soio-political dimensions addressed at length in this chapter.25 In the

subsequent chapters, this possibility will be explored in detail and will be operation
alized in a policy simulation model.
25 As Turner (1993) has identified, various concepts o f sustainable development can

be grouped from weak sustainability to strong sustainability depending upon how
natural capital and socio-political considerations like equity are addressed. For
example, assuming that the overall capital stock o f capital assets should remain
constant over time, a weak sustainability (Solow's idea of sustainability 1986)
assumes that natural capital is perfectly substitutable with human capital. Whereas
strong sustainability (stationary state sustainability o f the type discussed by Daly 1991) treats critical features o f natural capital as non-substitutable and damage to them
critical elements (e.g., tropical rain forests) as irreversible. According to such criteria,
this dissertation's concept o f sustainability belongs to the weak sustainability
category. However, the aim here is to begin the effort to model sustainable energy
systems with the goal o f eventually realizing a model o f a strong sustainability
system.
52
Chapter 3
SUSTAINABLE ENERGY DEVELOPMENT IN THE KOREAN CONTEXT
The last quarter o f the twentieth century has been characterized by dynam
ic changes in the world energy system. The 1990s have also witnessed great transfor
mations in the political and economic arenas. Regardless o f their size or stage o f
economic development, all countries have begun to liberalize their energy markets.26
Korea is no exception to this trend. After its transition to democratic governance in
1994, Korea commenced a series o f reforms in its energy sector. The key philosophy
o f these reforms was liberalization, which signals a paradigmatic shift away from
centralized planning and regulation to market-based competition.
This chapter provides an overview o f current and planned Korean energy
policies, as well as the basic data which will be used for empirical analysis in subse
quent chapters. The reason for selecting Korea as a case study for empirical analysis is
that Korea clearly illustrates the relationships between economic develop-ment, energy
consumption, and environmental degradation.
26 The breakup o f the Soviet Unions in the early 1990s played a key role in this
transition. However, this unexpected and sudden change creates new problems. The
unchecked stride o f international speculative capital has brought about a series o f
financial crises in the developing countries where financing system is not mature and
sophisticated enough to protect itself. The IMF bailout system that began with the
domestic financial crisis o f 1997 posed a dubious attitude to this liberal movement
among policy makers as well as scholars. Advocates o f market mechanism welcomed
government's initiatives in this direction, whereas progressive environmentalists are
opposed to this reform that encourages market competition.
53
This chapter will undertake several tasks. First, the Korean energy system
will be diagnosed and evaluated. Second, Korea's energy policy will be analyzed in
terms o f efficiency, as well as its effectiveness in maintaining socio-political stability.
Finally, the discussion will turn to the goals and necessary strategies for the transition
toward a sustainable energy future in the Korean context.
3.1
Overview of Economic Situation in Korea

Korea, located in the continental climate zone of Northeast Asia, has a
population o f about 46 million (as o f 1997) in an area o f about 100,000 km2. It has
four distinct seasons, with average monthly temperatures ranging from -3.0C (27F)
in January to 26C (79F) in August. Korea's endowment of natural resources,
including those used for energy, is poor.
Such climatic and resource conditions characterize not only seasonal
patterns o f energy consumption, but also economic activity. For example, demand for
heating fuels rises sharply in winter, while agricultural productivity is severely
restricted by both the cold winter and limited cultivatable area, which amounts to just
23% o f the total land surface. The country's manufacturing industry had remained
underdeveloped until the 1950s, mainly because o f the lack of natural resources and
capital. Although agriculture was traditionally Koreas primary industry, Koreas
strategy for developing its economy has concentrated on expanding the manufacturing
sector and increasing exports.
The past three decades have been characterized by unprecedented econ
omic growth in Korea, perhaps, the fastest rate o f economic growth that the modem
world has ever seen. Between 1970 and 1997 the Korean economy recorded an aver
age annual GNP growth rate o f 7.9%. Per capita income increased from $289 in 1971
54
to $9,511 in 1997 (in US dollar). In tandem with this rapid economic expansion,
significant changes were brought about in the countrys industrial structure. The share
o f primary production (agriculture, forestry, mining, etc.) in GNP decreased from
28.7% in 1971 to 6.7% in 1997, while that o f the secondary production (manufactur
ing, construction, etc.) increased from 18.7% in 1971 to 43.9% in 1997. The share o f
the service and tertiary sectors (finance, insurance, realtors, etc.) in GNP, however,
decreased from 52.6% in 1971 to 49.6% in 1997.
Table 3.1
Major Socio-Economic Indicators in Korea

1971
1980
1990
1997
71-80
81-97
Population (1,000)
32,883
38,124
42,869
45,991
1.7
0.4
GNP (W109, '90 Price)
39,355
73,481
178,262
285,589
7.2
8.3
Per Capita (US$)
289
1,597
5,883
9,511
20.9
11.1
Primary Industry
28.7
16.6
9.3
6.5
Secondary Industry
18.7
33.2
42.9
43.9
Tertiary Industry
52.6
50.2
47.8
49.6
GDP Composition
Source: National Statistical Office. Major Statistics o f Korean Economy. 1990-1998

Growth in the manufacturing sector has accomplished through the expan
sion o f energy-intensive industries. During the 1970s, the government placed a special
emphasis on industrializing the economy, focusing on the expansion o f heavy and raw
material industries (e.g., steel and petrochemicals) to build the basis for self-sustained
economic growth. As a result, industrial structure in Korea has undergone a funda
mental change, particularly in the manufacturing sector.
55
3.2
Diagnosis o f the Korean Energy System

As one o f the fastest growing economies in Asia, Korea has witnessed a
rapid increase in energy consumption, with an average annual growth rate o f 8.4%
during the 1970-1997 period. This annual energy consumption growth rate exceeds
the 7.9% annual GDP growth rate in the same period (See Table 3.3). This is mainly
due to the energy-intensive industrial structure that has been promoted for export
expansion. The energy intensity o f Koreas economy, the ratio o f energy consumption
to GNP was 0.6 in 1997. This is one o f the worst energy intensity ratios among
industrialized countries. Even more worrisome is the increasing vulnerability o f the
Korean economy to fluctuations in energy supply as its dependency on imported
energy continues to approach 100%.
Table 3.2
Major Energy Indicators

1970
1980
1990
1997
19,678
43,911
93,192
174,962
8.4
7.8
9.4
Per Capita (TOE)
0.61
1.15
2.17
3.80
Import Dependence (%)

Nuclear Included
Nuclear Excluded
47.5
47.5
73.5
71.6
87.9
73.7
97.5
86.5
Import Bill for Energy (109 US$)
6.5
10.9
27.1
Oil Imports (109 US$)
6.0
6.5
17.8
0.58
0.52
0.60
Primary Energy Demand (103 TOE)

Average Growth Rate (% )1
Energy/GDP (TOE/106 Won)
0.54
N o te:1 Average growth rate between the previous and the present colum n years.
Source: KEEI, Yearbook o f Energy Statistics. 1990-1998.
56
3.2.1
Energy Demand by Fuel Type

Koreas few domestic energy resources are limited to anthracite, firewood,
and hydropower. These energy sources are not sufficient for fueling the continuous
industrialization o f the economy, particularly given the current emphasis on the expan
sion o f energy-intensive industries. To fuel the industrialization o f the economy,
Korea has to import most o f its energy, including oil, bituminous coal, nuclear fuel,
and natural gas (see Table 3.2).
Table 3.3
Primary Energy Consumption by Fuel Type (Unit: 103TOE)

1970
1980
1990
1997
1970-97
Petroleum
9,293
26,830
50,175
103,404
9.3%
Coal
5,829
13,199
24,385
34,799
6.8/o
LNG
3,023
14,793
305
496
1,590
1,351
5.7%
869
13,222
19,272
2,815
8,117
17,267
12.8/o
909
Hydro
Nuclear
(Electricity)
(Dist. Heat)
Others
Total
666
4,251
2,517
797
1,344
-4.2%
19,678
43,911
93,192
174,962
8.4%
Note: Last column denotes the growth rate.

Source: KEEI. Yearbook o f Energy Statistics. 1990-1998
Obviously, Korea's ratio o f energy imports to energy consumption is high,
approaching 97.5% in 1997 (with nuclear energy included), and it is expected to
continue to increase. Korea paid $27.4 billion for energy imports in 1997 (including
$17.8 billion for oil, US$2.4 billion for coal), which amounts to 18.9% o f total imports
o f $144.6 billion.
57
200000
180000
Others
Hydro
DONuclear
BLNG
Oil
| aC o al
160000
140000
0120000
100000
o
80000
60000
40000
20000
0
1970
Figure 3.1
3.2.1.1
1975
1980
Y ear
1985
1990
1995
Trend o f Energy Consumption by Fuel Type
Petroleum
In the past two decades, oil has become the dominant energy source in
Korea. Oil consumption began to increase rapidly in the late 1980s and the early
1990s, with oil dependence reaching 59% in 1997. This phenomenon was primarily
due to the addition o f naphtha cracking facilities in the industrial sector, rapid increase
in motor vehicle ownership (about 20% increase per year), and the substitution of oil
for anthracite as a heating fuel in the residential and commercial sectors. Oil demand
in Korea is expected to continue to increase through the beginning part o f this century
(KEEL, 1998).
58
3.2.1.2
Coal: Anthracite and Bituminous

Anthracite use is principally in the form o f briquettes that have tradition
ally been used for heating in the residential and commercial sectors, but reliance on
this fuel has been in decline. As household income increased and the standard o f
living improved in recent years, major fuels in the residential and commercial sectors
have shifted from anthracite to oil and gas. Consequently, the demand for anthracite
has decreased since reaching its peak in 1986, and its share o f total prim ary energy has
declined from 22.5% in 1980 to 1.1% in 1997. In the near future, anthracite will no
longer be used in the residential or commercial sectors. Instead, its use w ill be limited
to electricity generation. Projections of annual anthracite consumption for electricity
generation shows it future use to be fairly constant at around 2 million tons (KEPCO,
2000).
hi contrast, demand for bituminous coal has rapidly increased during the
last two decades. Bituminous coal is used in the industrial sector for process heat, the
production of steam and power generation. The expansion o f the steel industry, and
fuel substitution in the cement industry and electricity generation were m ainly respons
ible for the rapid increase in bituminous coal consumption. Its share in total energy
demand increased from 7.6% in 1980 to 18.8% in 1997 (KEEI, 1998).
3.2.1.3
Gas: LNG
Gas in the form o f liquefied natural gas (LNG) is a comparatively recent
entrant into the Korean energy market. However, its role is expected to become
significant as Korea becomes more concerned about environmental degradation from
excessive fossil fuel use. The major users o f LNG are the electricity generation sector
and the residential and commercial sectors, which utilize LNG for town gas.
59
LNG consumption reached 11,379 metric tons in 1997, recording an

average annual growth rate o f 21.5% from 1987 when LNG was first introduced on a
commercial scale. The rapid growth in LNG demand resulted from its increased uses
in power generation and town gas production. Town gas had formally been made from
a mixture o f naphtha, propane, and butane. The use o f butane was phased out by 1983
as was naphtha in 1992. In 1987 LNG began to be used as town gas, and by 1997 it
accounted for almost 90 percent o f town gas consumption (KEEI, 1999).
3.2.1.4
Electricity
Electricity has played, and continues to play, a key role in Korea's indus
trial development. Korean industrialization has been made possible through the
supply o f cheap electricity, which made the Korean manufacturing industry more
competitive in the world export market. The supply o f cheap electricity, meanwhile,
has been made possible by the proliferation o f nuclear power plants and coal-fired
power plants during the late 19870s and 1980s. The cheap electricity has in turn
spurred rapid growth in electricity consumption in the commercial and residential
sector.
Electricity demand has shown remarkable growth, continuously expanding
its share o f total energy demand. The electrification rate is now approaching 100 %.
Total electricity consumption has more than tripled over the last decade, from 64,169
GWh in 1987 to 200,784 GW h in 1997. The industrial sector is by far the largest
electricity user, consuming 58.0% o f total electricity delivered. The residential and
commercial sectors are the next, consuming 35.3% o f total electricity delivered. Rapid
growth in electricity demand is expected to continue into the next decade as a result o f
60
extensive factory automation, increased use o f electric appliances, and the recently
revived construction boom.
3.2.2
Energy Demand and Supply by Sector

The relative shares o f sectoral energy consumption in total final energy
consumption are shown in Table 3.4. The industrial sector is the largest energy
consumer in Korea consuming over half o f Korea's final energy demand. As o f 1997,
the industrial sector was responsible for 52% o f total final energy demand, the resid
ential and commercial sectors were responsible for 24%, and the transportation sector
was responsible for 22%. The residential and commercial sector's share in the total
final energy consumption decreased from 37% in 1980 to 24% in 1997. This was due
Table 3.4
Final Energy Demand by Sector (Unit: 1,OOOTOE)
1980
1990
Growth Rate
1997
1995
80-90
90-97
Industrial
16,571
(44.1)
36,150
(48.1)
62,946
(52.7)
72,144
(52.0)
8.1%
10.4%
Resident/Com.
14,034
(37.3)
21,971
(29.3)
29,339
(24.1)
33,064
(23.8)
4.6%
6.0%
Transportation
4,905
(13.0)
14,173
(18.9)
27,148
(22.3)
30,832
(22.2)
11.2%
11.7%
Public/Others
2,087
(5.6)
2,812
(3.7)
2,416
(19.8)
2,715
(19.6)
3.0%
-0.5%
37,597
(100.0)
75,107
(100.0)
121,850
(100.0)
138,755
(100.0)
7.2%
9.2%
Total
Note: Numbers in ( ) are shares expressed in %.

61
160000
140000
Pub/Others
Resid/Comm
KBTransport
GOIndustrial
120000
g
100000
|j
80000
60000
40000
20000
1980
1985
1990
1995
Y ear
Source: KEEI. Yearbook o f E nergy Statistics. 1995-1998.
Figure 3.2
Trend o f Share b y Sector in Final Energy Consumption
to the fact that economic growth in Korea has been led by export-oriented industrial
activities. The transportation sectors share o f total final energy consumption
increased from 13% in 1980 to 22% in 1997, due to an increased reliance on motor
vehicles. Each o f these sectors w ill be examined in detail in the following section.
3.2.2.1
Industrial Sector
Industrial energy consumption doubled between 1990 and 1997, from
36,150 TOE in 1990 to 72,144 T O E in 1997. A number of factors are responsible for
such rapid growth in industrial energy consumption. These include: 1) the expansion
o f energy-intensive industries, such as petrochemicals and steel; 2) factory automation;
62
and 3) on-site cogeneration. The annual growth rate in energy consumption in the
industrial sector has averaged 10.4% between 1990 and 1997, surpassing that o f total
final energy consumption (9.2%) during the same period. Thus, the industrial sector
has been a major contributor to the growth o f energy consumption in Korea.
Table 3.5
Industrial Energy Consumption by Fuel Type
Coal
Oil
City Gas
Electricity
Others
Total (103 TOE)
Growth Rate
---------------------------80-90
90-97
1980
1990
1995
1997
3,653
(22.0)
10,806
(29.9)
16,244
(25.8)
18,138
(25.1)
11.5
7.7
10,948
(66.1)
20,014
(55.4)
36,810
(58.5)
41,378
(57.4)
6.2
10.9
235
(0.7)
863
(1.4)
1,496
(2.1)
30.3
1,971
(11.9)
5,095
(14.1)
8,294
(13.2)
10,009
(13.9)
10.0
10.1
736
(1.2)
1,123
(1.6)
36,150
(100.0)
62,946
(100.0)
72,144
(100.0)
8.1
10.4
16,571
(100.0)
Note: Number in ( ) indicates share in percentage.

Source: KEEI. Yearbook o f Energy Statistics. 1995-1998.
3.2.2.2
Residential, Commercial, and the Public Sector

The residential and commercial sectors have had relatively lower rates o f
growth in energy demand, compared with other sectors. However, their share o f total
energy demand is significant because of space heating needs. Energy demand in these
63
sectors combined increased from 14.0 million TOE in 1980 to 33.1 million TOE in
1997. The average annual growth rate in energy consumption was 5.2% for that
period. Consequently, the residential and commercial sectors combined share o f total
final energy consumption decreased from 37.3% in 1980 to 23.8% in 1997 (see Table
3.4). One possible reason for this observed trend is that the substitution o f oil and gas
for wood and coal has improved the energy efficiency o f space heating in the resident
ial and commercial sectors.
Table 3.6
Residential/Commercial/Others Energy Consumption

(Unit: thousand TOE and %)
Growth Rate
1980
1995
1990
1997
1980-90
1990-97
Coal
8,670
(61.8)
9,027
(41.1)
1,514
(5.2)
779
(2.4)
0.4
-29.5
Oil
2,222
(15.8)
8,876
(40.4)
17,632
(60.1)
18,712
(56.6)
14.9
11.2
Electricity
611
(4.4)
2,421
(11.0)
4,801
(16.4)
6,090
(18.4)
14.8
14.1
Firewood
2,517
(17.9)
872
(4.0)
265
(0.9)
154
(0.5)
-10.1
-21.9
City Gas
15
(0.1)
797
(3.6)
4,494
(15.3)
6,436
(19.5)
48.7
34.7
Heat
75
(0.3)
632
(2.2)
892
(2.7)
42.4
Total
14,034
(100.0)
21,971
(100.0)
29,339
(100.0)
33,064
(100.0)
4.6
6.0

Source: KEEI. Yearbook o f Energy Statistics. 1995-1998.
64
The fuel mixes in the commercial and residential sectors have undergone a
significant structural change. Oil and gas have replaced significant quantities of
anthracite, and electricity demand has grown rapidly, mainly due to increases in the
size and number o f electric household appliances. Petroleum products accounted for
only 15.8% o f total energy consumption in the sector in 1980. However, oil's share in
the total energy consumption o f the residential and commercial sectors has drastically
increased to 56.6% in 1997. The growth in electricity consumption has also been
impressive, recording an average growth rate o f 15% between 1970 and 1997 with its
share rising from 4.4% in 1980 to 18.4% in 1997. On the other hand, consumption o f
firewood, which is a unique noncommercial energy source in Korea used mainly in
rural areas, declined dramatically from 2.5 million TOE (17.9% o f the total consump
tion) to 0.2 million TOE (0.5%) in 1997.
3.2.2.3
Transportation Sector
The transportation sector, which depends mainly on petroleum, has had
the most rapid increase in energy demand over the last two decades in response to
substantial growth in the number o f vehicles and the amount o f miles driven. The
number o f vehicles increased at an annual average rate o f 17.8% between 1970 and
1997. Passenger cars, in particular, show dramatic growth, increasing 30 times
between 1980 and 1997, thereby recording an average annual growth rate o f 22.3%.
Energy consumption in the transportation sector in Korea increased from 4.9 million
TOE in 1980 to 30.8 million TOE in 1997 (see Table 3.7) with an average annual
growth rate o f 11.4% during the same period. Thanks to this robust growth, the
transportation sector's share o f total energy consumption increased from 13.0% in
1980 to 22.2% in 1997 (see Table 3.4).
65
Table 3.7
Fuel Consumption in the Transportation Sector (Unit: 1,000 TOE)

Growth Rate (%)
--------------------------1980-90
1990-97
1980
1990
1995
1997
4,868
(99.3)
14,086
(99.4)
27,010
(99.5)
30,681
(99.5)
11.2
11.8
Gasoline
760
(15.5)
2,936
(20.7)
7,527
(27.7)
9,074
(29.4)
14.5
17.5
Diesel
3,036
(61.9)
7,748
(54.7)
12,640
(46.6)
13,235
(42.9)
9.8
7.9
Bunker-C (B-C)
376
(7.7)
1,199
(8.5)
3,020
(11.1)
5,145
(16.7)
12.3
23.1
LPG
446
(9-1)
1,222
(8.6)
1,765
(6.5)
1,990
(6.5)
10.6
7.2
Others
250
(5.1)
981
(6-9)
2,058
(7.6)
1,237
(4.0)
3.5
3.4
Electricity
34
(0-7)
87
(0-6)
138
(0.5)
151
(0.5)
9.9
8.2
4,902
(100.0)
14,173
(100.0)
27,148
(100.0)
30,832
(100.0)
11.2
11.7
Petroleum Products
Total

Source: KEEL Yearbook o f Energy Statistics. 1990-1998
Most o f the energy consumed in the transportation sector comes from
petroleum products such as gasoline, diesel, LPG, heavy fuel oil, and je t fuel. Buses
and trucks, which occupy the significant traffic volume in Korea (see Table 3.8), are
responsible for 13.2 million TOE diesel oil consumption in 1997. Gasoline accounted
for 29.4% of the energy consumed in the transportation sector in 1997. Due to rapid
growth in the number o f passenger cars, gasoline consumption has rapidly increased in
66
recent years. LPG is currently used in the transportation sector as the primary fuel for
commercial taxis. This development was made possible by the liberalization o f fuel
use restrictions on taxis. Permitting the use o f LPG in private passenger cars is
currently under consideration.
Table 3.8
Number o f Vehicles by Type (Unit: 1,000)
1970
1980
1990
1997
Growth Rate (%)

----------------------------------70-80
80-90
90-97
Passenger Car
60.7
249.1
2,074.9
7,586.5
15.2
23.6
20.3
Bus
15.8
42.5
383.7
719.1
10.4
24.6
9.4
Truck
48.9
226.9
924.6
2,072.3
16.6
15.1
12.2
1.1
9.2
11.5
35.6
23.7
2.3
17.5
126.5
527.7
3,394.8
10,413.4
15.4
20.4
17.4
Special Car
Total
3.2.2.4
Energy Transformation Sector: Electricity and District Heat
Electricity
The major fuels for power generation in Korea were anthracite and
hydropower until 1962, at which point they accounted for 75% o f power generation.
However, since then, oil consumption has steadily increased. Oils share o f power
generation reached 88.3% in 1977, while the shares o f anthracite and hydropower
decreased to 6.2% and 5.2% respectively in the same year. After the second oil shock,
oil consumption for power generation declined significantly, and oils share fell to
67
16.9% by 1990. This was a dramatic downslide o f oil's dominance, it share dropping
by more than 60% in ju st 10 years. As oil decreased in importance as a fuel for
electricity production, bituminous coal took over oil's position as a m ajor fuel source
in power generation. W ith the completion o f a coal-fired power plant in 1983, the
consumption o f bituminous coal for power generation began to grow. Its share o f total
fuel consumption for power generation reached 26.7% in 1997. Along with bitumi
nous coal, the use o f nuclear power has also increased rapidly in the 1980s. Nuclear
Table 3.9
Fuel Consumption for Power Generation (Unit: 1,OOOTOE)
Anthracite
Bituminous Coal
Oil
LNG
1962
1970
1980
1990
1997
225
(47.4)
279
(11.2)
682
(7.6)
704
(4.3)
1,059
(2.0)
13,890
(26.7)
9,598
(18.4)
25
(5.3)
(-)
(-)
3,899
(15.0)
94
(19.7)
1,916
(76.6)
6,988
(77.3)
4,398
(16.9)
(-)
(-)
(-)
(-)
7,013
(13.5)
(-)
(-)
869
(9.6)
13,222
(50.7)
19,272
(37.0)
Hydro
131
(27.5)
305
(12.2)
496
(5.5)
1,590
(6.1)
1,351
(2.6)
Total
475
(100.0)
2,500
(100.0)
9,035
(100.0)
26,055
(100.0)
52,087
(100.0)
Nuclear
Note: Numbers in ( ) are the share expressed in %.

Source: Ibid.
68
power generation amounted to 19.3 million TOE in 1997. In the same year, nuclear
energy accounted for 11% o f total primary energy consumption and 37% o f total fiiel
consumption for power generation (see Table 3.9).
In response to ever-increasing electricity demands by export-oriented
industries, numerous large-scale power plants have been constructed. These plants
depend heavily on coal and nuclear fuels. Hence, electricity generation now causes
high levels o f pollution and poses serious safety concerns. Nevertheless, there is little
motivation for conservation in electricity consumption because electricity rates have
been kept low in order to benefit export-oriented industrial production. Consequently,
energy efficiency opportunities have not been fully realized.
Table 3.10 shows a recently publicized series o f long-term construction
plans for electricity power plants. According to the most recent long-term plan, The
5th Plan, 106 power generation units will be constructed, expanding the current gener
ation capacity o f 34.9 million kW to 79 million kW in 2015. This plan includes the
construction o f 14 nuclear power plants (15.3 million kW), 22 coal-fired plants (12.8
million kW), 2 anthracite power plants (0.4 million kW), 22 LNG power plants (7.5
million kW), 15 oil-fired power plants (5.3 million kW), and 12 pumped storage
power plants (3.7 million kW). Korea Electricity Power Corporation (KEPCO)
projects that electricity demand will increase by an annual average growth rate of
4.3%, resulting in 67.5 million kW o f peak demand in 2015.
Each plan has a different assumption regarding the growth rate o f elec
tricity demand, which in turn was based on an assumed economic growth rate. In
addition, such factors as decreasing energy intensity (electricity intensity in this case)
and environmental considerations were considered in the creation o f each plan. The
69
reason for the higher level o f demand in The Fourth Plan is because it was based on
the National Long-Term Plan for Energy Demand and Supply o f 1997 in which the
financial crisis and the subsequent IMF bailout were not considered. The Fifth Plan
assumed that the growth rate o f electricity demand would be below the economic
growth rate after 2003. It also considered two mitigating factors: 1) the intensifying
nation-wide antinuclear movement; and 2) growing international pressure to reduce the
CO 2 emissions.
Table 3.10 KEPCO's Plan of Power Plant Construction (Unit: Thousand kW)
The 3rd Plan (1995)
1995-2010
The 4th Plan (1998)

1998-2010
The 5th Plan (1999)

1999-2015
Nuclear Power
16,600 (16 units)
18,600 (18 units)
15,300 (14 units)
Coal Fired
11,100 (19 units)
14,500 (25 units)
12,800 (22 units)
Anthracite
400 ( 2 units)
600 ( 3 units)
400 ( 2 units)
Petroleum
1,150 ( 4 units)
4,610 (16 units)
5,300 (15 units)
11,500 (30 units)
9,470 (25 units)
7,520 (22 units)
2,700 (10 units)
3,700 (12 units)
3,700 (12 units)
150 ( 5 units)
110 (18 units)
110 (19 units)
43,600 (86 units)
51,590 (117 units)
45,130 (106 units)
LNG
Pumped Storage
Hydro/Others
Total
Source: MOCIE. The Fifth Long-Term Plan fo r Electricity Demand and Supply.
January 2000.
70
District Heating
Demand for district heat shows a trend o f rapid growth in Korea. District
heating is an economic option in countries such as Korea that have a high population
density and longer, colder winters. Only 3.7 % o f all Korean households are currently
serviced by district heating; however, the Korean government is planning to expand
the district heat supply. Currently, the government has a plan to supply 15% all
residential heat demand with district heat.
District heating was originally implemented as an energy conservation
measure in the early 1980s in Korea. It was introduced in Seoul and its suburban
satellite cities in 1990, and is expanding into local cities such as Kimhae and Cheongju. As o f 1996, 12 areas (620,000 households and 1,464 buildings) were serviced by
district heating. The total heat supplied in 1997 amounted to 250,000 TOE.
3.3
Koreas Energy Policy

Until the oil o f the 1970s, the Korean government had been in no urgent
need o f an independent energy policy. Energy policy, accordingly, had been managed
as a part o f economic and trade policy by the Economic Planning Board (EPB) and the
Ministry o f Trade and Industry (MOTI). The severe economic impact o f the 1974 oil
crisis, however, prompted the Korean government to develop a new energy strategy
that strongly emphasized the diversification o f energy supply sources and the promo
tion o f energy conservation, particularly, a reduction in oil consumption.
In the aftermath o f the first oil crisis, the Heat Management Act was
passed in 1974 to allow a systemic implementation o f energy conservation policies.
To effectively plan and implement national energy policy, the government established
a new independent ministry, the Ministry of Energy and Resources (MOER) in 1978.
71
The establishment o f MOER was in turn followed by the passage o f the Rational
Energy Utilization Act.
3.3.1
Basic Framework of Koreas Current Energy Policy

Despite the generally accepted notion that market mechanisms are the best
option available to improve economic efficiency, the energy sector remains an area of
governmental intervention throughout the world due in part to the strong linkage
between this sector and the economic and social well-being of a country. The Korean
government, while liberalizing its energy sector, still retains some degree o f control
over the sector. The basic philosophy o f the Korean government's energy policy can
be summarized as: 1) to ensure energy security; 2) to ensure the operation o f a free
market while regulating monopolies within the energy industry; 3) to maintain balance
among economic, environmental and social objectives; and 4) to fulfill international
obligations.
Given a poor endowment of indigenous energy resources, Korea considers
energy security as the primary concern o f its energy policy. This concern for energy
security, intensified by the two energy crises, forced Korea to diversify energy sources
over the last two decades. In addition to the diversification o f energy sources, the
Korean government expanded the energy supply infrastructure to meet increasing
energy demands. Nuclear and coal-fired power plants, because of their relatively low
vulnerability to world geopolitics, have been enthusiastically advocated. As o f 1997,
nine nuclear power plants were in operation and 14 more were under construction or
planned. Supply infrastructure for other energy sources, such as LNG and oil and gas
is also developed.
72
The Korean government has maintained an energy efficiency and conserv

ation program since the 1970s. The government passed the Heat Management Act in
1974 to systematically implement energy conservation policies, and promulgated the
Rational Energy Utilization Act in 1979 to encourage the comprehensive development
o f energy efficiency options.27 These efforts were strengthened following the Earth
Summit in 1992.28 hi particular, the government established the National Committee
for Energy Conservation (NCEC) in 1997 to ensure more effective implementation o f
energy conservation policies.
The energy efficiency and conservation strategy initiated by the govern
ment exerted pressure on Koreas ability to meet its energy needs economically. The
nation had to reduce the energy intensity o f the economy, while maintaining rapid
economic growth based on the expansion o f energy-intensive industries throughout the
1970s and 80s. As a result, Korea has not been able to dramatically reduce its energy
intensity. In fact, since 1989, energy demand growth in Korea has exceeded economic
growth. Consequently, the time is now critical for Korea to develop a practical plan to
improve energy conservation and to manage energy demand growth in the twenty-first
century.
Energy conservation, which had originally been pursued as a means o f
ensuring energy security, was recently rekindled as a means to curb the worsening
environmental pollution problem. In the New Five Year Economic Plan o f 1998,
energy conservation was emphasized as a means to build a more energy-efficient
27 National Communication o f the Republic o f Korea. Republic o f Korea, 1998, p. 45.

28 Korea's Energy Policy to Mitigate Climate Change. M inistry o f Commerce,
Industry and Energy, 1997, p. 8, and Ibid.
73
economy. In order to maximize the effects o f energy conservation measures, voluntary

participation by the private sector and local governments was promoted. The use o f
energy service companies (ESCOs) was also advocated by the government in order to
realize the full potential o f energy conservation opportunities. Currently, 53 ESCOs
are in business in Korea (KEMCO, 1999).
R&D activities in energy technology have also been given a high priority
in Korean energy policies. Major areas for R&D include energy conservation and
development o f alternatives to fossil fuel energy, including renewable energy. The
government leads R&D activities in collaboration with private and public industries,
universities, and research institutes. Priority projects are financed by the governments
budget and energy-related funds from government and industry.
3.3.2
Energy Prices and Taxes

The government has played a critical role in determining energy prices in
Korea. One o f the major goals pursued by the Korean government was to historically
keep energy prices low in order to promote economic growth. Classic economic
theory teaches that energy prices kept low by government controls should result in an
inefficient and distorted market. In addition to market distortion, artificially low
energy prices negatively impact policies designed to reduce environmental degradation
associated with excessive energy consumption.
The energy industry is capital-intensive and has long lead-times. Thus,
maintaining a proper price system in energy production, consumption, and investment
is essential for a healthy national economy. Prices that are below production costs
induce excessive consumption and result in the wasteful use o f national resources and
74
environmental degradations. On the other hand, an artificially high price will weaken
industrial competitiveness and raise the costs o f basic energy services for consumers.
Energy taxes in Korea are levied for two purposes: 1) to increase revenues
and secure capital funds for energy infrastructure expansion; and 2) to promote energy
conservation, efficiency improvement, and fuel substitution. Recently, some European
nations have also levied energy taxes in order to encourage the consumption o f partic
ular fuels that are more environment-friendly, thereby enabling them to achieve envi
ronmental goals.
Table 3.11 Price of Petroleum Products and Taxes in Korea (Unit: Won/liter)
Factory
Price
Gasoline
(Unleaded)
Kerosene
Diesel
Heavy Oil
(B-A)
Propane
Butane
City Gas
Excise Tax
VAT
Total Tax
Whole Sale
Price
Retail Price
176
334
51
385
561
621
167
137
22
34
19
17
41
52
208
189
242
220
117
12
12
128
137
n.a.
191
190
190
19
19
19
21
21
21
40
40
40
231
230
230
326
304
304
Source: IEA. ENERGY POLICIES o f the Republic ofKorea. 1994. P.42.

Petroleum products are charged with a 10% value added tax, a 5% tariff,
and a special tax o f $ 1.7 per barrel in order to supply capital for a petroleum business
fund. Special excise taxes o f 150%, 10%, and 20% are levied on gasoline, LPG, and
diesel fuel, respectively. The particularly high excise tax on gasoline is designed to
discourage its consumption. On the other hand, the special excise tax on diesel fuel is
75
kept low in order to enhance the competitive edge o f industries by holding down trans
portation costs. Only a 10% tax is levied on heavy oil consumption. These lower
taxes on heavy oil and diesel fuel, however, negatively impact the environment be
cause diesel fuel and heavy oil tend to emit more air pollutants than other petroleumbased fossil fuels.
As mentioned earlier, a major goal o f Korean energy policy is to supply
energy at a low and stable price. Electricity is no exception. The Korean government
believes that the Korean economy can be more competitive if electricity prices are kept
low. Korea's electricity pricing system differs, depending upon the usage (industrial,
agricultural, residential, commercial, educational, and street lighting). In addition,
electricity prices differ with respect to time zones, seasons, and customers o f interruptible service. A 10% value added tax is levied on electricity. In addition to this
tax, various tariffs and taxes are levied on the input fuels used for generation.
The Korean government believes that low prices will lead to an increase in
natural gas consumption. Thus, the government discounts gas consumed for cooling
office buildings in order to reduce electricity peak loads in the summer. Along with
privatizing the Korea Gas Corporation, the government is currently considering re
forming the existing natural gas pricing system. For instance, price differentiation by
sector and the introduction o f seasonal price differentiation for smoother load patterns
are now under consideration.
The negative effects o f low energy prices have been continuously pointed
out by a number o f experts. First, low energy prices discourage energy conservation
efforts. Second, they make it difficult to secure the funds needed to expand the
facilities necessary to meet increasing electricity demand. Third, excess energy
76
consumption brought on by low prices demands unnecessary facility expansions and

results in mismanagement o f national resources. Fourth, low prices distort energy
markets and are anti-environmental because they induce increased fossil fuel con
sumption.
Currently, Korea has no environmental tax, such as a carbon or energy tax,
because it is not allowed under the rules o f the present taxation system. Reform o f the
taxation system is now under consideration by the Ministry o f Environment to allow
for environment-related taxation.
3.3.3
Deregulation and Restructuring in the Korean Energy Industry

As a part o f the recent Five Year Plan o f Economic Development, the
Korean government has implemented several economic reforms including: deregul

ation, revitalization o f market mechanisms, privatization o f national corporations, and
institutional rearrangement.
Market deregulation o f the Korean economy generally, and its energy
sectors specifically, has been redirected by the newly elected democratic government
since 1998. Deregulation in the energy sector started in the petrochemical industry in
1993. Until then, prices and production limits o f most petroleum products were
determined by government regulations. Price deregulation on petroleum products has
been gradually implemented and most price regulations have now been repealed
except for regulations on diesel fuels, heavy oil, and LPG, which, the government
thinks, are still in need o f price control. Along with deregulation, a variety o f re
strictions on market entry to the petroleum sector were likewise abolished.
Recent deregulation efforts have been focused on the electricity industry.
The first step was to deregulate power plant licensing. The second step was to open
77
the electricity market to co-generation. Privatization o f electricity generation is also

now being seriously considered, as is privatization o f other state-owned energy
corporations. Privatization and deregulation are the main political tasks o f the new
national administration in the wake o f foreign debt problems stem m in g from the
devaluation o f the Korean currency.
W ith its industrial structure primarily oriented toward energy-intensive
heavy and chemical industries, Korea is vulnerable to fluctuations in energy prices and
supply disruptions. In addition to on-going energy security problems, Korea has
suffered serious environmental problems because o f its reliance on energy-intensive
industries. For these reasons, the government initiated restructuring programs
throughout the 1990s aimed at reducing the energy-intensity o f the economy. It is still
too soon to measure the effects of these programs. However, the share o f petro
chemical and heavy industry products in total exports decreased from 11.4% in 1990
to 11.1% in 1996, while electronic products increased from 15.7 % in 1990 to 18.8%
in 1996.29
3.3.4
Environmental Concern in Korean Energy Policy

In the past, uninterrupted and continuous economic growth was the
highest priority o f Korean economic policy. Thus, environmental protection and the
improvement o f environmental quality were subordinated to economic growth.
However, mounting environmental degradation brought on by industrialization and a
growing population forced the Korean government to implement national policies to
balance environmental and economic goals. However, this turnaround in the direction
29 National Statistical Office, Republic o f Korea. Major Statistics o f Korean
Economy. March 1998.
78
o f policy has left much to be desired. As Chapter 5 will show, strong energy demand
over the next two decades will make it difficult to implement effective environmental
policies.
Since 1990, the Korean government has legislated effluent charges against
air and water pollutants, based on the polluter pays principle. However, despite the
enactment o f air and water quality standards similar to those in developed countries,
actual implementation o f pollution charges has been delayed and additional laws will
be required for effective implementation and enforcement.
The primary goal o f energy-related environmental policy is minimization
of environmental damage in the process o f production, delivery, and consumption o f
energy products. As such, the expansion o f energy-related infrastructure should focus
on energy efficient facilities such as combined heat and power (CHP) generation.
Many CHP plants have in fact been constructed in the satellite cities around Seoul.
However, large-scale energy intensive industries such as steel and petrochemicals have
not utilized CHP generation despite its great potential for energy conservation.
3.3.4.1
Policies on Energy-Related Air Pollutant Emissions

Air-pollution due to energy consumption poses a serious environmental
threat to major urban areas in Korea. Consequently, the Korean government has
recommended consumption o f low-sulfur heavy oil in urban areas and in industrial
facilities. Additionally, the Ministry o f Environment (MOE) tightened the sulfur
content standard for Bunker-C (B-C) oil from 1.6% to 1% in Seoul and other major
urban areas in 1993. Consumption o f LNG as a substitute for coal and oil is also
strongly recommended in areas where LNG is available. Substitution of B-C oil with
cleaner fuels as well as the tightening o f total suspended particulate (TSP) standards in
79
factories and construction sites is also being implemented and the standards are being
enforced through detailed monitoring o f all sources o f TSP.
Figure 3.3 shows the trends for both major air-pollutant emissions and
ambient air concentrations from 1983 to 1997. Total emissions have been decreasing
despite rapid growth in total fuel consumption due to the expansion o f clean energy
sources and the introduction o f low-emission vehicles. NOx emissions, however,
show an increasing trend, due to rapid growth in the number o f vehicles. Air quality,
as measured by airborne concentrations, does not always match the em issions trends.
NOx Emissions and Concentration
S02 Emissions and Concentration
1963 1965 1967 1969
1991
1993 1996 1997
1963 1985 1967 1969 1991
Year
CO Emissions and Concentration
1963 1965 1967 1969
1991
1993
1995 1997
Year
HC Emissions a n d Ozon
Concentration
1993 1995 1997
Year
Fugure 3.3
Emission Trend and Concentration o f Major Air-Poilutants
80
In the case o f SO 2 and CO, emissions and airborne concentrations have a fairly similar
pattern. However, in the case of NOx and HC, the trend is enigmatic, which will be
partially explained in the latter part o f this chapter.
Emissions o f air pollutants by fuel type and in 1997 are shown in Table
3.12. Sulfur dioxide emissions were 2.89 million tons, o f which 69.8% came from
coal consumption and 30.2% from petroleum consumption. Twenty three percent of
total SO 2 emissions came from the residential/commercial sector and 26.9% from the
industrial sector. The remainder o f SO 2 emissions were produced by oil consumption
in the transportation sector.
Most NOx emissions come from the industrial (45.5%), transportation
(20.9%), and electricity sectors (17.1%). The main source o f CO emissions was the
transportation sector (91.4%), while the residential/commercial sector accounted for
only 5.5%. The transportation sector also accounted for 94.9% o f HC emissions as a
result o f gasoline and diesel fuel combustion.
From this analysis it becomes obvious which sectors should be the focus
of policy implementation. Priority should be placed on the transportation and indus
trial sectors. To reduce SO 2 and NOx emissions, which are the main causes o f acid
rain, it is necessary to reduce coal and oil consumption in these sectors or to regulate
the sulfur content o f these fuels. However, it is not as easy to reduce emissions in the
transportation sector as in the industrial sector because pollution sources in the trans
portation sector are mobile. In regard to CO and HC emissions, which contribute to
ozone build-up in urban areas, policies should be focused on CO and HC reduction
technologies in the transportation sector.
81
Table 3.12 Air-Pollutant Emissions by Sector and Fuel Type in Korea (1997)
(Unit: Ton)
Industrial
Transport.
R es./C om .1
2,041,172
168,368
494,816
61,730
0
676,560
18,790
3,905
153,146
so 2
Sub-total
248,888
1,175,281
2,194,319
50.3
5.7
%
26.9
283,595
86,377
Oil
367,585
Coal
14,309
250,122
0
Gas
85
NOx
13
0
100,771
Sub-total
283,595
617,720
45.5
20.9
7.4
%
12,723
Oil
9,825
910,019
Coal
44,727
7,895
0
Gas
121,984
4,220
CO
693
Sub-total
61,670
18,413
1,032,003
1.6
91.4
%
5.5
1,672
Oil
1,973
139,363
54
Coal
1,052
0
Gas
HC
14,665
1,196
110
Sub-total
2,922
3,135
154,028
1.9
94.9
1.8
%
Note: 1 denotes Residential/Commercial Sector.
Source: Ministry o f Environment. Emission o f Air-Pollutants
Oil
Coal
Gas
Electricity
183,200
511,806
51,230
746,236
17.1
107,010
247,245
54
354,309
26.1
6,059
7,506
3,441
17,006
1.5
1,121
1,001
150
2,272
1.4
Total
2,887,556
1,250,096
227,071
4,364,723
100.0
844,567
511,676
152
1,356,395
100.0
938,626
60,128
130,338
1,129,092
100.0
144,129
2,107
16,121
162,357
100.0
( 97). 1998
Thanks to recent government initiatives to reduce air-pollutant emissions

through the use o f cleaner fuels, low-sulfur content oil, and low-emission vehicles,
progress has been made in lowering the airborne concentrations o f SO 2 , HC, and TSP.
However, as mentioned earlier, NOx and ozone concentrations are gradually increas
ing, mainly due to rapid growth in the number of vehicles. Figure 3.3 shows the trend
for major pollutant concentrations in the air by averaging data from seven major
82
Reproduced with permission of the copyright owner. Further reproduction prohibited w ithout permission.
metropolitan areas in Korea.30 As indicated earlier, SO 2 and CO concentrations match

the emissions trend. NOx concentrations, however, do not match the emissions trend.
If the emission o f the mobile source (transportation) considered, the two trend lines
show a similar pattern. Consequently, NOx concentration in the air in the major
metropolitan areas is closely related to the emissions in the mobile source. This again
explains the similar pattern o f emissions and concentration trends in the case o f CO,
recalling the earlier finding that the main source o f CO emission is the transportation
sector (mobile source).
3.3.4.2
Policies on Greenhouse Gas (GHG) Emissions

Stabilization o f GHG emissions is an extremely difficult task for countries
such as Korea whose economies are rapidly growing. The Korean economy has re
corded an annual average economic growth rate o f 7.9% for the last 26 years and this
robust trend, though a little attenuated, is expected to continue until 2020. Thus, the
stabilization o f CO 2 emissions at current levels would require an average annual 2.5%
improvement in energy efficiency.31 This simple calculation shows how serious the
CO2 emissions problem is in Korea.
Korea ratified the Framework Convention on Climate Change and pub
lished two national reports on CO 2 emissions. Korea has already announced that it
30 Seven major metropolitan areas include Seoul, Busan, Taegu, Inchon, Kwangju,
Taejon, Inchon, Woolsan.
31 The calculation is based on the annual growth rate o f energy consumption in the
KEEIs report, The Second-Year Study o f Planning National Actions fo r the United
Nations Framework Convention on Climate Change. December 1998. According to
the KEEIs projection, total primary energy consumption in a reference case will
increase at an annual rate o f 2.5% from 1997 up to the year 2020.
83
would voluntarily reduce CO 2 emission 7% below the level o f 1990 starting from
2018. Policy tools to reduce GHG emissions are focused on energy conservation and
energy efficiency. A variety of energy and carbon taxes are also under consideration
as tools to meet the pledged CO2 reduction target. A number o f top-down as well as
bottom-up energy and CO 2 emission policy simulation models are being developed to
evaluate the effects o f these sorts o f energy and environmental policies.
Table 3.13 and Figure 3.4 show the historical trends o f CO 2 emissions by
fuel type and sector, respectively. CO2 emissions from coal consumption increased at
an annual rate o f 5% between 1981 and 1997, which is lower than the growth rate for
petroleum and LNG. CO 2 emissions from petroleum consumption showed a decreas
ing trend in the early 1980s, but then increased due to growth in the transportation
sector. Petroleum CO 2 emissions have more than doubled since 1981. Increasing
gasoline consumption has also been a major contributor to the rapid growth in CO 2
emissions. Total CO 2 emissions due to energy consumption increased from 37.1
million TC in 1981 to 116.9 million TC in 1997. As mentioned earlier, this increasing
trend of energy consumption, though a little attenuated, is expected to continue in the
future.32
32 According to KEEI, total energy demand o f Korea is projected to increase to 307

million TOE in 2020, which indicates an increase in CO 2 emissions from 150 million
TC in 1997 to 203 million TC in 2020. This projection will be used as a reference
case for policy simulations in Chapter 5 (MOCIE and KEEI. The Second-Year Study o f
Planning National Actions fo r the United Nations Framework Convention on Climate
Change. December 1998)
84
Table 3.13 CO 2 Emissions from Energy Consumption in Korea

(Estimation based on EPCC methods, Unit: l,000ton o f CO2 )
1981
1985
1990
1995
1997
8 1 -9 7
Coal
16,482.4
24,132.7
28,765.8
29,890.4
36,233.6
5.0%
Petroleum
20,628.0
19,820.7
34,270.6
6 5,283.3
71,251.8
8.1%
0.0
0.0
2,135.1
6,014.7
9,432.8
23.6% 1
12,169.0
13,289.6
23,783.7
36,232.9
39,776.9
16.8%
3,042.4
5,439.7
11,508.5
22,055.0
25,035.3
14.1%
14,373
16,971.8
19,536.4
20,166.7
21,452.5
2.5%
7,525.3
8,2 6 2 .2
10,343.0
22,733.8
30,653.5
9.2%
37,110.4
43,963.3
65,171.6
101,188.3
116,918.2
7.4%
Fuels
LNG
Sectors
Industrial
Transportation
C om ./R esid./O thers
Transform ation
Total
N ote:1Average growth rate between 1990 and 1997

Source: Korea Energy Economics Institute. 1998.
140,000
120.000
100.000
I-
EI Transformation
Public/O thers
R e s /C o m m .
Transportation
Industry
80,000
o
o
60,000
40.000
20.000
0
1981.0
Figure 3 .4
1983.0
1985.0
1987.0
1989.0
Year
1991.0
1993.0
Trend of CO 2 Emission from Energy Consumption
85
1995.0
1997.0
3.4
3.4.1
Sustainable Energy Development for Korea

Emerging Environmental Awareness
As seen in the previous sections, Korea is an economic miracle to the
developing world. Closer examination, however, reveals that such an economic

success has been attained at the expense o f m any valuable socio-cultural and environ
mental assets. To most Korean people, economic development has taken priority over
environmental protection, which, they think, will be taken care o f once the targeted
level o f economic growth has been achieved. The myth o f limitless economic growth
and the consequent negligence toward the environment has resulted in reckless
devastation o f precious natural resources. For example, air pollution levels in Seoul
are among the highest in the world, nearly equivalent to those found in Mexico City.
One study concluded that 40% o f the rainfall in Seoul contained levels o f acid
hazardous to human beings (Noh and Yim, 1998).
Air pollution threatens human health, flora and fauna, and valuable
physical property. For example, recent frequent ozone and smog warnings and sharp
growth in morbidity and mortality rates illustrate the growing seriousness o f air
pollution problems. The social cost o f air pollution estimated by Cho (1996)
amounted to 5,400 million won ($6.8 million) in 1994.33 Reduction in air pollutant
emissions must be a primary target o f national environmental policy in order to
minimize such a substantial social cost o f damages.
33 Cho, Joon-Mo. Social Costs o f Air Pollution. Proceedings o f Grand Sympsinm

fo r the Twenty-First Century's Air Quality Policy. 1996. Korea Academy for Air
Quality Protection.
86
3.4.2
External Pressure and Nuclear Power

As international pressure is building up on Korea to reduce CO2 emis
sions, nuclear power, once discredited as an unfruitful future energy source, is reemerging as a potential effective energy option to curb increasing CO 2 emissions aaid
still to continue economic growth. However, this energy policy approach, which h_as
been adopted, has created a sharp divide in Korean society between those who support,
and those who oppose, nuclear power generation.34 Heated and emotional debate o n
nuclear has intensified in Korea, even while the fission o f atomic nuclei continues "to
produces huge amounts o f energy.
It is undeniably true that the cheap and stable supply o f electricity g e n e r
ated by nuclear power contributed to the miraculous economic progress o f Korea
during the 1970s and 80s. Starting in the 1990s, however, planned nuclear power
plants were blocked by strong community-based opposition, the so-called NIMBY (not
in my back yard) phenomenon. Consequently, Korea is now experiencing an epidem ic
shortage o f electric supply during peak-demand periods. Thus, Korea must now fac e
up to the cheap energy prices that have been enjoyed during the past three decades.
At this point, the key question facing Korea is whether it can maintain a
high rate o f economic growth in the face of environmental constraints. Two cam ps
have continuously clashed as to which should take priority: economic development or
environmental protection. Until recently, advocates o f economic growth have pre
vailed in the economy vs. the environment policy debates. But, as an informed put*lie
34 The nuclear moratorium is a crucial issue in discussion o f the sustainable energy
system. Because the nuclear issue has recently become more delicate in political a s
well as economic debates in Korea, utmost caution is required in dealing with n u clear
moratorium at this critical moment. However, this issue is worth a close exam ination
as long as it is studied on purely academic basis
87
has increasingly become concerned with sustainable development rather than with
economic growth, environmental priorities have begun to reveal the problems with a
one-dimensional devotion to economic growth. Regardless o f the continued debate
between these two camps, Korea has no alternative other than to pursue sustainable
energy development. Realizing that environmental damage caused by excessive fossil
fuel consumption has nearly reached the point o f no return, the Korean government
has begun to work on a plan for a long-delayed sustainable energy system.
3.4.3
Harmonization o f Energy and Environmental Policies

It has been argued that energy and environmental policies should be har
monized to effectively attain policy goals, hi many cases, energy and environmental
policies can conflict, which means they m ust be coordinated to avoid working at cross
purposes. These two policy arenas, however, have been independently implemented in
Korea. One o f the principal reasons for this imbalanced implementation o f policies is
that no consensus has been reached on the necessity o f a common goal. This practice
o f fragmented policy implementation has caused continuous conflict between compet
ing sub-goals. Thus, the establishment o f a highest common goal, i.e., the optimiza
tion o f social welfare, is a necessary pre-condition to the harmonization o f energy and
environmental policy.
Energy and environmental policies, along with economic policies, should
lead to the optimization o f social welfare. Energy consumption produces external
costs, which are not resolved in the market. This situation leads to energy consump
tion and air pollutant emissions beyond socially optimal levels. Consequently, insti
tutions are needed which internalize the social costs o f air pollution by transferring
88
those costs back to energy consumers. This is the starting point for harmonizing
energy and environmental policies.
The social costs o f air pollution are not counted in the current energy
pricing system. As discussed in previous sections and shown in Table 3.13, environ
mental taxes are not levied on fuel prices, even though other taxes are included.
Traffic taxes are levied on gasoline and diesel consumption and are earmarked for
funding the expansion o f the transportation infrastructure. Educational taxes are
levied on all petroleum products and are earmarked for funding educational invest
ments. The lack o f a similar environmental tax is due to the fact that the vulnerability
o f natural resources has not been well understood by policy makers. Recently, policy
makers have come to a conceptual agreement that environmental goods such as clean
air and water are not free anymore. This conceptual agreement, however, is meaning
less in the absence o f an operational definition that assesses the damaged value o f
environmental resources.
The inability to systematically assess environmental costs leads the
Korean government to rely on simple and direct policy tools such as compulsory use o f
clean fuels, ambient standards, emission standards, and technology standards. The
cost-effectiveness o f these policy tools, the so-called command-and-control ap
proach, has been questioned by m any concerned economists. For example, compul
sory use o f clean fuel in the metropolitan areas has directly affected business profit
ability, resulting in a resistance against the regulation. They point to the high com
pliance and enforcement costs o f this approach. Command-and-control techniques
require public authorities to announce limits on polluters, the establishment of insti
tutions to enforce those limits (Field, 1994).
89
Table 3.14 Taxes on Fuel Types1

(Unit: Won/liter, Won/kg)
^ _
Special Excise
Educational
^.
Traffic Tax
Total
_____________________ Tax____________ Tax_________________
Gasoline
345
51.75
40
Kerosene
17
2.55
LPG
18
Diesel
02
396.75
46
19.55
18
Note: 1 As o f December 1996.2 Education tax was exempted

Source: Government Register. December 29, 1995
Environmental externalities have not yet been fully internalized in energy

pricing because energy is too closely related to industrial competitiveness. If external
costs were internalized, economic policy makers fear that rising energy prices would
weaken Koreas competitive edge. This may indeed be the case in the short-term; but
in the long-term it does not necessarily hold true. Increased energy price will lead
producers and consumers to seek more efficient ways to use energy, while spurring
investments in energy efficient technologies. Improvements in overall energy effi
ciency will strengthen industrial competitiveness by reducing energy costs. Thus, it
becomes obvious that a policy o f keeping energy prices low is not beneficial to indus
try in the long-term, because low energy prices will eventually impair industrial com
petitiveness by discouraging investments in energy efficiency.
3.4.4
Internalization of Social Costs

If a consensus was reached as to how to estimate social costs, cost-
effective policy tools could be developed. For example, incentive-based strategies,
90
such as taxes and subsidies could be used to internalize external costs.3536 There are
tw o basic types o f taxes: emission discharges and specific taxes.37 Emission taxes are
th e m ost straightforward incentive-based approach to controlling air pollutant emis
sions. A n emission tax works by placing a price on the environmental asset into which
the emissions are occurring. Specific taxes are levied on fuel consumption in propor
tion to the energy or carbon content o f the fuels. Subsidies are essentially similar to
taxes in that they provide incentives to encourage certain types o f behavior. For
example, if instead o f a tax, a subsidy is offered on emission reductions, reducing
emissions will be rewarded.
Among the policy tools under consideration, emission charges are deemed
to be the most effective because they are levied on emitting sources for the actual
am ount o f emissions. However, close monitoring o f emissions from polluting facil
ities is very difficult in reality. The next favored alternative is an energy or carbon tax.
35 There are basically two types o f incentive policies: taxes and subsidies; and transfer
able discharge permits. The first is a centralized system; it requires some administer
ing agency to put the program into effect and to deal directly and continuously with
polluters. The second is a decentralized approach; one the system has been established
and basic rules set, it is designed to work more or less automatically through the inter
actions among polluters themselves, or between polluters and other interested parties
(Field, 1994: 226).
36 Unlike the command-and-control approaches, the tax approach is to provide an
incentive for the polluters themselves to find the best way to reduce rather than a
central authority determine how it should be done.
37 These two types o f taxation are essentially the same in that taxes are levied in pro
portion to the amount o f pollutant emissions. Emission charges have a target for pol
luting facilities such as power plants and industrial processing plants. Emission taxes
are levied based on emissions o f pollutants. Specific taxes have a target for fuel con
sum ption itself. Thus it is levied by adding taxes to the fuel price. Classification is
only for the sake o f convenience.
91
These are effective policy tools because not only do they reduce energy consumption,
they also impact delivery systems, and energy facilities and equipment. In addition to
these benefits, energy and carbon taxes do not require monitoring, which reduces
policy enforcement costs.
3.4.5
Towards a Sustainable Energy System

How will Korea manage the transition to a sustainable energy system?
This issue is o f great concern not only for the energy system per se, but also for the
national economy as a whole, because it requires to some extent a revolutionary
change in social and economic patterns o f development. There are several major
requirements for an energy transition to take place. Among them, institutional change
is foremost. Institutional change implies a shift in the socio-political structure, as well
as in economic ideology.
Since the Korean socio-political system is rooted in democratic capitalism,
a most effective means to build a sustainable energy system is through m arket mecha
nism supported by the government intervention. However, markets should not be
relied upon without reservation. Market imperfections abound in terms o f both com
petition and information. In addition, markets do not ensure the equitable allocation of
resources. Equity is necessary for a smooth transition to a sustainable energy future,
and it needs to be adequately addressed prior to consideration of economic efficiency.
Thus, government intervention is necessary to address both market failure and the
inequitable allocation o f resources. However, to avoid government failure, energy
policies based on democratic participation o f various interest groups should be worked
out. This line o f discourse will be fully brought to tight in Chapter 6.
92
3.5
Summary and Conclusion

This chapter provided an overview o f the current Korean energy system,
including an examination o f energy supply and consumption patterns. The unprec

edented rapid economic growth in Korea over the last three decades has inevitably
demanded huge quantities o f energy. It is undeniable that such economic growth has
brought material affluence to Korean society. Nevertheless, it should also be admitted
that the Korean environment has been damaged severely. Deteriorating air-quality in
major metropolitan areas and polluted soil and rivers are good examples o f how an
unyielding commitment to economic growth has adversely impacted Koreas natural
resources.
More recently, the Korean government took the initiative in curbing the
continued environmental degradation caused by excessive fossil fuel use. According
ly, the Ministry o f Environment (MOE), in a concerted effort with the Ministry of
Commerce, Industry, and Energy (MOCIE), developed and implemented a series of
energy and environmental policies. Legislative efforts such as the Energy Rationaliz
ation Law (1979, 1982), the Promotional Law o f Alternative Energy Development
(1979, 1984, 1992), the Environmental Policy Basic Law (1977, 1990), and the Air
Quality Protection Law (1990) indicate significant progress in the institutionalization
o f environmental concern.
Energy efficiency improvements and the expansion o f renewable energy
sources are the principal policy goals in the effort to reduce both energy consumption
and air-pollutant emissions. Taxation on energy use is a key policy for achieving these
goals. Unfortunately, these tactics have not yet been widely adopted due to the domi
nant principle o f economic growth over environmental protection. In addition, the
recent liberalization o f the Korean economy and deregulation of the energy industry
93
have weakened environmental incentives while favoring those actions that lead to
further economic growth.
How can Korea achieve a sustainable energy future in Korea? This
inquiry has been the primary focus o f this chapter. By examining the current status of
the Korean energy system, we found that the current Korean energy system is not
sustainable and should be redirected toward a sustainable path. Although the desirab
ility o f the sustainable energy path is ostensibly agreed upon, the biggest problem is
how it should be pursued. Furthermore, unless the ideological dispute between con
ventional development and sustainable development is resolved, sustainable energy
development will not be realized in Korea in the foreseeable future.
The following two chapters will explore the possibility of sustainable
energy development in terms o f quantitative analysis, using Korea as a case study.
First, a policy simulation model will be developed to describe the interactions between
energy, the economy, and the environment. Then, a policy simulation will be con
ducted based on the model in order to identify the most effective policy tools for
achieving a sustainable energy future.
94
Chapter 4
POLICY SIMULATION MODEL
This chapter is devoted to the development o f a policy simulation model
based on the theoretical framework and information presented in the previous chap
ters. The primary purpose o f this chapter is to provide an empirical analysis for a
sustainable energy future in Korea. Since the purpose o f the dissertation is to develop
simple but useful policy simulations based on the interactions among Koreas energy,
economic, and environmental sectors, the model described in this chapter is more
simplified within each sector than most models that are used to simulate only a single
sector.
4.1
Introduction
The last quarter o f the twentieth century witnessed the development of a
number o f models describing the interactions among energy, the economy, and the
environment. Their development was stimulated and supported by governments in
need o f policy tools pertaining to energy supply and environmental protection. While
considerable analytical effort has been devoted to, and some actions taken on, the
interaction among the three E s, little attention has been paid to equity and justice
issues associated with energy supply and environmental protection. Recognizing this
prior neglect o f socio-political dimension, this dissertation attempts to consider this
dimension in building its simulation model. As will be seen, the task is easier said
than done. Basic questions this model attempts to answer are:
95
1. What are the impacts o f policy interventions designed for sustain

able energy development such as an excise tax, an energy tax, a
carbon tax, or other incentives?
2. What are the m ost cost-effective policies to transform the current
unsustainable energy system into a sustainable energy system?
3. What are the socio-political impacts o f policy-making on different
socio-economic groups in society as well as on generations to
come?
The first question regarding the impacts o f policy interventions on energy
consumption, the environment, and the economy is relatively easy to answer using the
policy simulation model, since it is designed explicitly for this purpose. The second
question regarding the cost-effectiveness o f policies that are designed to lead to sus
tainable energy systems is also easily answered as long as the model is set up to
examine economic impacts. The third question regarding the evaluation o f the socio
political impacts, however, is much harder to answer because the model is designed
solely for economic and energy policy simulations.38
4.2
Review of Simulation Modeling Techniques

Economists have long recognized the importance o f trying to understand
interdependence in an economic system, especially when assessing the effects o f exo

genous changes. Various attempts have been made to formally analyze direct and
indirect energy-economic-environmental interactions in a single methodological
framework. In the past two decades, numerous models have used a simulation frame
work to model E3 interactions at the national and regional level. Systems Dynamics,
38 An option is to utilize a satellite module that is developed solely for evaluation o f

socio-political impacts. There have been several suitable models developed by
recognized research institutes.
96
Input-Output (I-O) models, econometric models, linear programming (LP) models and
more recently, computable general equilibrium (CGE) models have been employed in
these simulations. This section discusses the major modeling techniques, including
their strengths and weaknesses.
4.2.1
Systems Dynamics
The systems dynamics approach o f Jay Forrester (1961) was popularized
through various reports to the Club o f Rome. Unlike other approaches, which break a
system up into small pieces, systems dynamics employs a holistic view. The central
theme o f systems dynamics is to understand how all the elements in a system interact
with one another, i.e., to understand the basic structure o f a system, and thus under
stand the behavior it can produce. The objects and people in a system interact through
"feedback" loops, where a change in one variable affects other variables over time,
which in turn affects the original variable, and so on. Due to their complexity, systems
dynamics models are usually built as models on a computer. Systems dynamics takes
advantage o f the fact that a computer model can be of much greater complexity and
carry out more simultaneous calculations than can a mental model.
Systems dynamics had widespread influence and spawned three separate
disciplines: Industrial Dynamics, Urban Dynamics, and World Dynamics. Industrial
Dynamics, the first use o f systems dynamics, examined the success and failure of
corporations. DYNAMO, a computer program, was developed and used for this
purpose. Urban Dynamics, the most influential and controversial systems dynamics
model, was developed to answer the questions, What causes American cities to
degenerate? and W hat can be done to revitalize these stagnant urban areas? This
work produced strong, emotional reactions from academic groups as well as urban
97
policy makers.39 Urban Dynamics was the key that led to both the System Dynamics
National Model and the W orld Dynamics project. The World Dynamics project ad
dressed the following questions: Can the Earths resources support humanity, with its
present economic and population growth rates, in the next millennium? What can be
done to confront possible global collapse? Is a sustainable future possible? Answers
to these questions were provided in the two seminal works by Meadows et al.s The
Limits to Growth (1972) and Beyond the Limits (1992).
Several early energy models, including two long-term models built by the
US Department o f Energy (EIA long-term model, LEAP and IFFS),40 were based on
systems dynamics. This approach had mathematical attraction, but economic theory is
based on the notion o f a balance between supply and demand in real-time. Thus, all
major successful economic models are typically simultaneous models. However,
simultaneous models require the use o f advanced techniques to estimate the para
meters o f the model based on historical observations, particularly for long-range fore
casts. Systems dynamics models, on the other hand, are typically not statistically
calibrated to historical reality. Forrester (1961) has criticized the conventional tech
nique o f calibrating models to historical reality in any case.
39 The conclusion o f this study is that the most damaging urban policy was to build
low-cost housing. At that time, building low-cost housing was believed to be essential
to reviving the inner cities. It is easily imagined that the conclusion was not readily
acceptable to policy makers and low-income class.
40 These two models were conceived o f as nonlinear, simultaneous integrating systems
from the start. LEAP, in particular, follows classical economic theory in assuming that
current investment and prices depend on future markets. Perfect foresight is a ques
tionable assumption, and it substantially increases the complexity o f the model.
(Werbos, Paul J. Solving and Optimizing Complex Systems: Lessons from the EIA
Long-Term Energy Model. Energy Models and Studies. Benjamin Lev (Editor).
North-Holland Publishing Company. 1983.)
98
4.2.2
Input-Output (I-O) Model

The Ihput-Output (I-O) model developed by Leontief (1951) is a linear
representation o f inter-industry relations. That is w hy it is sometimes regarded as a

form o f mathematical programming which provides a solution to an optimization
problem. In an I-O model, the economy under study is divided into a set o f mutually
exclusive, exhaustive sectors. I-O models are capable o f providing a detailed descrip
tion o f the economys structure, with specific treatment o f intermediate and final
demand and primary input requirements for each sector. It further depicts the nature o f
the various interrelations among the industrial sectors and between the industrial
sectors and other sectors o f the economy. Its strength lies in its detailed representation
o f the production and distribution characteristics o f the industries in the economy.
Thus, the I-O technique explicitly recognizes that economic activity involves sectoral
interrelationships. Despite some limitations, it has been the basis o f energy and envi
ronmental modeling for many years (Cumberland, 1996; Isard, 1969; Leontief, 1970;
Hannon, 1973; Pearson, 1989; Proops, Faber & Wagenhals, 1993).
Hannon (1973) constructed an energy I-O table for the United States. Al
though economic interrelationships described by I-O models are typically measured in
terms o f dollar flows, Hannon used energy units (joules or therms). He argued that the
monetary value o f energy may not always represent its true value to society because of
subsidies, inaccurate pricing techniques and policies, and consumer confusion caused
by inflation.
Leontief (1970) has developed models o f the U.S. and world economy that
focus on emissions o f major pollutants and abatement activities. They can be used to
estimate the price effects o f pollution abatement technologies, as well as to evaluate
alternative government policies for regulating industrial pollution. Leontief used
99
pollution coefficients to relate emissions to the activity o f each industry. An abate

ment industry is added which can eliminate a technology-determined amount of
pollutants.
Isard (1969) built an I-O model o f the combined economic-ecological
system. Recognizing the usefulness o f the I-O approach, he believed that it would also
work for the ecological system. However, since there has not been as much pressure
or need for collecting detailed data on the ecological system as there is on the econ
omic system, Isard recognized the limitations o f modeling the interrelations between
the economic and ecological system through an I-O approach.
One o f the basic assumptions o f the I-O approach is that factor inputs are
used in fixed proportion per unit o f output; that is, production is assumed to have a
particularly simple form, described by a set o f linear equations. The assumptions o f
fixed factor proportions imply a given or fixed technology. While technology, i.e.,
factor proportions, is fixed for any individual year, technology can change over time in
response to changes in relative prices, resource availability, the direction o f scientific
inquiry, etc. As a way to overcome this limitation, Leontief (1970) constructed a
World I-O model to allow for shifts in technology. Some o f the shifts are built into
other models on the basis of World I-O projections of future input structure: The
projected changes in input-output structure were based on some special studies o f
anticipated changes in technology and relative resource availability. Changes in I-O
structure can be induced by appropriate user specifications.
40
While technology, i.e., factor proportions, are fixed for any individual year, techno
logy can change over a long period o f time in response to changes in relative prices,
resource availability, the direction o f scientific inquiries.
40
100
4.2.3
Linear Programming Models

Dynamic linear programming (L-P) models are developed to answer a
particular constrained optimization problem. L-P models may be o f a general equili

brium type in which energy, economic, and environmental sub-models are linked to
produce equilibrium solutions through utility maximization over a planning horizon.
These models allow the economic evaluation o f new technologies, and therefore are
better suited for medium- to long-range forecasting (Bunn and Larsson, 1997).
Like I-O models, L-P models are generally deterministic in nature, al
though variations are found in the stochastic forms. The model consists of an ob
jective function and specified constraints. Implementing this kind o f model requires
adequate information, such as information on institutional constraints and future
technologies. Information on future technologies poses a serious problem in the use o f
L-P models. Various techniques have been developed to overcome this problem.
Despite some limitations as a policy model, the potential o f the L-P approach as a
policy analysis tool merits further attention.
4.2.4
Econometric Models
Econometric models are similar to input-output models in the sense that
they describe the general equilibrium nature o f an economy. Econometric models

using a large set o f macroeconomic equations can provide a broader representation o f
energy-economy-environment interactions, and can determine demand levels and
prices more endogenously. An econometric model contains dependent variables,
independent variables, and stochastic error terms. The independent or explanatory
variables incorporated in the model depend upon the phenomena (economic, social, or
political) being analyzed. Econometric techniques test hypotheses by applying
101
statistical methods in accordance with the economic theories define the characteristics
o f the model. W hile theory indicates which variables are to be considered, it does not
predetermine the mathematical form o f interrelationships, thereby allowing diversity in
the analysis.
Econometric models differ in several important aspects from input-output
models. First, they are typically more aggregated and therefore unable to provide the
detailed inter-industry information which is the strength o f input-output models.
Second, they need not be strictly linear and are thus capable o f including important
non-linear elements within behavioral and definitional relationships. In fact, the
nature o f functional relationships and relevant system variables is much more openended in econometric models. Third, unlike input-output models that are basically
models o f production relationships, econometric models are capable o f including
descriptions o f prices and monetary relationships as well. Fourth, the data require
ments o f econometric models are considerable, but are typically more modest than
those o f comparable input-output models.
Specifications in econometric models are based on existing theories and
are generally expressed in the form o f dependent variables on the left-hand side o f the
equation and independent variables on the right-hand side. The explicit form could be
linear, log-linear, or some other form. Moreover it could take other functional forms,
freeing it from the homogenous linear form of traditional models. Such a wide range
o f functional forms offers more flexibility for analysis, and there is no need to estimate
input-output coefficients. Econometric models can be constructed to avoid some o f
the pitfalls o f input-output models such as constant trade coefficients and the predeter
mination o f final demand.
102
Econometric models can be made dynamic by the introduction o f time-lag

variables on the right hand side o f one or more o f the equations. Often, simulations
based on econometrics take the form o f simultaneous equations. To make a model
simultaneous, an independent variable is often taken as a dependent variable so that
two equations are mutually interdependent. Some theorists dismiss simultaneous
models, arguing that there does not appear to be any particular advantage in making a
model simultaneous, since it creates statistical estimating problems and there is little
theoretical support for simultaneity (Harris and Nadji, 1987). Nevertheless, many
econometric simulation models use simultaneous equations to identify the interactive
nature o f variables in their models . 4 2
4.2.5
Hybrid Models
Hybrid modeling approaches are often considered to balance the weakness
o f one technique against the strength o f another. This strategy involves applying
various combinations o f techniques, and it should be emphasized that these are simple
combinations o f techniques. Many variations o f mixed techniques have been devel
oped, depending upon the objectives o f the modeling exercise. For example, in a
mixed form o f econometric and I-O techniques (Hudson and Jorgenson, 1974), coef
ficient estimates based on econometric techniques are in turn put into I-O models.
These approaches, despite the flexibility inherent in using a combination o f tech
niques, require large investments o f time and resources. In some cases, the data
requirements are so enormous that access to an extensive data bank system such as
Many econometricians have developed various techniques and theories to avoid the
statistical bias inevitably occurring in the estimation o f simultaneous equations.
(Johnson, 1984; Greene, 1997; Gujarati, 1995).
42
103
Data Resources Incorporated (DRI) becomes essential to the analysis. Unfortunately,

such extensive and detailed data is not always readily available.
Many recent modeling efforts have sought to develop large-scale opti
mization models that are rich in detail. These models generally take as exogenous
assumptions a number o f variables that should be evaluated as part o f the model.
Demand-price interactions and feedbacks, for example are difficult to represent in
these models. It is therefore not surprising that recent research has focused as much on
macroeconomic models as it has on developing new techniques for handling larger and
more detailed specifications (Bun and Larsen, 1997). A good example o f a hybrid
model is the MARKAL-MACRO model (Manne and Wene, 1992) that is a combin
ation o f the original linear programming model (MARKAL) and a non-linear macro
economy model (MACRO). The primary purpose o f this model is to link the linear
MARKAL model with a simplified macroeconomic model in order to provide a
longer-term framework and feedbacks between demand, prices and resource substi
tutions. The MARKAL model was originally developed by the Energy Technology
Systems Analysis Program o f the International Energy Agency (IEA) in 1976.43 Since
The main decision variables o f the MARKAL model include energy consumption,
technology capacity and facility utilization. The model consists o f two main parts, i.e.,
an energy end-use databank and linear programming software. Energy demand within
various sectors, primary energy supply, energy technology development, and the
standard o f environmental regulations and energy taxes constitute the main data
sources. MARKAL model has limitations such that; the empirical results o f the
MARKAL model optimum solution is limited to energy systems only; it cannot simul
taneously explain the trade-off between the environment and the economic system; it
focuses on supply-side planning and neglects the energy demand requirement aspect;
and it overlooks the feedback relationship within the energy system and within the
whole economy since it views energy demand as an exogenous variable.
43
104
then, the MARKAL model has been widely accepted and many derivatives such as the
IEA-MARKAL and MARKAL-MACRO models have been developed.
For the longer term, the use o f Computable General Equilibrium (CGE)
models has become quite popular among econometricians. A great advantage o f CGE
models is that the effects o f exogenous changes can, at least in principle, be traced
through the whole system, with full account taken o f the interdependencies that exist.
Set up as a system o f supply and demand equations for all o f the markets involved in
the specification, the model is solved endogenously for prices, demand and resources
substitution. As such, it is useful for long-term analyses o f future socioeconomicenvironmental scenarios, but is not without criticisms (Borges, 1986). Because it
relies upon arbitrary or mechanistic calibration, rather than estimation, the coefficients
in CGE models do not reflect actual changes in the real world. Most o f the assump
tions regarding elasticity, etc. have to be determined outside the model and used as
inputs, rather than being estimated as parameters within the model.
4.3
Development of an Econometric Simulation Model

Although the I-O model, and more recently, the CGE model, are the most
popular techniques in studies o f energy-economy-environment interactions, the econo

metric model was chosen as the basic modeling device for this dissertation. The
econometric model, as discussed in the previous section, is superior to I-O models in
terms of data-requirements, functional flexibility, and the representation o f market
variables such as prices, taxes, and income. In developing a simulation model, how
ever, it is important to recognize that, because most economic models take the state of
existing institutional arrangements as given and are built based upon historical data,
they are only valid for the past, not for the future. Furthermore, the limited availability
105
o f relevant data should be considered as well as possible structural changes in the

longer term . 4 4 Thus, as seen in the CGE model, the calibration o f regression equations
is necessary depending upon the medium- and long-term structural trends o f the
economy.
4.3.1
Model Structure
The structure o f any econometric model rests on both the nature and avail
ability o f empirical data and the substance o f relevant theory linking major variables in
a causal relationship. In early models, the structure was frequently simply recursive,
making it impossible to examine and account for important feedback and interactive
effects within E 3 relationships. Through 1980s and 1990s, m ore sophisticated models
that incorporated the interactive nature o f subsystems have been developed, thanks to
the availability o f empirical data and the development o f relevant theory linking major
variables in a causal maimer. In this regard, the structure o f any econometric model is
a reflection of both the nature and availability o f empirical data and the substance o f
relevant theory linking major variables in a causal manner. The following is a brief
description o f the econometric simulation model developed in this dissertation:
Model Type: General Equilibrium and Dynamic Simulation Model
A longer time horizon in dynamic models means that one focuses on long-term
rather than short-term processes, in order to minimize on model complexity given the
specific modeling purpose. However, this does not necessarily imply that models o f
long-term processes are the opposite o f short-term models, since some elementary
repetitive processes, such as production, consumption, regeneration, emission and
recycling, may be relevant for both short and long-term outcomes. Especially in an
integrated model the interactions between economic and environmental sub-systems
should receive adequate attention, and they can only be made explicit in terms of
interfacing short-term processes (Bergh, 1996:109).
44
106
Equation Type: Deterministic-Stochastic equations
Data Base: Empirical-Theoretical
Solution Method: Iterative Simulation-Optimization

Figure 4.1 presents a flow schematic o f the econometric simulation model
developed in this dissertation. This diagram shows the major model components and
their linkages. Four different types o f variables or flows are used in characterizing the
structure o f the model system. Exogenous variables describe those external forces
having a direct impact on the system. Endogenous variables are internal to the system
and are thus influenced by both external and internal forces. Lagged variables are
merely exogenous or endogenous variables lagging by one or more time periods. The
very existence o f these lagged variables characterizes the dynamic nature o f the
system.
The model is composed of four modules: an economic module, an energy
module, an environmental module, and socio-political module. In this model, the first
three modules are treated as mutually interactive, whereas the socio-political module is
treated as a satellite module such that each CE affects social sustainability .4 5 Figure
4.1 also shows the schematic framework o f the simulation model. Impacts o f policies
on energy, the environment, and the economy are calculated through the economic
module. These impacts are then evaluated based on sustainability indices to determine
how they will promote or inhibit the creation o f a sustainable energy development
path.
As will be pointed out later, the socio-political dimension will be treated as an

independent module that evaluates the socio-political impacts o f the current and future
patterns o f energy consumption. The results o f the present simulation model will be
examined based on the sustainable energy development indices.
45
107
Emissions
Mitigation
Target
Mitigation
Measures
GAP
Emissions
Forecast
Reference
Environment
Module
- Taxes
- Incentives
- Standards
Environment
Impacts
Environment
Module
Structural C hange
- New Technology
- New Markets
New Development Path
4.3.2
Energy
Im pacts
Econm om ic I
Impacts
I
Sustainability
A ssessm en t
SocioPolitical
Impacts
Economic
Module
Figure 4.1
Emissions
Trend
General Scheme of Simulation Model
Sectors
National, as well as regional accounts, can typically be decomposed from
any one or a combination o f three equivalent ways o f measuring aggregate economic

activities: 1) gross expenditures by class; 2) gross income by type; and 3) gross
product by sector. The structure would describe gross domestic product as the sum-
108
mation o f gross product (value added) by sector, or equivalently, as the summation o f

all wage and non-wage income.
The model developed in this dissertation builds primarily on the product
side o f national accounts and uses economic base theory to structure the basic inter
relationships o f the model. Two major economic sectors, the industrial and commer
cial/residential/public sectors are included in this analysis. In addition to these two
sectors, the transportation and transformation sectors are also considered as separate
sectors in the energy module. Gross domestic product (GDP) is sim ply the sum of
value added in each o f the first two sectors.
Sector 1: Industrial (mining and manufacturing, construction, and

agriculture)
Sector 2: Commercial, Residential, and Government (wholesale and

retail, services, c o m m u n ic a tio n s)
Sector 3: Transportation Sector
Sector 4: Transformation Sector

Such sub-division o f economic and energy sectors is at variance with the
general convention o f dividing the energy supply and demand system into five sectors,
i.e., industrial, commercial/residential, transportation, government/public, and trans
formation . 4 6 However, it is a compromise form of both economic and energys con
ventional approaches.
Here, transformation sector includes electricity generation and transmission and

district heating. The reason for adding the transformation sector is because energy
losses as well as air-pollution in energy production and transmission are ascribed to
this sector in Korea. OECD's or IEA's convention o f statistics is that each sector is
responsible for the air-pollution only in proportion to the amount o f energy
consumption in each sector.
46
109
Table 4.1 shows how the sectors are subdivided in order to better model
the interrelations between the economy, energy, and the environment. Because a
major concern o f this dissertation is energy consumption and its environmental im
pacts in terms o f air-quality, no distinction between energy consumption and the envi
ronment is assumed. However, a mismatch exists in the sectoral division between the
economy and energy. The transportation sector in particular is related to all sectors in
the economy. Transportation-related energy consumption in each economic sector
Table 4.1
Subdivision of Sectors
Sectors
Economy
Energy and Environment 1
Sector 1
Industrial
- Agriculture
- Mining
- Manufacturing
- Construction
Industrial
- Agriculture
Mining
Manufacturing
Construction
Sector 2
Service and Others

- Wholesale and retail, restaurant
and hotels
- Finance, insurance, realtor,
business service
Residential/Commercial
- Residential
Commercial
Public & Others
Sector 3
Transvortation
- Road
- Railroad
Sea
- Air
Sector 4
Transformation
Power Utilities
District Heating
Gas Utilities
Note : 1 These sectors are considered as having the same subdivision o f sectors.
110
is not clearly identifiable. Another sector that causes problems is the transformation
sector. This sector, however, is not so much a problem o f analysis as a problem o f
partition that varies depending on the purpose o f analysis at issue .4 7
4.3.3
Model Specifications
The model presently contains approximately 80 variables o f various types.
Endogenous variables predominate, and clearly indicate the interactive nature o f the
model's structure. Key endogenous variables such as GDP, energy consumption,
energy intensity, and energy prices are present and interconnected as linkage variables
in the key equations in each module. These linkage variables characterize the simult
aneity o f the model. The interrelated nature o f the models specifications is reflected
in the selection o f estimation methods: either Ordinary Least Squares (OLS) or TwoStage Least Squares (TSLS). The TSLS method was applied in specifying the equa
tions that are mutually interdependent. In addition to these interactive relationships,
lagged variables are introduced to emphasize the dynamic nature o f the model.
Economic theory sometimes says little about the specific mathematical
form o f econometric models. But it has become a standard convention to assume
linearity either in the actual levels o f the data or in the logarithms o f the observations.
Functional forms o f the equations used in this model are either linear or log-linear,
depending upon linear or non-linear relationships between dependent and independent
Take the CO 2 emission issue for example. If the purpose o f analysis is a policy
development o f CO 2 emission mitigation on the supply side, the entire electricity
production is assigned to the transformation sector. If a policy development is on the
demand side, electricity as final energy consumption was assigned to each sector while
rest of energy (loss) will be assigned to the power sector. This issue will be discussed
later in an appropriate section.
47
Ill
variables. Log-linear model specifications have increasingly gained its popularity in

applied work . 4 8 Consider an electricity demand equation,
lnZ>, = a + {J\nPt + ut ,
where D t denotes electricity demand and Pt denotes the price o f electricity. This model
is linear in the parameter a and p, linear in the logarithms o f the variables D t and Pt,
and can be estimated by OLS regression. The parameter estimates, i.e., coefficients in
this form o f the log-linear model are the elasticities o f the respective independent
variables, and these are constant over the entire range o f the demand function 4 9
M ost o f equations in the economic module take the linear functional form.
Only production functions that are used to describe the relationships among capital,
labor, and energy supply, take the log-linear form. In contrast, the most frequent
In an attempt to determine which is the most appropriate functional form, William

Donnelly (1987:58, 84-87) conducted a BC (Box-Cox transformation, 1964) analysis
using the Savin and White likelihood ratio statistic (1978) to test various conditional
general and joint hypotheses for alternative functional form. These tests do not reject
the logarithmic formulation.
48
Elasticity o f demand is expressed in terms o f the percentage change in the quantity

demanded for a given percentage change in one o f the explanatory variables o f the
model, for example, its own price. Mathematically, this is
49
cJ p _
Qe *
Pe Qe
Or in this specific case,
* =
Q
\
r E J
Qe
(William A. Donnely. The Econometris o f Energy Demand, A Survey o f Applications.

Praeger. 1987: 84-87.)
112
functional form in the energy sector is log-linear except for price equations. Often the
relationship between energy demand and price is non-linear, which is well described in
a log-linear functional form. What follows is a visual description o f and model
specification for each module.
4.3.3.1
Economic Module
Figure 4.2 shows a schematic o f the conceptual framework o f the econ
omic module. Here, gross domestic production {GDP) in each sector, expressed in
value-added terms is the principal variable. The economic base hypothesis assumes
that GDP in the manufacturing sector is a function o f the world GDP, and that manu
facturing activities are mainly export market-oriented. On the other hand, sector two
(service and others) is domestic market-oriented. Therefore, GDP2 is shown to be
dependent on components o f domestic income and consumption. Employment is then
determined as a function o f GDP. Detailed relationships will be discussed in the
following section.
GDP. Income. Consumption, and Export'. It is theoretically acceptable and
practically appropriate that the time-honored CES production function is employed to
relate economic activities and energy consumption . 5 0 A CES production function
states that gross domestic output {GDP) depends upon four inputs: capital, labor,
In a variation of Cobb-Douglas (CD) production function, the following production
function has been used in which energy is considered as a m ajor factor.
50
Y = bK aLpE r ,
where K denotes capital; L, labor; and E, energy supply. Such a modified form o f CD,
often called CES (Constant Elasticity Substitution) function, has been widely used as a
translog form in the analysis o f fuel substitution. (W illiam A. Donnelly, The
Econometrics o f Energy Demand, A Survey o f Applications. Praeger. 1987: 177-182)
113
Exporting
Demand
Interest
Rate
investment
Exchange
Rate
Population
Capital
Stock
mM:
Energy
Boss
Energy
Supply/
Demand
Sectoral
Emplymnt
t
1
Figure 4.2
Sectoral
Wage
C on sum ption 1
Labor
Force
Stability of
Economic
Structure
Unemploy
Rate
Average!
Wages I
! v 5 W ^ 3 I
P er so n a l I
In co m e 1
ReaTWagejQ>
Econom ic Module
energy, and material inputs (K, L, E, and M ) . 51 I f it is assumed that these factors are
weakly separable, the CES function can be expressed in the following form:
The aggregate production function uses a nested non-linear functional form based
on the following assumptions:
51
There are constant returns to scale in terms o f the four inputs;
There is a unit elasticity o f substitution between capital and labor;
There is a unit o f elasticity o f substitution between energy and material; and
There is a constant elasticity o f substitution between these two pairs o f inputs.
A function with these characteristics is a constant-elasticity-of-substitution (CES)

aggregation o f a Cobb-Douglas energy aggregate and a Cobb-Douglas aggregate o f
value added. (Joseph M. Anderson. Energy-Economy Modeling. Kydes, A. S. et al
(editors). Energy Modeling and Simulation. North-Holland. 1983.)
114
Y(GDP) = f ( K ,L ,E ,M ) = f( y ( K ,L ,E ) ,M ) .
In this dissertation the CES function is the key link between economic activities and
energy consumption. Through this equation the impacts o f energy supply shortages or
energy price hikes on GDP, labor markets (employment, wages), and consumption will
be examined. Such a specification is needed because the primary concern o f this
model is to identify the interaction between the energy and economic sectors.
Using the CES function, GDP, GDP1 and GDP2 are calculated. As the
first step, GDP1 was estimated in the form o f a stochastic regression equation. Then
GDP2 is calculated in the form o f the identity, GDP2 = GDP - GDP1. Theoretically,
it is more desirable to estimate the equations o f GDP1 and GDP2 separately, and then
calculate GDP in the form o f the identity, GDP=GDP1 + GDP2. However, such an
approach is difficult in the absence o f detailed data set to fit the underlying theory . 5 2
Since the Korean economy is export-oriented, the GDP in sector one is
assumed to be a function o f exports, XPT. As mentioned earlier, GDP2 is simply
calculated by subtracting GDP1 from GDP. Exports are expressed as a function o f
GDPF ,53 and EXCJPN (the foreign exchange rate o f Yen54). This equation is
If GDP1 and GDP2 are to be specified in the form o f CES function in order to in
corporate energy factor in each equation, it requires capital stock, employment, and
energy consumption for each sector. However, energy consumption including trans
portation can not be exactly subdivided into sector 1 and sector 2. Even if it is pos
sible, CES function does not include variables such as consumption and personal
income that are appropriate in explaining GDP2. hi other words, GDP in sector 2 is
domestic market-oriented, depending upon disposable personal income, DISPI, and
consumption, CONS.
52
14 countries whose share in the export from Korea is significant are selected and
sum o f their GDP is taken as GDPF.
53
The reason this model takes Japans exchange rate against dollars instead o f Koreas
is because Japans exchange rate is empirically better suited in explaining the export in
54
115
recursively used as an input to GDP in the sector one. GDPF and E X C J are given as
exogenous variables.
In GDP a x + P x InK S + y x \n.TEMP + 8 XktT O T + //,
GDPl = a 2 + j32X P T + fj.2
GDP2 = GDP GDP\
CONS = a 3 + J33R D ISP I +
//3
RDISPI = a 4 + ft4GDP + /z4

X P T = a 5 + p sE X C J+ y 5GDPF + / / s ,
where KS denotes capital stock, TEMP denotes the total employment, TOT denotes
the total energy supply, RDSIPI denotes real disposable personal income.
The Labor Market. Waxes, and Investment'. Employment in each sector
and total employment, TEMP and EMP1R (employment share o f sector one in TEMP),
are determined as functions o f GDP and GDP1R (share of G D Pl in total GDP), res
pectively. This specification is based on the observation that a change in industrial
structure will induce a migration o f the labor force from one industry to another. This
phenomenon was observed throughout the 1980s and 90s when the service industry,
based on the so-called hi-technologies, was rapidly replacing the prim ary and manu
facturing industries that had dominated in the industrialization during the 1960s and
70s.
Korea. Japan has been a major rival o f Korea in world exporting market. Consequent
ly, Koreas export generally is influenced by Japans exchange rate against dollars.
116
In most national econometric models such as the one developed by the

Korea Development Institute (KDI), consumer price index (C P /) is endogenous. 5 5 As
opposed to those models, here C PI is exogenous on the theory that the rate o f inflation
can be controlled by government policy. CPI is a determinant o f real energy prices
(generic price o f petroleum product, RPOIL).
Real wages, RWAG1 and RWAG2, are taken as functions o f the real aver
age wage, RWAG, and the employment ratios in EMP1R and EMP2R, respectively. It
is both theoretically and empirically well documented by the works o f Phillips that
WAG and the unemployment rate, UNR, are inversely related (Phillips Curve, 1958).56
UNR can be calculated from total employment and total labor force in an identity. The
magnitude o f fluctuation in UNR over time is so large that it does not seem feasible to
set this variable as endogenous in the current model. 5 7 However, it is necessary to
characterize the dynamic nature o f the interaction between labor and energy supply.
WAG, in turn, serves as a feedback for the real wages, RWAG1 and RWAG2.
5 5 Park, U. K. et al. Analysis o f Long- and Mid-Term Policy Impacts based on MacroEconomic Model. 1995. Korea Development Institute (KDI).
Phillips, A. W., The Relationship between Unemployment and the Rate o f Change
o f Money Wage Rates in the United Kingdom 1861-1959. Economica 25 (November
1958): 283-299. In this paper Phillips observed a negative correlation between the
percent change in wages, sometimes called wage inflation, and the unemployment
level. Later, this relationship came initially to be known as Phillips Curve.
56
Mean Absolute Percentage Error (MAPE) o f UNR shows a range o f 10%-20%, de

pending upon how to be specified, which is greater than normally expected as a backcasting criterion. MAPE, if greater than 10%, is generally not acceptable and the
model needs to be rerun. However, as an exception, greater than 10% is acceptable for
unemployment rate. (Latham, William R. et al., 1979).
57
117
TEMP = a x + fiyRWAG + y xRINV\ + 8XTLF + exTMESQ + //,

R IN V l= a 2 + P 2M T l + y 2laC X + n 2
EMPIR = a 3 + P 3 In GD PIR+ y 3 la TIME + ju3
RWAGl = a 4 + P 4RWAG + y 4EMPIR + / / 4
RWAG2 = a s + p sRWAG + y sEMPlR + / / 5
TLF = a 6 + P 6POP + y 6 la TIME + fi6
It is assumed that investment is determined as a function of consumption
and exports (C X = CONS + XPT) and the interest rate in sector one. This variable is
again used as a feedback in determining total employment in the national economy.
Thus, investment depends upon external market forces, as expressed by world export
demand, as well as internal market forces, as expressed by final consumption. Since
investment and the interest rate are viewed as inversely correlated, a negative sign is
expected for the coefficient o f the interest rate, INTI.
It should be noted here and in other places, that the goodness-of-fit o f an
estimated equation is not an imperative in a mid- and long-term policy simulation,
because even if the fit o f a particular equation is better, overall simulation results can
still be negatively influenced by that equation. In that case, the equation with an
inferior goodness-of-fit that produces a good simulation result would be preferred to
an equation with a good fit that produces a poor simulation result . 5 8
As a good illustration, the regression equation that defines the employment in sector
one, la EMPIR = a 2 + P 2 la GDPIR + /r 2 , is accepted instead o f the equation,
la EMPIR a 2 + P 2 In GDPIR + y 2 ]aEMPlRt_x + fx2 . Actually, the latter is better in
terms o f model fitness; however, the former results in a good long-term forecasting,
which is m ore important in a long-term simulation model.
58
118
4.3.3.2
Energy Module
In the energy module, the division o f sectors basically follows those in the
economic module. However, as mentioned earlier, it is a big challenge to reach a com

promise between economic and energy sectors. 5 9 Such a problem demands an ingenu
ous analytical mind. As shown in Figure 4.3, final energy demands in terms o f fuel
type and energy prices are proposed as key variables in connecting the energy module
with the economic module, and later with the environmental module . 6 0
Energy demand is estimated by fuel type, as well as by sector. Such an
approach gives us more flexibility in incorporating carbon taxes, energy taxes, or other
taxes into energy prices. Furthermore, pollutant emissions are easier to calculate if
energy demand is estimated based on fuel type. All energy prices are exogenously set,
partly because of Koreas position as a price taker in the world energy market and
partly because of its implicit indirect taxation or subsidization o f domestic energy
prices. Thus, energy prices depend solely upon imported price and taxes. It is conven
iently assumed that taxes are positive if a carbon or energy tax is imposed, or negative
if subsidies are offered.
5 9 As mentioned in the section o f sectoral division, energy consumption in the trans

portation sector is not earmarked for each sector, which makes it difficult to relate
energy consumption to economic activities in the transportation sector since there is no
transportation sector in the economy.
As often mentioned in this dissertation, flexibility in the treatment o f prices and

taxes characterizes the uniqueness o f macro-econometric simulation model as a policy
tool in which the economic behavior can be controlled by manipulating these policy
variables.
60
119
Energy and N
Environ. Policy
Energy
Intensity
GDP
- Standards
SI
Technology
Change
Personal Income
Energy Demand \
(Sector)
Impacts
- S e c to r 1: Industrial
- Economy
- Environment
Socio-political
- S e c to r 2: S erv ice/O th ers

- S e c to r 3: Transportation
- S e c to r 4: Transform ation
y fT y p e )
A
> ^ O i l , C oal, G a s, H y d r g ^ r
Fuel
^ ^ ^ N u k e ie tr^ ^ ^ ^
Energy
Efficiency
Population of
Vehicles
Figure 4.3
Energy M odule
Stochastic Equations: Stochastic equations in the energy module are used

to estimate the relationships among final energy demand, energy prices and some key
economic variables such as GDP, consumption, and income. Each sector consumes a
variety o f fuel types. Fuel oil and coal are the major fuels in sector one. Gasoline and
diesel fuel are the major fuels in sector two. Consumption o f each fuel type is basic
ally set as a function o f energy price and GDP. Or, i f necessary, lagged dependent
variables are included in the right-hand side o f equations. The inclusion o f lagged
dependent variables signifies the dynamic character o f a simulation model. Other
variables influencing energy consumption are income (RD ISPI) and the number o f
120
vehicles registered ( V E H ). Because energy consumption shows a steadily increasing

trend regardless o f price fluctuations, the time variable plays an important role in
estimating an energy consumption equation, which is well exemplified by the con
sumption pattern o f petroleum fuels in sector one. The following are the basic forms
o f the energy demand equations for selected fuels:
lnQZLl = ,+ /? , InRPOIL + yx\nOIL\t_x + 8XInTIME + //,
In GASl = a 2 + fi 2 hxRPGASW + y 2 In RPOLLl + S 2 In GASt_x + / / 2
\nGAS3 = or3 + / ? 3 In RPGASW + y 3 InLRPGSLW + 83 \nGAS3,_x + f i 3
\nELEl = a 4 + (34 \nRPELE + y 4 \nELE\,_2 + 8 4 \nRPGASWt_2 + s 4 InTIM E + fi4
\nVEH = cc5 +/35 XnRPGSLW + y 5 In POP + 8 S In GDP + //s
For the sake o f analytical convenience, all price equations are assumed as
functions o f the real oil price, which is actually expressed in terms o f the petroleum
product price index. Gas prices in sector two are a weighted average o f LNG and LPG
prices, since the m ajor gas product in this sector is town gas that is manufactured by
mixing LNG and LPG . 6 1 The same technique is employed to calculate the weighted
average price o f fuels consumed in the transportation sector. Three types o f fuel,
gasoline, diesel fuel, and LPG are consumed in this sector.
RPCOL = ,+/?, InRPOIL + y lRPCOLt_l + //,
RPGASW = a 2 + P2RPOIL + y 2TIME + fi2
RPGSL W = a 3 + &RPOIL + y3TIME + ^
RPELE = a 4 + P 4 In RPOIL + y 4 \nRPELEt_x + / / 4
It is a general practice in Korea that LNG and LPG are mixed together in various
ratios to manufacture town gas. It is necessary to ensure a supply o f town gas with a
constant heat value.
61
121
Identities' Important relationships in the energy and environmental

module are expressed in the form o f identities. These identities provide a basic
relationship between final energy consumption and fuel consumption in each sector,
hi addition, the transformation sector, which includes electric power generation,
district heating, and town gas manufacturing, is handled as a separate sector in which
energy consumption by fuel type is calculated based on fuel shares forecasted in the
long-term national energy plan . 6 2 Energy demand in the transformation sector is
calculated by summing fuel inputs. The ratio o f fuel input to electricity generated
CEF4) is used to calculate the primary energy needed to generate electricity. LNG and
town gas are used in heat production for district heating, but town gas should be
excluded to avoid double counting in calculating primary energy use in the trans
formation sector.
The following identities are selected for illustration (see Appendix 1 for a
complete list o f equations). Here, F1N3 and FIN4 denote energy consumption in the
transportation sector and the transformation sector, respectively. ELE denotes
electricity, H E A T denotes district heat consumption, NUK denotes nuclear power,
HYD denotes hydraulic power, and TALT denotes new and renewable energy. Energy
efficiency in electricity power generation (EF4) is set as an exogenous variable and is
used in the calculation o f primary energy consumption in this sector. OIL4R, which
denotes oils share in the total energy inputs into the transformation sector, is also
6 2 Ministry o f Commerce, Industry, and Energy (MOCIE), The Fourth Long-Term

Plan fo r Electricity Power Demand and Supply. August 1988.
122
exogenous. This ratio variable will be used to predict the future oil consumption in
this sector. 6 3
OIL=OILl +OIL2+OIL3
FIN1 =OILl+GAS1+COL1
FIN=FIN1 +FIN2+FIN3+TALT
FIN4=ELE/EF4 +HEA T+ TW N
OIL4=OIL4R/FIN4
TOIL=OIL+OIL4
TOT=TOIL+TCOL+TGAS+NUK+HYD+TALT
4.3.3.3
Environmental Module
The development o f the environmental module o f the simulation model
presents some unique challenges. For starters, air quality modeling is at an early state
of development, particularly in Korea. This is due to two basic factors. First, the gov
ernments concern with air-pollution is a fairly recent phenomenon, emerging only
during the last few years. Second, the nature o f the problem is extremely intricate, as
air-pollution is characterized by a set o f complex chemical pollutants that are in a
constant state o f flux.
In addition to problems, trans-boundary migration o f air pollutants poses a
serious dilemma when trying to develop a reliable model o f air pollution in Korea.
This ratio, in a sense, indicates a substitution among competitive fuels. Many
modeling efforts have been made on fuel substitution. As mentioned earlier, William
A. Donelly (1987) was one o f those who attempted to build an energy substitution
model based on the translog production function. This dissertation, however, does not
attempt to develop such a model, considering that long-term energy substitution in the
electricity sector is often times decided by policy needs rather than by pure market
forces, which is particularly so in the Korean case.
63
123
Acid rain in Korea, on the west coast in particular, is to a great extent influenced by
economic activity in eastern China. The so-called yellow-sand-particulate travels
every spring to Korea from eastern China. This yellow-sand-particulate is transported
by the flow o f the je t stream. The je t stream picks up yellow sand and other industrial
pollutants such as SO 2 and NOx from China, and drops them on the Korean Peninsula
and even as far as Japan. Carbon monoxide concentrations in the air are also influ
enced by the trans-boundary migration from China. Thus, it is an extremely difficult
task to incorporate these phenomena into a model and still expect a completely reliable
result.
Despite the difficulty o f modeling air-pollution, this model attempts to
describe the interactions between energy consumption and environmental quality; and
between economic activities and environmental quality. Figure 4.4 describes the basic
framework o f the environmental module. Three major air pollutants were selected to
represent air quality in m ajor Korean cities: NOx SOx, and CO. In addition, to
reflect increasing national concern over global warming, carbon dioxide emissions are
also included. Total emissions of these air-pollutants are affected by fossil fuel con
sumption as a result o f economic activities in each economic sector. Two types o f air
pollution sources are identified: stationary and mobile sources. This dissertation
assumes that all emission sources have the same impact regardless o f whether they are
stationary or mobile . 6 4 The most puzzling part o f this schematic exists in attempting
to identify the true relationship between air-pollutants emissions and air-quality.
Emission sources are generally grouped into two sources: stationary and mobile. A
stationary source is believed to directly relate to sectorl whose m ain components are
factories and power plants. Mobile sources are associated with transportation. For
stationary sources, pollutant emissions are functions o f GD Pl and fossil fuel con
sumption. For mobile sources, on the other hand, pollutant emissions are functions o f
64
124
Energy &
Total Energy
Consumption
Industrial
Output
Environm ental
S tan d ard s
(GDP)
Fossil Fuel
Consumption
Mobile
Transportation
- # of Vehicles
- VMT(vehicIe
miles traveled)
Sources
Total Emissions C =
i
I
Im pact
- Energy
- Economy
- Socio-olitical
Stationary
Sources
Populaton
IRaim
1
E nergy
L --------------
Intensity
Technology
- R&D
- Diffusion
A ssessm ent of
Environmental
Sustainability
C "l f F O S ) ( TOT'\
GDP)
x POP
FOS J X{ T O T J X LG D P J X [ p O P J
W here FOS: fossil fuel consum ption, TOT: total en ergy consum ption, POP: population
Figure 4.4
Emissions ofAir-Pollutants: Emissions are expressed as a variation o f the

identity first formulated by Kaya (1990). This identity effectively relates emission
levels to energy intensity . 6 5 The basic form o f this formula is as follows:
the total population o f vehicles and vehicle emission factors. This dissertation, due to
difficulties in data collection, ignores this classification.
The Kaya Identity has been used in a number o f analyses. It is a useful tool for
evaluating estimates developed by modelers by providing a measure o f how much the
core variables that drive emissions must change from past experience and future
expectations in order to reach national CO2 emission reduction targets.
65
125
Total Emission C =
FOS
TOT
TOT
GDP
Based on this formula, equations are derived for each major variable: SO 2,
CO, NO 2, and CO 2 . Here, C/FOS, which is expressed as C02R in the actual equation,
is the amount o f carbon dioxide produced by a given unit o f fossil fuel consumption.
This variable is a component in the air-quality equation. The same method is applied
to other pollutants. Another key variable is TOT/GDP, which is actually the energy
intensity (JE1) expressed as the amount o f energy required to produce a unit o f GDP.
C 02R can be easily calculated by using a CO 2 factor. It is, however, not an easy task
to calculate emission ratios in the case o f other pollutants. The model design does not
allow a simple calculation for these pollutants because emission factors differ, depend
ing upon how fossil fuels are consumed. Therefore, it is convenient to estimate
regression equations for the emission ratios o f these pollutants. The following is a
selected list o f ratio equations expressed in a stochastic functional form:
SOR = a x + PxRPOIL + yxTIME + //,
NOR = a 2 + P2RPGSLWt_x + y2COST + SZTIME + fi2
COR oc. 4 p 3BUSR + y3RCOSTt_2 + S3CORt_x + fi^
-
BUSR oc4 + P^RDISPIt_2 + y4BUSRt_x + SATIATE + fx4

Air Quality: Air quality is expressed in terms o f the atmospheric con
centration o f SO 2 , NO 2 , CO, and ozone, hi addition to these air quality variables, this
dissertation also considers acid rain that results from the combustion o f high sulfurcontented fossil fuels. Air pollutant concentrations are expressed as a function o f
126
various factors, such as the ratio o f busses to passenger vehicles, BUSR, the ratio o f
environmental investment to total investment, COSTR; and the ratios o f SO 2 , NO 2 , and
CO pollutant to total fossil fuel consumption, SOR, NOR, and COR, respect-ively. It
should be noted that BUSR is a function o f disposable personal income, DISPI.66 The
following is a selected list o f ratio equations expressed in a stochastic functional form:
SOC
= QTj 4- P^SOR 4- Yy COST\R'_x 4- S^TIME 4-
COC = crj
P^COR 4- Y 2 BUSR
4-
/i2
NOC = a 3 + p 3BUSR + y 3R C O ST + fxz

OZN = a 4 4- P 4 FOSR 4- Y4 COSTR 4ACD = (xs 4- fisFOSR 4- ys CO ST\Rt_^ 4- fis
4.3.3.4
Socio-Political Module
The development of the socio-political module is itself a challenge since
no simulation model has ever attempted to incorporate a full account o f socio-political

concerns into its structure. In the socio-political module, the key variable is equity.
There are two concepts o f equity: procedural equity and consequentialist equity
(IPCC, 1996). Procedural equity denotes participation o f all concerned parties and
equal treatment o f those participants. Consequentialist equity, by contrast, hinges on
equitable outcomes between classes, regions, and generations. Figure 4.5 presents
how the impacts o f policies on equity are related to the energy, economic, and envi
Air-quality is generally expressed as a function o f ambient air quality standards,

emission discharge standards and control costs for stationary, as well as mobile,
emission sources.
66
127
ronmental modules. Impacts in each module are assessed based on equity indices to
evaluate the sustainability o f the socio-polittical structure.
Energy Impacts
M --------------------------
- Consumption
- Price
Environ. Impacts
- Em issions
- Air-Quality
EQUITY
Process
- Participation
- Equal Treatment
utcomes
- Inter-generational
- Inter-ciass
Inter-region
Sustainability of
Socio-Political
Structure
Economic Impacts
- Income Distr.
- Consumption
Figure 4.5
Socio-Political Module
Specification in the socio-political module requires data on income and

personal consumption distribution, and energy consumption and price distribution as
well as emissions and air-quality data by urban and rural sectors. The module divides
the urban and rural sectors between high-income groups in those sectors and an upper
income group that receives profit income. This dissertation addresses the socio
political dimension in terms o f the impacts o f policies on energy consumption and the
distribution of environmental burdens.
128
The impacts o f different policies on energy consumption distribution are

generally evaluated by comparing per capita energy consumption among different
groups. Although it is more appropriate to assess policy impacts by fuel type, assess
ment in terms o f total energy consumption will reveal the overall equitability o f energy
consumption patterns. Per capita energy consumption o f urban and rural sectors is
represented as:
TOTUt / POPUt and TOTRt / POPRl ,
TOTUt / RDISPIUt and TOTRt !RDISPI r , ,
where subscripts u and r denote urban and rural, respectively.
Similarly, the impacts o f policies on environmental distribution can be
evaluated by comparing per capita pollutant emissions o f urban and rural sectors. For
example, per capita CO 2 emissions o f urban and rural areas can be expressed as:
C 0 2 X UI / POPu l and C 0 2 X r l /P 0P r l ,
C 0 2 X ut / RDISPIu l and C 0 2 X r t !RDISPIr t .
Other pollutant emissions can be calculated in a similar way. These per capita
pollutant emissions, then, are evaluated in light o f the sustainable emissions levels.
4.3.4
The Data
The collection and synthesis o f data for estimating structural coefficients
for the simulation model typically presents a major obstacle, due to the lack o f relevant
data, especially in the area of the environment. However, some sound sources o f data
are available. The National Statistical Agency and other relevant organizations
provide necessary data for the economic and energy modules. Time series estimates
for sectoral output and GDP are reported by the Korean Ministry o f Finance and
129
Economy. Monthly, as well as annual, reviews of energy supply and demand are
released by the Korea Energy Economics Institute (KEEI) and the Ministry o f
Commerce, Industry and Energy (MOCIE). Data for the environmental module are
retrievable from two major sources, Environmental Statistics Yearbook and The
Environment White Paper, published by the Ministry o f Environment. Air quality and
stationary source emissions data are obtainable from the relevant offices o f the
Ministry o f Environment.
4.4

hi this chapter, the theoretical as well as technical background o f the
simulation model was discussed and a basic framework in which to model energyeconomy-environment interactions in the Korean context was developed. The model
type chosen for this dissertation is an econometric macro-economic simulation model.
An econometric simulation model has several advantages over other modeling tech
niques such as 1-0 and L-P, including functional flexibility, aggregate data require
ments, and easier incorporation o f policy variables such as prices and taxes. Never
theless, this technique is limited in some respect, especially with regard to long-term
forecasts and simulations.
Model specifications were based on the existing economic theories and
incorporated the most recent developments in the empirical analysis o f E 3 interactions.
Unfortunately, for model purpose, the Korean economy is still in a developmental
stage, as evidenced by its high and unstable growth rate. Such unstable economic
behavior make it difficult to develop a long-term simulation model. With this caveat
in mind, this dissertation considered long-term trends in the development o f its model
specification. For example, when a choice was to be made between consideration o f a
130
long-term trend or the goodness-of-fit of an estimation equation, this dissertation

chose the equation that m ost accurately reflected the long-term trend rather than the
equation with the best fit.
The next chapter will report the estimation results o f each regression
equation. It will explore possible applications o f this model for policy simulations
well into the future. A good policy simulation depends on the model design as well as
on the quality o f the estimation o f each regression equation. These characteristics are
required to produce a model that will survive the tests o f validity and reliability.
131
Chapter 5
MODEL ESTIMATION AND POLICY SIMULATION
This chapter undertakes three tasks: first, an estimation o f the simulta
neous equations o f the model based on historical data from Korea; second, backcasting
o f the model over the estimation period to evaluate its robustness; and third, policy
simulations for both the estimation period and the forecast period. For the first task,
estimation o f equations specified for a simulation model requires purely statistical
techniques. Initial specifications are open to question and they can be modified for
improvement. This step permits the modification and replacement o f basic model
postulates based on quantifiable results. For this purpose, the second task o f backcasting is conducted to test the accuracy o f the models predictive capacity. Finally,
policy simulations will be conducted for past and future periods. Policy simulations o f
past conditions are designed to find the impacts o f changes in policy variables on the
economy. Policy simulations for the future can be undertaken, if the values o f
exogenous variables are forecast. 6 7
5.1
Estimation and Prediction

The literature on econometric estimation o f the equations for a simulta
neous system is among the most extensive in econometrics. Many theorems and
6 7 Attempting to predict the future is always a challenging exercise, since the largest
changes are often wrought by events, ideas, or techniques which are unforeseen, and
often unforeseeable.
132
examples on specification and estimation on large or small samples are available in

the vast literature. To get consistent and efficient estimates o f parameters, various
methods and techniques have been developed. In this study, estimation was under
taken based on existing theories and techniques, such as ordinary least squares (OLS),
estimation by instrumental variables, two-stage least squares (TSLS) , 6 8 and regression
with lagged variables . 6 9 In this study, annual data were used in all cases. Thus, only
14 observations were available and the problems o f small-sample bias are likely to be
serious. For this reason, the estimates o f the standard errors and other goodness-of-fit
statistics may be even less reliable than usual. In all cases, the standard errors o f the
parameter estimates are reported parenthetically directly below the coefficients. R 2 is
the coefficient o f determination adjusted for degrees o f freedom and d is the DurbinWatson (DW) statistic . 7 0 Regression equation estimations are listed in Appendix-A.
To make estimation consistent and unbiased, instrumental variable (IV) estimators

are used for simultaneous-equations models. They differ in the choice o f instruments
and in whether the equations are estimated one at a time or jointly. TSLS is used for
estimating over-identified as well as exactly identified equations.
68
In a model with lagged endogenous variables, the entire previous time path o f the
exogenous variables and disturbances, not just their current values, determines the
current value o f the dependent variables. The intrinsic dynamic properties o f the auto
regressive model, such as stability and the existence o f an equilibrium value, are em
bodied in their auto-regressive parameters. (Greene, William H., Econometric
Analysis. 1997. Third edition. Prentice-Hall International, Inc.)
69
7 0 If an equation contains a lagged variable, the Durbin-Watson statistic is often times

misleading as a test for the existence o f auto-correlation. In this event, the following
/z-statistic, a modified form o f the Durbin-Watson statistic is used.
133
As mentioned earlier, backcasting is conducted to test the accuracy o f

model prediction by comparing them to historical data. Criteria such as M A PEs
(Mean Absolute Percentage Errors) are used to determine whether a modeL should be
accepted or rejected. As shown in Table 5-1, most o f MAPEs for this stu d y are
reasonably within the range o f acceptability . 71
Figure 5.1 depicts the actual and predicted values o f selected econom ic
variables. In the economic module, all endogenous variables, except for re a l invest
ment (RINV) and exports (XPT), are within a comfortable range o f MAPE betw een 0%
and 3% (see Table 5.2). Even R IN V and X P T show acceptable MAPEs o f 6.2% and
5.6%, respectively. The unemployment rate (JUNK) shows the largest M A PE in the
economic module, 9.4%, which, also, is acceptable. Since UNR is calculated by
where n = sample size, var(a2) = variance o f the coefficient o f the lagged variable.
Thus, unlike (/-statistic, if h = 0, the statistic follows the standardized norm al distri
bution, that is, the normal distribution with zero mean and unit variance. (Gujarati,
DamodarN. Basic Econometrics. 1995. Third edition. McGraw-Hill, Inc.))
71
The MAPE estimates are calculated as

MAPE =
./=!
where Y? is the z'th endogenous variable as predicted by the solution o f the m odel
within the sample period, Y~ is the actual value o f the z'th endogenous variable during
the sample period, and N is the number o f observation. It is a convention th.at MAPES
are excellent if they are less than 3%; good if less than 5%; and not acceptable if
greater than 8 %.
134
dividing the difference between I L F and TEMP by TLF, even a minimal change in
either variable will make a large difference in U N R 12
350000.
GDP
Export
1 .5 E + 0 8 .
S l.O E + 0 8 -
5 .0 E + 0 7 .
Actual
A c tu a l
50000
84 85 8 6 8 7 88 89 90 91 9 2 9 3 94 9 5 9 6 9 7
O.OE+OO.
8 4 85 86 87 88 89 90 91 9 2 93 9 4 9 5 9 6 97
Yaar
Y aar
4.5
24000
22000
Predictad|
Total Employment
Unemployment Rate
4.03.5-
o 20000
3.0
25A c tu a l
20-
Predicted
84
Year
Fig 5.1
A c tu a l
Predicted!
1.5
12000
8 4 85 8 6 8 7 88 89 9 0 91 9 2 9 3 9 4 9 5 96 9 7
86
88
90
92
94
96
Y ear
Actual and Predicted Values o f Selected Economic Variables
Figure 5.2 depicts the actual and predicted values o f demand for selected
energy sources. In the energy module, most endogenous variables show acceptable
7 2 Consider an UNR o f 4%. If the UNR changes from 4% to 4.5%, MAPE is 12.5%.
Generally speaking, MAPE gets bigger as UNR gets smaller. This explains that even
bigger than 10% o f UNR is reasonable in this sense.
135
MAPEs, except for coal demand in sector two (COL2) and gas demand in sector one
(GAS1). GAS1 in particular shows an exceptionally large MAPE o f 9%. Such a large
MAPE can be reduced to a smaller scale if the estimations o f regression equations are
confined only within the scope o f historical data. However, the primary concern o f the
current simulation model is long-term policy simulation, which requires to some
extent an adjustment o f coefficients on the basis o f predictions o f the structural and
behavioral change in the national economy.
20000a
3600a
Coal Consumption
Total Primary Energy Demand
8
m
20001
soooa
A c tu a l
Actual -- Predicted
Predicted 1
i6 o o a
84 8 5 86 87 88 89 9 0 91 9 2 93 9 4 95 96 97
84 85 86 87 88 89 90 91 9 2 93 94 95 96 97
Year
Y aar
12000a
3500a
Oil Consumption
30000-
LNG Consumption
2S ooa
iu s o o o a
a
2 0000 -
| 15000-
2000a
A c tu a l
5000-
Predicted
Actual
Predicted
84 85 86 87 88 89 90 91 9 2 93 94 9 5 96 97
8 4 85 86 87 88 89 9 0 91 9 2 9 3 9 4 9 5 9 6 97
Year
Year
Figure 5.2
1000a
Actual and Predicted Values of Energy Variables
136
In the environmental module, most o f the variables show acceptable

MAPEs except for emissions o f carbon monoxide (COX) and its share in fossil fuel
consumption (COR ). MAPEs o f these two variables are much higher than other
variables with values o f 9.9% and 8.7%, respectively. This anomaly could be easily
adjusted by calculating the actual values based on emission formulas and historical
energy consumption data. Air-quality variables, such as the atmospheric concentration
o f sulfur dioxide (SO X), nitrogen oxides (NOX), carbon monoxides (COC), and even
pH value in acid rain, show exceptionally good MAPEs. Figure 5.3 depicts the actual
and predicted values o f selected environmental variables in terms o f air quality.
0.03Z
0.06.
NOx Concentration in the Air
S02 Concentration in the Air
0.030-
0.05.
0.0280.04-
a.
o. 0.026.
Q.
CL
0.03-
0.0240 . 02 -
0 . 022 -
Predicted
0.01
A c tu a l
Predicted
0 . 020 .
84 85 86 87 88 89 90 91 92 93 94 95 96 97
Y ear
84 85 86 87 88 89 90 91 92 93 94 95 96 97
Y ear
0 . 020 .
5.8.
Ozone Concentration in the Air
Add Rain
0.018.
5.7-
0.016-
5.6-
0.014-
i . 5.5-
0 . 012 -
5.4-
0 .0 1 0 .
A c tu a l
5.3-
Predictedl
A c tu a l
0.008
84 85 86 87 88 89 90 91 92 93 94 95 96 97
Y ear
Figure 5.3
Predicted
5.2.
84 85 86 87 88 89 90 91 92 93 94 95 96 97
Y ear
Actual and Predicted Values of Environmental Variables
137
Table 5.1
MAPE Distribution o f the Simulation M odel

MAPE
Observations
Frequency
% or greater
4.3%
5-7.99%
12.9%
3-4.99%
19
27.1%
Less than 3%
40
57.1%
Total
70
100 0
Table 5.2
MAPEs of Selected Endogenous Variables1

Variable
MAPE
Variable
MAPE
GDP
1 8
. %
TCOL
1 8
XPT
5.9%
TGAS
2.5%
RINV
5.7%
ELE
1.3%
TEMP
0.5%
C 02X
RWAG
1.7%
SOC
5.9%
UNR
9.4%
NOC
3.7%
TOT
2 0
. %
COC
4.3%
1.4%
OZN
4.3%
TOIL
Note:
. %
. %
. %
0 8
This table shows only selected variables among a total o f 70 endogenous

variables
The present results are highly consistent with theoretical expectations.

Revision and alterations in the theoretical structure also can be made and tested with
relative ease. Long-term inference based on data covering 14 years is arguably less
reliable than inference based on a longer time period; however, such long data series
are simply not available. 7 3 Within the data limits, however, the present form o f the
energy-economy-environment model yields simulation results that are encouraging,
and its effectiveness as a policy design tool is promising . 7 4
So far model analysis has been concerned with behavior within the sample
period. This step provides us with the validation o f the model at issue. The resulting
MAPEs, as a criterion for accuracy and reliability o f the models prediction, gives us
confidence with the present simulation model and allows us to go ahead with the rest
o f the task: forecasting and policy simulation. Forecasting has two purposes in this
dissertation. The first purpose is to predict what the future has in store for us. So we
may be able to design specific strategies for the future. The second purpose is to
provide a reference case for policy simulations. Since the policy simulation is the
primary purpose o f the model, it is crucial to construct a most feasible and reliable
forecasting technique.
Even if such data series are available, there arises another problem: stability o f an
economic system. Because Korea has been and is still undergoing a developmental
stage, it is hard to determine whether the relationship o f the past will continue to be
the same in the future. Thus it is more appropriate to assume that the most recent data
would be in a better position to predict the future pattern.
73
Replicating historical performance, however, m ay not indicate that the model will
predict the future well. Ex ante tests are probably m ore important in understanding the
worth o f this model. One way o f evaluating ex ante forecasts is to compare actual
values with those forecasted by the model. Unfortunately, data after 1997 are not all
available at the time o f this analysis.
74
139
5.2
Forecasting
There are many uncertainties in Koreas future energy system. The current
Korean energy system is steadily expanding due to high growth in all economic
sectors, resulting in a very unstable energy system. The Korean energy system is much
more vulnerable to external impacts than those o f developed economies that are in the
mature stage. Observing this fact, Mori (1992) suggested a cross impact method (X-I
method) to treat the interdependencies among future uncertain factors. He contended
that this method provides a ranking o f possible future scenarios based on the subject
ive occurrence probabilities given by the policy decision-maker.
The year 2020 was selected as the time-horizon for forecasting. This span
o f time period was chosen because it has become a convention that m ost long-term
simulation models use a 20-25 year time horizon for forecasting and also this is
generally perceived to be the maximum length o f time over which an economic system
remains stable. 7 5 During this time period aggregate demand is considerably shifted by
changes in tastes, expectations, tax structure, net exports, investment, and more than
anything else, technological innovation. Beyond this time horizon, it is meaningless to
assume that coefficients o f these variables will remain constant. However, even this
length o f time cannot avoid the impacts o f structural change. Accordingly, the
A growth rate o f 3 percent per year, which is average for most industrialized
countries, raises national income by 10 percent in 3 years and doubles it in about 24
years. Simon Kuznets (1946) found that there existed a long business cycle o f
approximately twenty years length. Another long business wave cycle was proposed
by the Russian economist, N.D. Kondratieff in the 1920s and early 30s. He identified
long cycles, associated with the introduction of major innovations, o f 40 to 50 years.
In his theory, major technical innovations, which occur every fifty years or so, set off a
cycle o f prosperity and depression. A new set o f technological innovation then sets off
another period o f prosperity (McCandless Jr., George T. Macroeconomic Theory.
1991. Prentice-Hall International Editions.)
75
140
coefficients o f key variables should be adjusted to reflect fundament-al structural

change. Therefore, it is reasonable to use 23 years as a time horizon for forecasting.
5.2.1
Assumptions
Forecasting was conducted for the reference case (the so-called Business-
As-Usual scenario). Before we undertake meaningful forecasts, it is essential to have

a set o f assumptions for the exogenous variables. Successful forecasting always
depends on having reasonable assumptions. In this dissertation, reference is made to
many reports and academic papers o f major research institutes, domestic as well as
international, re g a rd in g the assumptions for the exogenous variables concerned here.
The assumptions for the key factors in the reference case are shown in
Table 5.3. In the economic module, the service orientation of the economic structure
will increase over time. According to a report by the Korea Institute for Industrial
Economics and Trade (KIET), the share o f primary industry, manufacturing, and
public utilities in the national GDP will decrease from 37% in 1995 to 32% in 2020.
Regarding GDPF, this study refers to the USDOEs Energy Information Administ
ration (EIA), International Energy Outlook 1999. According to its reference case, the
world GDP is forecast to increase at an annual growth rate o f 3.0% between 2000 and
2020. An additional key assumption is that the interest rate in Koreas manufacturing
sector will continue to decrease until it reaches the level characteristic o f most indus
trialized countries
In the energy module, the most crucial variable is real oil price. Real oil
price is assumed to grow at 3% annual growth rate . 7 6 Input fuel share in power
7 6 Forecasting world crude oil price is one o f the most unreliable tasks. It shows an
extremely wide range o f high and low value, depending on the major economic and
141
generation is based on KEPCO's Long Term Electricity Power Generation Plan and
KEEIs projections, both o f which persistently assume the important role o f coal and
nuclear power. Consequently, the projected share o f coal and nuclear fuels will con
tinue to increase. Efficiency in power generation is assumed to increase at an annual
growth rate o f 0.5%, reaching 40.5% in 2020. Such an increasing efficiency projection
is based on the introduction o f higher efficiency power generating facilities, as well as
wider use o f combined heat and power generation.
AEEI Factor
Energy efficiency improvements are induced in three main ways: 1)
changes in energy prices, 2) non-price policy effect, and 3) independent and voluntary
actions. Among these factors, independent and voluntary actions which are not related
to energy prices or policies, are called Autonomous Energy Efficiency Improvements
(AEEI). The model includes AEEI to describe energy efficiency gains (unrelated to
price/policy) freely available to the economy. The AEEI factor covers several aspects,
including technical improvements due to replacement-investing and organizational
restructuring, the production o f fewer energy-intensive goods within a given economic
sector and administrative measures, such as speed lim its . 7 7
energy forecasting institutes. For example, Data Resources Inc. (DRI) forecast annual
average oil price growth rate o f 2.1%; World Economic Forecasting Agency (WEFA),
0.8%; International Energy Agency (IEA), 3.9%; and Petroleum Energy Laboratory
(PEL), -3.1%.
77
A CES production function including AEEI is generally expressed as:

r - > = a - K ~ e + b Y J ( r l ( t ) - E , r i,
/ I
142
Table 5.3
Assumptions for Exogenous Variables in BAU Forecasting
Exogenous Variables
1997
Economic Module
GDPW (proxy for GDPF ) 1
Foreign Exchange Rate (Japan)
Interest Rate
Tax Rate
Population (1,000 persons)
. %
2 0
121
1 0 .6 %
21.3%
45,991
2 0 0 0
3.1%
114
1 0 .0 %
21.9%
46,790
Assumptions
2 0 1 0
2005
3.1%
103
9.0%
2 2 .6 %
-
2.9%
98
8 .1 %
23.4%
49,680
20 2 0
114
6.7%
25.1%
50,580
Energy Module
3.5%
Real oil price 1
2 .0 %
2.5%
3.0%
4.0%
Fuel share in transformation sector2
Coal
25.5% 31.6%
30.9% 29.3% 25.0%
8.3%
5.7%
16.7% 1 1 .0 %
8.4%
Oil
Gas
24.7% 24.1%
23.8% 2 1 .0 % 23.3%
2.7%
Hydro
2.3%
1 .0 %
2 .2 %
2.3%
Nuclear
34.6% 38.7% 45.0%
30.9% 31.0%
Efficiency in power generation
37.6% 38.5% 40.5%
36.1% 36.6%
Renewable energy
0.76% 0.92%
1.25% 1.70% 3.14%
0.5%
0.5%
0.5%
AEEI
0.5%
0.5%
Investment in energy/environment3
3.3%
5.0%
2 .2 %
National
2 .0 %
2.7%
7.4%
9.0%
10.9%
Manufacturing
6 .1 %
8 .2 %
Note: 1 indicates average growth rate between the current column year and the next
One. Based on EIA/DOEs International Energy Outlook, 1999.
based on KEEIs The Second -Year National GHG Mitigation Study fo r the United
Nations Framework Convention on Climate Change, 1998; and KEPCOs The Fifth
Long-Term Plan fo r Electric Power Development, 2000.
based on The Korea Development Banks Survey o f Facility Investment Plan, 1996.
where y t (t) represents AEEI. y i (t) represents energy-augmenting technical progress,

with Y, (0 E measuring energy in efficiency units. Generally, AEEI rates must be
given externally (Kemfert, C. and Kuckshinrichs, W. MIS: A Model-based Macroeconomic Information System for Energy Analysis in Germany. System Modeling fo r
Energy Policy. Edited by D. W. Bunn and E. R. Larsen. 1997. John W iley & Sons
Ltd.
143
Although the AEEI factor differs in each economic sector, this dissertation
uses an average AEEI for the entire economy. Kemfert et al. (1997) estimated the
sectoral AEEI rate for German industrial sectors based on historical data. According
to their calculations, the average AEEI rate for all sectors was greater than 1.5% and
less than 3%, which is unusually high because o f the characteristics o f the German
economy. Germany is one o f the most advanced countries in terms o f energy effi
ciency, and its industrial sector is a place where energy-efficient technologies and
equipment are rapidly adopted.
For the forecast period, several studies have calculated AEEI values. The
USDOE and Lawrence Berkeley Laboratory assumed an AEEI rate o f 0.5% per year
for the US industry. KEEI (1998) and Jung and Yoo (1994) also assumed that AEEI
in the Korean industry be 0.5% per year between 2000 and 2020 in their simulation
models. 7 8 According to the Korea Institute for Industrial Economics and Trade
(KIET), energy efficiency improvements were assumed to advance at a rate o f 1.2% a
year between 2000 and 2020. This figure includes policy induced as well as automatic
energy efficiency improvements. In light o f these calculations, this dissertation also
assumed an AEEI rate o f 0.5% per year.
5.2.2
Simulated Projection: Reference Case

The Business-As-Usual (BAU) reference case is the standard against
which variations in energy and environmental policies will be compared. This BAU
KEEI estimated that energy efficiency improvement over the past two decades
(1975-1995) was 1.2% a year. Based on this estimation, they assumed an AEEI o f 0.30.8 %, depending on usage and subsector (an average o f 0.5%) (KEEI. The Second
Year Study o f Planning National Actions fo r the United States Framework Convention
on Climate Change. Decemberl998).
78
144
scenario demonstrates the effects o f structural change without explicit energy policy
implementations. The following is an overview o f major indicators in each dimension.
5.2.2.1
Projection of Economic Indicators

The major economic indicators forecast based on the assumptions in the
previous section are shown in Table 5.4. The most popular economic indicator, GDP,
is projected to increase at a relatively rapid annual growth rate o f 4.6% between 1997
and 2010. However, GDP annual growth rate is predicted to slow down to a level o f
3.2% between 2010 and 2020, indicating that Korean economic structure will follow
the stabilized pattern
Table 5.4
Projected Major Economic Indicators1

1997
2010
GDP (billion won)
290,888
524,594
717,891
4.6%
Capital Stock (billion won)
779,599
2,798,762
6,044,022
10.3%
8 0
97,738
329,208
6,00,093
9.8%
6 2
150,317
265,221
359,535
4.5%
3.1%
185,116
321,361
432,525
4.3%
3.0%
21,048
24,808
25,562
1.3%
0.3%
1 .8
3.4
Investment (billion won)

Consumption (billion won)
Disposable Personal Income
(billion won)
Employment (thousand)
Unemployment Rate (%)
2 .6
2020
97-20102
2010 202
3.2%
. %
. %
Wage (thousand won)
988,048
1,447,153
1,707,963
3.0%
1.7%
Export (million US$)
105,000
262,000
380,000
7.3%
3.8%
Note:
1
2
All m onetary values are 1990 price.

Average annual growth rate
145
o f industrialized countries. In 2020, per capita GNP is expected to reach $ 15,000 in

1990 US dollars, similar to the level o f the Western industrialized countries in the
early eighties. Total employment and unemployment rates, which are important
indicators o f an economys stability, are also expected to stay in good shape with
employment continuously increasing and unemployment remaining at comfortable
level.
5.2.2.2
Projection of Energy Demand and CO 2 Emissions

Energy consumption and CO 2 emissions forecasts, based on the assump
tions in the previous section, are shown in Table 5.4 and Figure 5.5. Total primary
energy consumption and CO 2 emissions in 2020 are predicted to be 318.5 million TC
and 217.7 million TC, respectively. These results are consistent with those of other
major studies (KEEI, 1997 and 1998).7980 Energy demand shows an annual average
growth rate o f 2.5% up to 2020. Increases in CO 2 emissions, however, are not as fast
as those o f energy demand, which implies a decreasing level o f CO 2 intensity in energy
consumption. This phenomenon is partly due to probable interfuel substitution and
In examining the model-generated forecasts, it might be appropriate to compare and

contrast some typical results with those developed by other researchers. It provides a
sense o f direction in the forecasting task.
79
8 0 According to K E E rs Basic National Energy Plan, energy consumption and CO 2

emissions are forecast to be 348.2 million TOE and 239.1 TC, whereas KEEI's new
revised BAU projection in consideration o f the IMF financial crisis are 306.7 million
TOE and 202.8 m illion TC. Our prediction lies between these two forecasts, and is
more realistic, considering the recent recovery o f the Korean economy to the prefinancial crisis. Both o f KEEIs studies use a model based on a bottom-up approach in
which GDP growth rate, energy intensity, etc. are predetermined, hi contrast, the
present model incorporates GDP and energy intensity into endogenous variables.
146
technology development, both o f which are reflected explicitly as well as implicitly in

the model. 81 hi fact, in KEPCO's The Fifth Long-Term Plan o f Electric Power Devel
opment, nuclear energy is forecast to have an increasing role in the national energy
mix. In the current model, input fuel share in the transformation sector is predeter
mined, based on both the KEPCOs and the KEEIs long-term plans . 8 2
Coal demand is projected to reach a plateau before 2010, while oil and gas
show a robust increase in their share o f the energy mix. Oils increase in the energy
mix is due to increasing consumption in the transportation sector. The increased share
o f nuclear power is solely due to government policy that favors nuclear power as an
effective means to curb CO 2 emissions. Despite local opposition against the central
ized siting o f nuclear power plants and nuclear waste disposal facilities, the govern
ments persistent commitment to nuclear power as a future energy source is not ex
pected to weaken. This issue will be brought up for more detailed discussion, under
the topic o f a nuclear moratorium, in Chapter 6 . The consumption o f renewable
energy is expected to increase from the current 1.3% to 9.3% in 2020, which reflects
the governments plan . 83
81
Consider the following electricity demand equation,
\n.ELE\ = a-, + fi 7 InRPELE + y 7 ]n.ELElt_z + X6 InRPGASWt_2 + vkiTIM E + p 7,

where ELE1 is electricity demand: RPELE, electricity price; RPGASW, gas price. In
this equation gas is reflected as a substitute fuel for electricity. So if relative price o f
electricity to gas is higher, electricity demand is substituted by gas demand, which
would result in CO 2 emissions reduction.
KEPCO. The Fifth Long-Term Plan o f Electric Power Development. 2000. KEEI,
The Second-Year Study o f Planning National Actions f o r the United Nations
Framework Convention on Climate Change. 1998.
82
83
KEMCO. Long-Term R&D Plan fo r Alternative Energy. 1999.
147
Table 5.5
Energy Demand and CO 2 Emissions Projections

(Unit: Million TOE, TC)
1997
2010
2020
Boo
Energy Demand
KEEI (Old)
KEEI (New)
1 7 4 .9
2 6 5 .7
3 1 8 .5
348.2
306.7
Coal
3 4 .8
4 7 .3
4 9 .5
51.4
Oil 1
Gas 1
Hydro
Nuclear
Alternative
9 6 .2
133.1
1 5 0 .3 1
3 0 .1
4 4 .3
5 6 .8
1 .4
2 .4
1.2
19.3
3 4 .2
5 5 .0
1.3
4 .4
9.3
1 3 5 .6
1 9 5 .2
2 1 7 .7
CO 2 Emissions
239.1
181.2
22.7
3.8
45.4
2.3
202.8
N o te :1 LPG dem and is excluded and added to g a s consum ption

Source: MOCIE and KEEI, 1998. The Second-Year Study of Planning National Actions for the
United Nations Framework Convention on Climate Change.
350000
1.00
300000
0.90
O
1-
250000
0.80
LU
200000
O
h|
150000
0.70
100 00 0
Energy Consum ption

C 0 2 Em ission
C 0 2 Intensity
50000
0.60
0.50
00 0 0 0
1982
1986
1990
1994 1998 2 0 0 2 2006 2 0 1 0 2 0 1 4 2018
Year
Figure S.4
Energy Demand and CO 2 Emissions Projections
148
5.2.23
Projection of Environmental Indicators

The final set o f reference case forecasts is derived from the present envi
ronmental module. Our primary concern here is threefold: first, to develop predictions
o f air-pollutant emissions for SO 2 , NO 2 , and CO; second, to translate these predictions
into estimates o f future air-quality; and third, to estimate CO2 emissions in preparation
for international regulation o f greenhouse gas (GHG) emissions. Table 5.6 and Figure
5.5 present simulation model-generated emission levels and air-quality forecasts.
Table 5.6
Projection o f Selected Environmental Indicators

1997
2 0 1 0
2 0 2 0
1997-20201
Emissions Level
( 1 0 3 ton)
C 02
116,919
195,169
217,705
2.7%
S02
1,356
802
500
-4.2%
N 02
1,278
1,168
1,087
-0.9%
CO
1,129
464
247
-6.4%
S02
0.014
0.004
0 .0 0 2
-8 . 1 %
N 02
0.025
0.025
0.025
1 .1 0
0.51
0.35
- 1 .2 %
0.015
0 .0 1 2
0.008
-2.7%
5.6
-0.07%
Air-Quality
(PPM)
CO
Ozone
Acid Rain(pH)
5.7
5.6
Note: 1 Indicates average growth rate between 1997 and 2020.
149
aos
aos
1800
1400
1800
gf 1400
8 0 2 Emissions
SQ 2 Concentration*
O
12D0
5 1000 .
800
IN .
8
1000
0.02
NOx Em issions
NOx Concsntistion
0 0 .
400
00
06
10
aoo
20
86
Yssr
06
ato
ao
OO Emissions
CO Conosntnflon
00
80
Yssr
2500
2000
0.01
aoo
6.0
25 a
-20
- >
19X1 -
1 0 0 0
0.02
1 .5
Fom il Shi
Arid Rain
O 500
96
Figure 5.5
oo
Yl
06
ao
0.78
*0
20
*6
OO
6.0
06
16
Yl
Forecasted emissions and air quality
A variety o f forces are operating behind the estimated air quality. In most
cases, air pollutant emissions are directly related to the air quality in the cities. Air
pollutant emissions are influenced by several factors, such as vehicle numbers and
environmental standards and regulations. In the case o f acid rain, overall fossil fuel
consumption has been identified as the principal culprit behind the increasing levels of
acidity. While forecasts for SO2 and CO concentrations show a continuous downward
trend, the case for N O x concentration and the acidity o f rain (the reverse o f pH value)
is quite the opposite. Under BAU assumptions, stationary and mobile sources for NOx
will remain almost the same over the next two decades. Because o f increase in the
vehicle population up through 2015, N O x emissions from mobile sources will become
another problem in controlling air-quality in the major cities.
150
5.3
Policy Simulation
Policy simulations are intended to identify the impacts o f changes in
policy variables. Impacts are usually expressed in so-called 'multiplier effects. 8 4

Policy simulations are conducted in two ways. One is for the historical period, which
is an ex post exercise to gain an insight into what would have happened if exogenous
variables had been changed. The other is for the future, with which this dissertation is
more concerned. Policy simulation for the future can be undertaken, if values of
exogenous variables are forecasted, which is usually set up under the so-called
scenarios. It is to this policy simulation in conjunction with forecasting, that this
dissertation now turns.
5.3.1
Policy Simulation Scenarios

Six scenarios are considered for policy simulation, based on three policy
interventions: excise, energy, and carbon taxes. An excise tax is an ad valorem type o f
taxation, whereas energy and carbon taxes are a specific type o f taxation. The latter
two policy variables are common tools in simulation exercises, whereas excise tax has
not been given a serious consideration as a policy tool, despite its simpler form in that
it is levied in proportion to the values o f fuels. The other two taxes are to some degree
8 4 Multiplier effect is observed in a dynamic model with lagged variables. In models

with lagged endogenous variables, the entire previous time path o f the exogenous
variables and disturbances, not just their current values, determines the current value
o f the dependent variables. Impact multiplier implies coefficients o f exogenous
variables, whereas cumulated multipliers are obtained by adding the matrices of
dynamic multipliers that has more than one lagged variable. These cumulative multi
pliers are the long-run or equilibrium multipliers that dampen over time and converge
to zero (William H. Greene. Econometric Analysis. The third edition. 1997: 764-769.
Prentice-Hall, Inc.).
151
complicated. However, they are more reasonable since their purpose is to discourage
energy consumption and the consequent reduction in emissions o f air-pollutants . 8 5
Eventually all types o f policy tooLs, if they are taxes o r incentives, are
reflected in the form o f a price increase or decrease. As an ad valorem tax, $5/bbl and
$10/bbl equivalent taxes are considered. Two- types o f specific taxation, energy and
carbon taxes are introduced for policy simulation scenarios, with $5/bbl and $10/bbl
equivalent taxes are considered for each tax type . 8 6 An ad valorem tax in proportion
to energy price is only introduced here as an intermediate step tow ard the two major
types o f specific taxes: energy and carbon taxes. After a brief analysis o f ad valorem
tax, a more detailed discussion will be provided on energy and carbon taxes.
Table 5.7 shows energy and carbon taxes calculated (per TOE) based on
S5/BBL equivalent taxes. It also includes energy contents and CO 2 emission factors
and corresponding tax rates for the fossil fuels as well as electricity. In the case of
electricity, weighted average o f carbon contents per TOE is calculated based on fuel
mix in power generation. Because the electricity tariff in Korea is kept low by govern
ment policy, which is unreasonably lower than even the average consum er price o f oil
(about two thirds), the impact o f energy taxes o n electricity will be greater than on
other energy forms. 8 7 Consequently, energy tax is higher than carbon taxes for
Several progressive European countries, including German, Sweden, and Denmark
have already started energy or carbon taxation. Since the late eighties these countries
have studied the cost-benefit analysis o f energy and/or carbon taxes.
85
Energy tax is simple to calculate since it is Levied based on energy content o f each
fuel. Carbon tax, however, is a little bit more complicated. We need to identify the
carbon content o f oil in terms o f barrel and calculate the tax per unit carbon. Then, we
should calculate the tax for each fuel based on its carbon content.
86
If all the energy losses in electricity generation were transferred to the consumers,
energy tax on electricity would become much higher.
87
152
electricity because nuclear and hydroelectric power are not included in the calculation
o f carbon taxes. This implies that the energy tax is not effective as a policy tool to
reduce CO 2 emissions. Another factor for the higher energy or carbon tax in the elec
tricity price is that energy loss in electricity generation is transferred to consumers in
the form o f an energy or carbon tax. However, the opposite is true for the carbon
tax . 8 8 Since the carbon tax is calculated based on the carbon content o f the input fuels
in power generation and more than 40 percent o f input fuel is from non-fossil fuels,
such as nuclear and hydro, the carbon tax on electricity is much lower than on other
Table 5.7
Energy Contents, CO 2 Emission Factors and Tax Rates

($5/bbl equivalent tax) 1
Fuel Type
Energy
Contents
(TOE/ton)
Energy
Prices
(S/TOE)
Oil
1 .0 0
310.7
Coal
0 .6 6
Gas
Electricity
(TOE/kWh)
CO 2 Emission
Factors
(TC/TOE)
Energy Taxes
(S/TOE)
Carbon Taxes
(S/TOE)
0.875
36.8
32.20
78.7
1 .1 0 0
36.8
40.48
1.30
370.6
0.675
36.8
24.84
0.25
184.52
0.553
36.8
20.353
Note: 1 $5/bbl is equivalent to $36.65/TOE in 1997 consumer price. Consumer price for each fuel
is calculated in 1997 price. 2 Loss value calculated based on the generating efficiency of
36.1% is added to electricity tariff. 3 Based on the projected input fuel mix in the power
generation, approximately 0.3, 0.1, 0.2 for coal, oil, gas, respectively.
8 8 Because electricity is derived from carbon and non-carbon energy sources, a carbon
tax applied to electricity end uses only influences the carbon-based energy sources,
reducing the efficiency o f the tax as a means to influence this form o f energy use.
153
Fuels. Nevertheless, considering that the unit energy price o f electricity is compara
tively lower than those o f other fuels, the price hike resulting from an energy or carbon
tax would be comparatively much higher. Thus, electricity will become a more costly
energy carrier when an energy or carbon tax is levied.
Table 5.8
Scenarios Set-Up for Policy Simulations
Scenarios
Description
Tax Period
$5/bbl equivalent
ad valorem energy tax
1998-2020
11 8
$ 1 0 /bbl equivalent
ad valorem energy tax
1998-2020
23.6%
in
$5/bbl equivalent
specific energy tax
1998-2020
Oil: 11.8%
Coal: 46.8%
Gas: 9.9%
Electricity: 19.9%
1998-2020
Oil:
Coal:
Gas:
Electricity:
1998-2020
Oil: 10.4%
Coal: 51.4%
Gas: 6.7%
Electricity: 11.0%
1998-2020
Oil: 20.8%
Coal: 102.8%
Gas: 13.4%
Electricity: 22.0%
IV
specific energy tax
$5/bbl equivalent
specific carbon tax
VI
specific carbon tax
Price Effects 1
. %
23.6%
93.6%
19.8%
39.9%
Note : 1 Price effects are calculated according to the energy content for energy tax and
the carbon emission coefficients for carbon tax.
154
Table 5.8 shows the six scenarios based on the three policy variables.
Price effects are calculated based on Table 5.7. The tax period is set to start from
1998, which does not affect the results greatly, since the primary purpose of the study
is to identify the pattern o f impacts o f policy interventions. To minimize the impacts
o f a price hike incurred by high tax rates, escalating tax are applied in the case o f taxes
more than $10/bbl. For example, in the case of a $10/bbl carbon tax, a $5/bbl tax is
levied in the first year, and then the tax is increased by $l/bbl per year for the follow
ing 5 years. In addition to these six scenarios, this dissertation considers three policy
cases: 1 ) reinvesting the carbon tax ($ 1 0 /bbl carbon tax), 2 ) policy induced energy
efficiency improvements ($10/bbl energy and carbon taxes), and 3) stabilization of
CO2 emissions in 2020 at the level o f 2000. These additional scenarios will be
discussed in more detail later in the following section.
5.3.2
Policy Simulation Results

This section will discuss the policy simulation results based on the refer
ence case and the policy scenarios suggested in the previous section. The dynamic
interactions o f the model can further be understood by measuring the impact o f
changes in key exogenous variables. It involves more than merely estimating the
impact o f a specific policy; it involves analysis o f policy designs and the identification
o f key exogenous variables that are most effective in attaining the desired target. As
already specified in the design o f the policy scenarios, our simulation focuses on the
two policy variables for a sustainable energy system: energy and carbon taxes. The
following sections will discuss the policy simulation results in terms o f impacts on
energy demand, the environment, and the economy as a whole.
155
5.3.2.1
Impacts on Energy Demand
Excise Tax (Ad Valorem Tax)

Selected simulation results based on the excise taxes o f $5/bbl and $10/bbl
are presented in Tables 5.9 and Figures 5.6. Here, a basic pattern o f impacts from
policy intervention is identified: the so-called multiplier effect. The multiplier effect
clearly indicates the dynamic and interactive character o f the model, as it takes time
for impacts to reach their peak and then gradually taper off. The standard econometric
textbooks describe a multiplier effect in terms o f short-term (immediate), medium
term, and long-term impacts, based on the observation o f lagged variables (Greene,
1997; Gujarati, 1995).
89
Table 5.9 shows the impacts o f excise taxes on energy demand. The
impacts are expressed in terms o f a reduction in energy demand. As discussed earlier,
multiplier effects are easily identified in the reduction pattern for each fuel. Peak
reduction takes place in different years for each fuel. Another salient fact is that
doubling the tax does not result in doubling the scale o f reduction in energy demand . 9 0
89 For example, consider an equation in the form of distributed-lag models as follows,
Yt = a + P 0X t + f$xX t_x+ Pt_-2.Xt_r +
+ PkX t_k + fit
which has a finite lag o f k time periods. The coefficient flQ is known as the short-run,
or impact, multiplier because it gives the change in the mean value o f Y following a
unit change in X in the same time period. If the change in X is maintained at the same
level thereafter, then, (/? + p x) gives the change in (the mean value o f ) Y in the next
period, (/? + p x + /?2) in the following period, and so on. These partial sums are
called interim, or intermediate, multiplier. Finally, after k periods we obtain the longrun, or total, distributed-lag multiplier, provided the sum P exists (Gujarati's Basic
Econometrics, 1995: 585).
It is primarily due to the price elasticity o f energy demand that is equivalent to the
coefficient o f price variable in the log-linear form o f regression equation. Another
90
156
It is also noticeable that the reduction in each fuels consumption is in proportion to

the amount o f each excise tax. Thus, the excise tax is ineffective in reducing energy
demand.
350000
300000 _
250000 _
T3
C
8
3 200000
O
150000 _
100000
Business A s Usual
$5/bbl Excise Tax
$10/bbl Excise Tax
90 92 94 96 98 00 02 04 06 08
10 12 14 16
18 20
Year
Figure 5.6
Impacts o f Excise Tax on Primary Energy Consumption
reason is probably traced back to the simulation model itself in which price effect is
indirectly reflected through recursive or simultaneous relations.
157
Table 5.9
Impact o f Excise Tax on Primary Energy Consumption

$5/bbl Equivalent Excise Tax
(Ad Valorem Tax)
Reduction o f
Demand (2020)
Oil
Coal
-8.1%
-5.9%
Year o f Peak
Reduction
$ 10/bbl Equivalent Excise Tax

(Ad Valorem Tax)
Reduction o f
Demand (2020)
2015
-1
-14.3%
Year o f Peak
Reduction
2009
-11.3%
-1
Gas
-7.4%
2014
-14.5%
2014
Total
-7.0%
2015
-12.6%
2015
Note : 1 Year o f peak demand for coal does not occur in the simulation period.
2 Nuclear and Hydro show the same % o f reduction because the reduction is
based on electricity demand.
Energy Tax (Specific Tax)

The energy tax is levied in proportion to the amount o f energy content in
each fuel, so it can be more effective in reducing energy demand than excise taxes.
Figure 5.7 depicts the impacts o f different excise taxes on total primary energy
demand. Table 5.10 presents the simulation results o f energy tax impact on each
primary energy carrier. As expected, the impact o f the energy tax differs depending on
the energy contents o f each fuel, which is quite different from the impacts o f excise tax
shown in Table 5.9. The reduction in coal demand is much greater than in the case of
the excise tax. This is also the case in total energy demand. The reduction in total
energy demand amounts to 17.7% for $10/bbl equivalent energy tax, whereas it
amounts to only 12.6% for $10/bbl equivalent excise tax. The multiplier effect o f the
energy tax, however, is more complicated because peak reduction in total energy
demand takes place much later than that in excise tax.
158
35000Q
g 25000Q |
20000a
B u s in e s s -A s -U s u a l
$ 5 /b b l E n e r g y T a x
$ 1 0 /b b l E n e r g y T ax
50000.
90
Figure 5.7
95
00
05
Y ear
10
15
20
Impact of Energy Tax on Primary Energy Demand
Table 5.10 Impact o f Energy Tax on Primary Energy Consumption

$5/bbl Equivalent Energy Tax
(Specific Tax)
Reduction o f
Demand (2020)
Oil
Year o f Peak
Reduction
$10/bbl Equivalent Energy Tax

(Specific Tax)
Reduction o f
Demand (2020)
Year o f Peak
Reduction
-8.4%
2013
-15.1%
Coal
-16.3%
_i
-31.3%
_i
Gas
- 9.1%
2015
-16.2%
2015
Total
- 9.7%
_i
-17.7%
_i
2010
Note: 1 Year of peak demand for coal and total energy do not occur in the simulation period.
159
Carbon Tax (Specific Tax)

Carbon tax is levied in proportion to the carbon content o f each fuel.
Accordingly, it is easily understood that a carbon tax is more effective in reducing CO 2
emissions than an energy tax. However, it is too early to draw a conclusion until
simulation comes up with the firm and indisputable results.
Figure 5.8 depicts the impact o f carbon tax on total prim ary energy
demand and again, Table 5.11 shows the more detailed simulation results by fuel type.
As in the case o f the energy tax, the demand for coal is the hardest hit by carbon
taxation, while gas receives the lowest impact. All in all, the comparative scale and
degree o f impacts are almost the same for the carbon tax as for the energy tax, except
for gas. The impact o f the carbon tax on gas demand is 33% less than that o f the
energy tax, which means that the carbon tax is more effective in prom oting gas
consumption. However, the impact on total primary demand is a little smaller than
that o f energy tax.
Another phenomenon worth mentioning here is that, as seen with the
energy tax, peak reduction is not identifiable for oil, coal, and total energy demand,
which indicates that multiplier effect is still working during the forecasted period and
peak reduction is greater than expected. A clearer picture regarding the effectiveness
o f each tax will be revealed in the discussion o f impacts on the environment in the
following section.
160
35000Q
Thousand TOE
300000-
150000L
B u s in e s s -A s -U s u a l
$ 5 /b b l C a r b o n T ax
$ 1 0 /b b l C a r b o n T ax
10000a
50000.
90
Figure 5.8
95
00
05
Y ear
10
20
Impacts o f Carbon Tax on Total Primary Energy Demand
Table 5.11 Impact of Carbon Tax on Primary Energy Consumption

$ 5/bbl Equivalent Carbon Tax
(Specific Tax)
Reduction o f
Demand (2020)
Oil
-7.3%
Year o f Peak
Reduction
_i
$ 10/bbl Equivalent Carbon Tax

(Specific Tax)
Reduction o f
Demand (2020)
-13.5%
Year o f Peak
Reduction
j
Coal
-16.3%
-30.4%
Gas
-6 . 1 %
2015
-11.4%
2015
Total
- 8 .0 %
_i
-15.2%
Note: 1 Years o f peak demand for coal, oil, and total do not occur in the simulation period.
161
5.3.2.2
Impact on Environmental Variables

Since excise tax turns out to be an inferior policy tool to; energy and
carbon taxes, our analytical focus should be directed to these two policy tools. For the
sake o f analytical simplicity and convenience, only energy and carbon taxes are
considered from now on. Excise tax, however, will be presented as a comparison,
where necessary.
1800.
130a
S02
1601
NOx
1200 .
S 1400-
Business As Usual
SSbbl EnaigyTax
g lb b l C H o n Tax
cn
V
g 1200-
1100.
1000-
800-
400.
90
Business As Usual
tSTbbl Enetgy Tsc
g fb b l CertKin Tex
900-
600-
800.
95
00
05
Ysar
15
90
20
95
00
05
Year
20
250000
200I
C02
CO
200000
0 1500
Business As Usual
t&ibbl Ensryy Tax
$6fbbl Cartxan Tax
1000
1
150000
90
Business As Usual
SSibbl Ensiyy Tax
$8bbl Cutaon Tax
100000
500-
95
Figure 5.9
00
05
Year
50000
20
90
95
00
05
10
20
Year
Impacts o f Taxes on SO 2, NOx, and CO
Figure 5.9 depicts the impacts o f the two major types o f taxes on CO 2 and
other pollutant emissions (only $/bbl equivalent taxes are considered). As shown in
162
Figure 5.9, energy taxes have the greatest impact on CO 2 emissions, while excise taxes
have the smallest. Based on only this observation, a preliminary conclusion is that
energy tax is m ore effective in reducing CO 2 emissions than the carbon tax. However,
we need to take into consideration the cost o f taxes in terms o f losses in GDP. Only in
this way can the cost-effectiveness o f each policy tool be evaluated, hi addition, it
should be recalled that our analytical concern is not confined to CO 2 emissions; but
other environmental indicators, such as SO 2 , NOx, and CO, should be given an equal
consideration. The cost issue will be further discussed in section 5.3.2.3 on impacts on
the economy.
Table 5.12 Impacts of Energy and Carbon Taxes on Environment in 2020

B AU
Carbon Tax
Energy Taxthe
(2 0 2 0 )
$5/bbl
$ 1 0 /bbl
$5/bbl
$ 1 0 /bbl
C 0 2 (10 3 Ton)
223,479
- 1 0 .6 %
-19.5%
-9.3%
-17.7%
S 0 2 ( 1 0 3 Ton)
513
-16.7%
-29.4%
-14.6%
-26.5%
N 0 2 (10 3 Ton)
1,115
- 1 2 .0 %
- 2 1 .8 %
-10.4%
-19.5%
CO (10 3 Ton)
225
- 0 .6 %
- 1 .0 %
- 0 .1 %
0 .0 0 2
-10.9%
-19.7%
- 9.7%
-17.8%
N 0 2 (PPM)
0.025
0 .0
0 .0
0 .0
0 .0
CO (PPM)
0.329
+ 6 .1 %
+ 11.9%
+ 4.9%
+ 9.9%
Ozone (PPM)
0.008
- 1 .8 %
- 4.3%
- 3.5%
- 7.3%
Acid Rain (pH)
5.52
- 0 .2 %
- 0.4%
- 0.3%
- 0.7%
Emission Level
. %
0 0
Air-Quality
S 0 2 (PPM)
163
Table 5.12 presents a list of impacts o f energy and carbon taxes on air
pollutant emissions and air quality. Generally speaking, doubling the tax would result
in doubling the reduction in emissions and doubling o f air quality improvements. In
the case o f CO, reductions in emissions levels caused b y the energy and carbon taxes
are negligible, whereas improvements in air quality are rather increasing. This is
because CO emissions are little influenced by fossil fuel consumption, but are related
to a variety o f environmental investments and by the total number o f vehicles, with the
ratio o f buses to other vehicles being an important factor. I f the energy cost in
transportation increases because o f energy and/or carbon taxes, the proportion o f buses
in the total population o f vehicles will increase. Consequently, CO concentration will
increase as a result o f increases in the bus ratio, hi the case o f ozone and acid rain, the
carbon tax is more effective in lowering the ozone level and increasing the pH value in
acid rain, because ozone and acid rain are more affected by fossil fuel consumption.
In summary, as Tables 5.10,5.11, and 5.12 indicate, energy and carbon
taxes are by far more effective than the excise tax in reducing both energy consump
tion and CO 2 emissions. Although all these taxes have similar effects as in increasing
prices, the magnitude is smaller and the time to reach its peak is much slower in the
case o f the carbon tax. In addition, because it is levied regardless o f carbon content o f
each fuel, the excise tax generates a similar level o f CO 2 reduction in each fuel. Con
sequently, the excise tax is considered as an inferior policy option to the carbon tax in
reducing the CO2 emission levels.
hi contrast, the energy and carbon taxes are highly sensitive and targeted
to the energy and carbon contents o f a fuel, inducing m uch more reduction in energy
and CO 2 emissions. Although the overall impacts o f these two taxes are similar,
164
reduction in CO 2 emissions for each fuel shows a substantial gap between the two
cases. The case o f gas is more telling. Since the carbon content of gas is 20-50% less
than oil and coal, the impact o f the carbon tax on gas demand is more lenient and leads
to promotion o f gas consumption. For both taxes, the reduction in energy demand for
coal is dramatic, which is partly explained by the fact that the coal price is so low
compared to oil or gas prices, resulting in it being more price-sensitive. This price
sensitivity provides another explanation o f why the reduction in gas consumption is
bigger than that o f oil, even though the carbon content o f gas is much lower than that
o f oil.
5.3.2.3
Impacts on the Economy

Up to now the discussion has been exclusively concerned with the positive
impacts o f energy or carbon taxes, such as reduction in energy consumption and air
pollutant emissions, and improvement in air quality. Taxes also produce negative
impacts on GDP, employment, and wages. Identification o f these impacts on the
economy is necessary, partly because we need to know how much is paid for reducing
CO 2 emissions, and partly because this information can be used in determining the
optimal range o f taxation. The information about the negative impacts on the national
economy also provides an indirect or social cost in the benefit-cost analysis o f CO 2
emission measures.
Figure 5.10 depicts the impacts o f energy and carbon taxes on selected
economic indicators. Losses in GDP and consumption are relatively greater in com
parison with those in total employment and wages. Relatively less losses in employ
ment and wages can be explained by the fact that reductions in energy demand and
higher energy prices caused by energy or carbon taxation indirectly affect the stability
165
o f labor market. However, the effects o f these impacts are directly transmitted to GDP
and related indicators without any dampening mechanism . 9 1
26000
70000a
Employment
GDP Loss
600000
500000.
*0 2 2 0 0 0
c
| 400000
25
300000
200000
Business As Usual
S5lbU Energy Tac
SMCYbbl Energy Tac
SSIbbl Carbon Tac
SIQfbbl Carton Tac
SStU Cartxn Tac

HCYbH Carbon Tax
10000a
90
aa
o
|E
Business As Usual
$5rtaMEnergy Tac
S1<Ybbl Energy Tac
95
00
05
10
1
5
18000
90
20
Y ear
05
00
20
Y ear
400000
2000000
Consumption
350000
300000
c
3 250000
c
200000
a
150000
Real W age
g150000a
S100000a
o
Business As Usuel
*bbl Energy Tac
JICYbbl Energy Tac
SSbU CabcnTax
JIQfbbl Carbon Tac
100000
5
0
0
0
0
J
9
0
95
95
00
05
10
1
5
20
500000
9
0
Business As Usual
*Sbbl Energy Tax
S10!bbf Energy Tac
S5fbbl Carbon Tax
$10/bbl Cartxn Tac
r9p5
00
Y ear
05
10
15
Y ear
Figure 5.10 Economic Impacts of Energy and Carbon Taxes
Table 5.13 shows the impacts o f carbon taxes on major macro-economic

variables: GDP, income, consumption, employment, wage, and investment. As
91 These relationships are clearly incorporated in the model (see the economic
modules specifications in the simulation model).
166
20
indicated in Figure 5.10, the peak economic impacts on GDP, income, and consump
tion seem to occur after 2 0 2 0 , having a longer effect than on energy consumption.
This is partly due to the fact that economic impacts o f the price hike are conveyed
through energy supply, whereas impacts on energy consumption are directly trans
ferred. A s shown in Table 5.13, GDP loss is 4.5%, while reduction in total primary
energy consumption and CO 2 emissions are 15.2% and 17.7% respectively (see also
Tables 5.8 and 5.10) in the case o f a $10/bbl equivalent carbon tax. This is consistent
with the results o f other key studies (KEEI, 1998; Jung and Yoo, 1994; Kwak and
Kim, 1995). This also gives a partial explanation for the smaller magnitude o f econ
omic impacts. Nevertheless, it is true that the magnitude o f economic loss is in pro
portion to the reduction in energy consumption. The greater the reduction in energy
consumption, the greater the loss in GDP and other key macro-economic indicators.
Table 5.13 Impacts o f Energy and Carbon Taxes on the Economy

Energy Tax
Carbon Tax
$5/bbl
Equivalent Tax
$ 1 0 /bbl
Equivalent Tax
$5/bbl
Equivalent Tax
$ 1 0 /bbl
Equivalent Tax
GDP
- 2 .8 %
- 5.3%
- 2.3%
- 4.5%
Income
- 2.7%
- 5.1%
- 2 .2 %
- 4.3%
Consumption
- 2 .8 %
- 5.2%
- 2.3%
- 4.4%
Employment
- 0 .0 2 %
- 0.05%
- 0 .0 2 %
- 0.05%
Wage
- 0 .0 1 %
- 0.03%
- 0 .0 2 %
- 0.04%
Investment
- 0 .6 %
- 1 .1 %
- 0.5%
- 1 .0 %
167
S.3.2.4
Reinvestment o f Energy and Carbon Taxes

So far, the analytical focus has been on the negative impacts o f energy and
carbon taxes on the economy. Now the study w ill consider the positive impacts on
major macroeconomic indicators. I f the government reinvests the taxes collected in
promoting energy efficiency and renewable energy technologies, the benefits will be
realized in increased employment and increased GDP. These benefits will, to some
extent, compensate for the economic losses incurred by levying energy or carbon tax.
The benefits obtained by reinvesting the carbon or energy tax into energy efficiency
and renewable energy technologies can be traced by the following two equations in the
model.
R IN V = a x + /3xC X + y xIN T \ + 8xRPOIL + //,
In TEMP = a 2 + P 2 In R IN V + y 2 In RW AG + 8 ZIn IL F + s 2TIMESQ + fx2
The above two equations explain the way in which the increase in investment by
reinvestment o f tax, ARINV, will increase total employment, ATEMP, which in turn
will increase GDP in the CES function. The calculation o f these positive impacts is
shown in Table 5.14.
The positive impacts are expressed in terms o f benefits on major economic
variables. As shown in Table 5.14, all major variables are positively affected by a re
investment o f tax revenues. GDP and its relevant macroeconomic indices, income and
consumption, are significantly benefited, whereas labor market indices benefit little
from reinvestment. On the average, the losses in GDP and its related indicators are
reduced by 2.0%. On the other hand, benefits for labor market variables are negligible
in size, but significant in terms o f percentage gains. For example, the benefit for em
ployment is more than a 50% improvement than without reinvestment, although it is
merely a 0.214% point recovery, resulting in m ore employment realized than without
168
carbon taxation. By and large, nearly 50% o f losses are recovered by reinvesting the
tax revenue.
Table 5 .1 4
Economic Benefits of Carbon Tax Reinvestment

($10/bbl Carbon Tax)
Without Reinvestment
With Reinvestment
GDP
- 4.5%
- 2.5%
Income
- 4.3%
- 2.4%
+ 1.9%
Consumption
- 4.4%
- 2.5%
+ 1.9%
Employment
- 0.044%
+ 0.17%
+ 0.214%
Wage
- 0.067%
- 0.044%
+ 0.023%
Investment
- 1.13%
+ 4.12%
+ 5.25%
Note:
5.3.2.5
Benefit1
2 . 0%
Benefits are calculated in terms o f gains in percentage point.
Induced Energy Efficiency Improvements

In addition to automatic energy efficiency improvements (AEEI) discussed
earlier, energy efficiency gains could be obtained through investment into energy
efficiency improvements and voluntary conservation efforts. Energy and carbon taxes
will prompt the energy users to invest in energy efficiency and renewable energy
technologies. If the revenue collected by energy and carbon taxes is recycled to fund
R&D and dissemination programs for energy efficiency and renewable energy
technologies as indicated in the previous section, the energy users effort would be
much more fruitful. Consequently, the GDP loss would be much less or zero. The
169
gain in energy effici-ency boosted by energy and carbon taxes w ill in turn increase
GDP by the following CES function:
In GDP = a + j3 \n K S + ykiT E M P + SQ nT O T - \n(A E E I + IEEI) +
where A E E I denotes automatic energy efficiency improvements and IE E I denotes

induced energy efficiency improvements due to energy and carbon taxation. Because
AEE I and IE E I are expressed in reduced energy consumption, the sign should be
negative in log-linear form. These factors o f energy efficiency improvements are
externally given . 9 2 The positive impacts calculated by this regression equation are
presented in Table 5.15.
As indicated by Table 5.15, all major economic variables are positively
affected by energy efficiency efforts by energy users. Interestingly enough, macroeconomic indicators show higher values than prior to carbon taxation. Total benefits
from efficiency improvement and reinvestment o f carbon tax amount to more than 5%
for GDP and its related indicators. More benefits are expected, i f more efficiency
gains (EEI) are assumed. This result is distinct from other studies that show negative
impacts o f carbon tax on national economy.
Based on this result, it can be generalized that, even i f high energy and
carbon taxes are levied for the purpose o f energy savings and reduction in CO 2 emis
sions, its impacts on the economy are negligible or rather positive. This is because the
As discussed in the section o f forecasting, most simulation models take automatic
energy efficiency variable (AEEI) as exogenous. Following this convention, this
dissertation sets IEEI as externally given. The positive effect o f IE E I on macroeconomic indicators will differ depending upon the assumption how much efficiency
gain might be attained by energy and carbon taxes. This dissertation assumes that the
efficiency gains in addition to the existing A E E I would be 50% and 100% for $5 and
$ 1 0 carbon taxes, respectively.
92
170
revenue is recycled within the economy, not leaking outside the economy. The carbon
tax is beneficial to the national economy in that it not only reduces energy consump
tion, but also brings benefits to the national economy. In contrast, if energy prices are
raised due to external forces, such as oil embargoes or the price hike by OPEC expe
rienced in the early and late seventies, the impacts on the national economy should be
negative because the price difference is forgone and never retrieved.
Table 5 .1 5
Economic Benefits of Carbon Tax Reinvestment

No Efficiency
Improvement
Efficiency
Improvement
B enefitlr2
GDP
- 4.5%
+ 1 .2 %
+ 5.7%
Income
- 4.3%
+ 1 .1 %
+ 5.4%
Consumption
- 4.4%
+ 1 .2 %
+ 5.6%
Employment
- 0.055%
+ 0.29%
+ 0.35%
Wage
- 0.32%
+ 2.36%
+ 2 .6 8 %
Divestment
- 1 .0 0 %
+ 4.40%
+ 5.40%
Note:
1
2
S.3.2.6

Indicates total benefits o f tax reinvestment and efficiency improvement.
Stabilization o f CO 2 Emissions at the Level o f 2000

In this section, another simulation will be conducted which evaluates the
impacts o f CO 2 emissions stabilization strategies. The Climate Change Convention
171
requires developed countries to reduce CO 2 emissions at the level o f 1990.93 This

international pressure upon Korea will be intensified, as international governance of
environmental regulation is taking shape. In response to its increasing global obliga
tion, Korea has sought an effective national strategy. Among the options under serious
consideration, only CO 2 stabilization at the level o f 2 0 0 0 will be examined in this
dissert-ation. In order to stabilize CO 2 emissions in 2020 at the level o f 2000, $20/bbl
carbon tax will be needed based on simulation.
Figure 5.11 shows the simulation result of $20/bbl carbon tax. Impacts of
this tax on major economic variables are presented in Table 5.16. Losses in GDPrelated indicators, including income and consumption, are more than 9%, whereas
those in labor-related indicators, including employment and wage, are negligible,
amounting to only 0.1%. However, if carbon tax were reinvested, losses in GDPrelated indicators would be drastically reduced, showing roughly 1.1%. In contrast,
labor-related indicators, if carbon tax is reinvested, show positive impacts. Invest
ment, in particular, shows the greatest improvement, approaching 10%. These results,
however, should be interpreted with some reservation. Because it is based on the
assumption that the revenue from carbon tax is immediately reinvested in energy
efficiency and renewable energy R&D program, more benefit is expected to obtain
than the cost incurred from taxation. In the real world, those benefits shown in Table
5.16 might not materialize as expected. For example, if some portion o f the revenue is
1997 Kyoto Conference required that ANNEX I countries (developed on reduce

GHG emissions including CO 2 by 5.2% from those of 1990. Korea was exempt from
this requirement. However, developed countries including the United States and EU
countries will continue to demand Korea to set a targeted reduction level.
93
172
used as subsidies for low-income family to compensate the higher energy prices
resulted from carbon taxes, benefits from reinvestment will be significantly reduced.
800000,
240000
C02 Emissions
GDP
e 600000
O
5
e 500000.
o
c
Q 300000
(9
hi
Business-As-Usua I
$20/bbl Carbon Ta t
Reinvestment
200000
O 80000
100000
95
15
00
Business-As-Usur
$20/bbl carbon T a
40000
90
20
95
00
Year
20
Year
Figure 5.11
CO 2 Stabilization Impacts on the Economy
Table 5 .1 6
Economic Impacts of 2000 CO 2 Stabilization

Without
Reinvestment
With
Reinvestment
GDP (109 Won)
717,891
- 9.7%
- 1 .1 %
Income (10 9 Won)
432,525
- 9.3%
- 1 .1 %
Consumption (109 Won)
359,535
- 9.5%
- 1 .1 %
Employment (103 )
25,562
- 0 .1 %
+ 0.5%
Wage (Won/month)
1707,963
- 0 .1 %
+ 3.5%
Investment (10 9 Won)
600,093
- 2.5%
+ 9.7%
Note:
173
5.4
Major Findings
There are several important findings from the policy analysis based on the
six scenarios that deserve to be highlighted.

First, as opposed to the generally accepted notion, energy and carbon taxes
are sim ilar in their effectiveness in reducing energy demand and CO 2 emissions.
Interestingly enough, the carbon tax is the least effective o f the two in reducing SO 2 ,
NOx, and CO emissions. The carbon tax has proved to be better only in the case o f
gas consumption, where it is one-third higher under the carbon tax than the energy tax.
The carbon tax shows a similar impact on oil and coal demand. Assessing which tax
measure is more cost-effective in reducing CO 2 emissions should be based on the
comparison between econ-omic losses and reductions in CO 2 emissions, in which case
the amount o f reduction in CO 2 emissions m ust be converted into monetary value.
Second, no previous research has provided a rationale for why continual
taxation on carbon emissions and energy uses is needed. As evidenced by the results
show n in Tables 5.9, 5.10 and 5.11, the maximum multiplier effect takes place several
years after a carbon or energy tax is levied, after which it then gradually tapers off.
Therefore, additional measures are needed to stabilize CO 2 emissions under the
desired level. The timing o f the maximum multiplier effect depends upon the coef
ficient o f an individual fuel, and occurs between 2009 and 2016. With the refinement
and sophistication o f this model, it is possible to estimate the timing o f such addition
al measures for the carbon tax effect. For example, the earliest peak impact o f the
carbon tax is predicted to occur in 2009, and that is when the reinforcement should
start w ith additional carbon taxes.
Third, simulation results show that the reduction in gas consumption is
sim ilar to that in oil, despite the carbon content o f gas being much less than that o f oil,
174
which is contrary to conventional knowledge. For example, if $10/bbl equivalent

carbon tax is levied, the reduction in gas consumption is 11.4 percent, whereas the
reduction in oil consumption is 13.5 percent . 9 4 This occurs partly because the price
elasticity o f gas demand is greater than that o f oil. This result is consistent with Shin's
study (Shin, 1990). As shown in Table 5.16, major studies drew different conclusions,
depending upon their estimation o f the price elasticity o f energy demand. Shin's result
is close to that o f this study.
Table 5.17 Impact o f Carbon Taxes on Energy Consumption

$5/bbl Equivalent Carbon Tax
Coal
Oil
Ryu
(1993)
Shin
(1990)
KEEI
(1993)
-37.9%
-19.8%
-8.3%
$10/bbl Equivalent Carbon Tax

Boo
(2 0 0 0 )
Ryu
(1993)
Shin
(1990)
KEEI
(1993)
(2 0 0 0 )
-33.5%
-16.3%
- 75.7%
-39.5%
-67.2%
-30.4%
-3.3%
-12.9%
-7.3%
-16.7%
-6.7%
-25.8%
-13.5%
Boo
Gas
-5.0%
- 6 .1 %
- 1 0 .0 %
-11.4%
C 02
-9.6%
-9.3%
-19.2%
-17.7%
Source: Kwak and Kim. Introduction o f Environmental Tax and Its Improvement. Korea
Environment Institute (KEI). Research Report. 1995
Finally, as opposed to the results o f other studies, energy and carbon taxes
would increase a nations welfare if levied and recycled for the purpose o f energy
savings and reduction in CO 2 emissions. Their impacts on the economy are negligible
In energy tax case, the opposite is the case. Reduction in gas demand is greater than
that in oil demand by energy taxation. (See Table 5.11)
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or mildly positive. Carbon tax prompts and encourages the private sectors to save
energy and reduce CO 2 emissions. In addition, revenues from carbon taxation, if
reinvested in energy efficiency improvement and environment-related technologies,
will have a positive impact on the national economy. It is true that some private
sectors will be harmed by carbon taxation. However, in the longer-term, energy effic
iency investment by industries prompted by carbon tax will enhance their competitive
edge in the world export market.
5.5

hi this chapter, a policy simulation is conducted based on a simulation
model developed in Chapter 4. The present model is designed to be versatile in deal

ing with major pollutant emissions and environmental qualities. Three types o f taxes,
i.e., an excise tax (ad valorem tax), an energy tax (specific tax), and a carbon tax
(specific tax) are provided in six scenarios: 1) a $5/bbl equivalent excise tax; 2) a
$10/bbl equivalent excise tax; 3) a $5/bbl equivalent energy tax; 4) a $ 1 0/bbl equiv
alent carbon tax; 5) a $5/bbl equivalent carbon tax; and 6 ) a $ 1 0/bbl equivalent carbon
tax. After brief discussion o f the excise tax, analysis is focused on two popular types
o f taxation: energy and carbon taxes. These energy and carbon taxes have been touted
as major policy tools for many years since global warming began to be studied. The
results from policy analysis from the present simulation model are consistent with
those from other studies (Jung and Yoo, 1995; Shin, 1990).
It is concluded that energy and/or carbon taxes alone are insufficient to
reduce CO2 emissions below the level o f 1990 by the year 2018 as promised. W ith a
$ 1 0 /bbl equivalent carbon tax, only an 18 percent reduction in CO2 emissions can be
expected. This reduction level is considerably above the level o f 1990 CO 2 emissions
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and occurs because rapid economic growth and the accompanying energy dem ands
that result from the Korean economy being still in the stage o f rapid grow th, which is
typical o f developing countries. Such level o f reduction in CO 2 emissions- could not be
attained even with a $2 0 /bbl carbon tax, which will bring about a serious im pact on the
national economy and is not politically tolerable. However, if other p o lic y options,
such as energy efficiency programs and inter-fuel substitution, are aggressively imple
mented, the target set for CO2 reduction to the level o f 1990 is attainable . 9 1 5 In this
regard, government interventions through controlling policy variables, sucdi as incen
tive programs for energy conservation and efficiency technology developinent and
dissemination, are highly recommended. In addition to such efforts by government,
international cooperation in technology transfer is urgently required.
Limitations and Suggestions for Further Research
It is a convention that every econometric model developed f o r the
purpose o f policy simulation closes with a combination apology-caveat th a t the model
would be improved by further work and that it may not be accurate for future ex ante
prediction. Over time every economy grows and its structure changes e ith er as a result
o f changes in exogenous variables or external socio-economic shocks. In fact, the
Korean economy and economic system are still in a volatile state and the structures are
subject to changes by external events and their impacts. The financial c risis from the
end of 1997 through 1998 is, o f course, an outstanding example o f what co u ld be in
If the tax collected is reinvested in R & D, as well as in the dissem ination o f energy
efficient technologies and renewable energy, a further reduction in CO 2 em issions
would be achieved. In addition, negative impacts on economy will be greaitly reduced
because such an additional investment in energy R & D will bring positive impacts on
the economy.
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store in an uncertain future. In addition to these uncertainties in predicting future

events, several limitations which are inherently grounded in the econometric model
itselfj in terms o f its structure as well as its data, are discussed in the following para
graphs.
Inter-fuel Substitution: This model attempts to reflect inter-fuel competi
tion by incorporating variables for substitute goods in the demand equation wherever
possible. However, in the transformation sector, this dissertation considers inter-fuel
substitution only based on existing trends and shares o f fuels in the long-term national
energy plan. However, actual inter-fuel substitution cannot be predicted by this
method. Several ingenious options such as a muti-logit model (Mori, 1992) and a
nested inter-fuel module (NEMS, 1994)96 have been suggested for this purpose. Other
models adopt as a satellite module the inter-fuel substitution model developed by other
studies. However, none o f them is interactively connected to the main program as part
o f a dynamic system. It m ight be useful to find a method to incorporate the inter-fuel
substitution into the model itself.
Mechanisms to relate air-pollutant emissions and air-pollution levels (airquality): This study does not consider mechanism that has been scientifically proven
to explain the relationship between emission levels and air-quality. Many studies have
already been conducted for this purpose, resulting in good models to explain the mech
anism . 9 7 Further research is suggested for incorporating these results into the model.
9 6 National Energy Modeling System (NEMS: EIA/DOE), an energy forecasting
model, was completed in 1994. Since then, it has been constantly revised. This model
reflects the inter-fuel substitution by considering relative price change, technology
development, and consumer's preference (Kydes and Shaw, 1997).
Several studies regarding this issue are initiated by major environmental research
institutes in Korea, including Center for Environmental Plan, Seoul National
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Adjustment and Calibration o f Coefficient Reflecting Long-Term Trend:

Regression equations estimated in this study are only representative o f the past trends.
The future is full o f uncertainties and the accuracy o f prediction for the future loses its
power as the period o f prediction extends into the longer term. Another concern is that
because the Korean economy has gone through an unprecedented expansion, the
model based on these observations is unstable and needs to be adjusted.
Socio-Political Dimension o f M odelling'. Recent efforts to define sus
tainable energy development include recognition o f socio-political dimen-sions, such
as equitable energy consumption and environmental justice (Munhasinghe, 1994;
UNDP, 1995). In a sense, sustainability is more closely related to this socio-political
dimension which provides a reference for the simulation model. Unfortunately, this
model could not incorporate this dimension, partly because the model design p e r se
does not allow for this dimension, and partly because regional, as well as historically
detailed, data needed to perform this task are simply unavailable at the present. How
ever, inclusion o f the socio-political dimension will eventually serve to enrich the
concept o f sustainable energy development. It seeks to maintain the stability o f social
and political systems, including the prevention o f destructive conflicts. It is our hope
that the present model would become a more comprehensive one by including this
essential element.
Sensitivity A nalysis'. Performing a sensitivity analysis is a standard proce
dure to test a models robustness with respect to variations in the assumed input data.
Sensitivity analysis is particularly important in long-term energy modeling because the
University, Korea National Institute o f Environmental Research, Ministry o f

Environment, etc.
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time span o f available data is too short to apply standard statistical validation tech
niques (Freedman, 1980; Nordhaus and Yohe, 1983). The simulation model devel
oped in this dissertation is versatile enough to exercise a sensitivity analysis. We can
explore the sensitivity o f the quantitative results with respect to variations in the as
sumptions for key policy variables such as oil prices, world GDP (a proxy for GDPF),
and the impacts o f tax revenue reinvestments on energy efficiency.
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Chapter 6
STRATEGIES FOR SUSTAINABLE ENERGY FUTURE IN KOREA
6.1
Introduction
This chapter discusses the strategies for a sustainable energy future in
Korea. For this purpose, several viable policy options, including energy and carbon
taxes, will be reviewed and evaluated in terms o f the transition toward a sustainable
energy system. First o f all, energy transition in general will be discussed using his
torical examples to highlight key points. A brief review o f historical will provides
insights into the present energy transition. A rationale for, and a characterization of,
the next energy transition also will be provided, emphasizing energy options for a
sustainable energy future in Korea. Secondly, barriers to the energy transition will be
examined to identify those measures required to transform the existing energy system
into a sustainable one. Lastly, based on these discussions, strategies for a sustainable
energy future in Korea will be presented. Discussion o f these strategies will focus on
energy and carbon taxation with regard to equity issues.
6.2
Transition toward A Sustainable Energy System

Human beings tend to endear the artifacts and symbolism constructed by a
social regime and disregard the critical social inquiry with the implicit belief o f the
immortality o f a social regime. The current energy regime, in this regard, is one o f the
most entrenched social superstructures ever built by the human race. After more than
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two decades since the oil crises o f the 1970s, the world is still governed by a fossil
fuel-based energy regime. Many believe that fossil fuels such as oil and coal will meet
energy demands well into the twenty-first century. Indeed, a review o f official energy
forecasts and expert studies o f the early 1990s reveals a rather surprising consensus
that dining the next few decades only minor changes will occur, yielding a slightly
more efficient, marginally cleaner version o f todays fossil fuel-based energy economy
(Flavin, 1996).
Oddly enough, most official reports by major international research insti
tutes, in the face o f growing concerns about global warming and possible shortages o f
oil and gas supplies, support the assumption that oil and coal will continue to run the
worlds economy. What has been largely neglected in their reports is the unchanging
fundamental truth: energy is scarce. Here, we face a serious but simple problem.
What is the use o f the current energy infrastructure and institutions, however efficient
and effective they may be, if there is simply not enough energy sources to fuel these
systems? What is the use o f internal combustion cars, roads, refineries, or gas stations,
without a steady and reliable supply o f crude oil? Such a system is doomed to a
catastrophic end.
A catastrophic end is inevitable when there is no freedom o f choice. The
time left before an impending catastrophe and the degree o f freedom o f choice are
positively related: freedom o f choice diminishes as catastrophe draws near. In this
respect a strategy o f "wait-and -see," which is patronized by a group o f hardcore
neoclassical economists, is the m ost unsuitable, the most risky, and the most costly
strategy for dealing with energy and environmental problems. Thus, the soundest
option is to plan for and guard against the worst possible outcomes.
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Energy systems evolve like living organisms. They should evolve into
another stage when the conditions and the environment in which they exist change.
During the last decade the worlds economic and social structures have undergone
rapid and substantial changes. These changes demand new modes o f thinking to
address social, economic and political issues. As concluded theoretically and em
pirically in chapters 2 and 3, current patterns o f energy consumption and projected
future energy trends are not sustainable. Thus, we need to determine what m ust be
done for a smooth transition into a sustainable energy future. In the following section
a history o f past energy transitions will be discussed to gain insights into the future o f
our energy system.
6.2.1
Historical Evidence
It is worthwhile to review the history o f past energy transitions. This may
provide insights into the future energy system and offer wisdom as to how to reach a
sustainable energy future without unnecessary conflicts. In order to understand the
changes yet to come, the best bet is to leam from the past. However, we need to admit
that the past experience gives us only a limited understanding o f an uncertain future.
The patterns of evolution observed in the might not necessarily repeat themselves in
the future. 9 8
Historically, all successful energy transitions were from low grade energy
resources to higher-grade energy sources (Reynolds, 1996; Odum, 1976). Higher
History offers a useful, though often neglected, long run perspective on current
energy problems. O f particular interest to those who seek to analyze the coming
transition from petroleum to alternative sources o f energy is the history o f the tran
sition from coal to oil in the early part o f the twentieth century.
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grades o f energy are required as economic activities became more energy intensive and
sophisticated. This upgrading trend has also been coincident with changing patterns of
human settlement, technological innovation, and economic conditions. Urbanization
provides a good example o f this parallelism. As a new kind o f human settlement,
urban agglomerations required a much higher concentration o f energy per acre than
more rural, dispersed forms of settlement. Only cities endowed with high-grade
energy sources and an efficient energy system have survived in the fierce competition
between cities (Odum, 1976).
In each energy transition, three factors, technology, economics, and insti
tutional structure have played an important role. Technology is closely related to the
convenience in fuel use. Solving energy problems, today as in the past, depends on the
availability o f technologies and the rate at which they evolve. The interplay o f energy
and technology, as exemplified by the three phases of the industrial revolution, drives
energy transitions (Davis, 1991). Economics dictates the costs o f production and
delivery system and is reflected in the price o f fuel. Institutional structure, which is
built upon socio-political structure, governs the entire fuel cycle: that is, the explor
ation, development, production, transportation, and consumption o f energy sources.
Let's examine the past two energy transitions in terms o f these three aspects.
From wood to coal: The first energy transition that occurred in the
Industrial Revolution was from wood to coal energy sources. This implies a transition
from low-grade energy (renewable natural energy) to high-grade energy (fossil fuels).
Until the mid-nineteenth century, the world was powered almost entirely by renewable
energy resources: wood for heat and smelting, water wheels, wind mills, sailing ships,
and animal power for mechanical energy. Coal was first used to replace wood as a
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source for heating and for smelting iron. Diminishing wood sources and the intro
duction o f the steam engine, which required the higher quality energy, precipitated the
transition from wood to coal energy. In the latter part o f the 19th century, coal became
the primary energy source for industry. Wood, the energy source for households, was
growing scarcer and coal was cheaper and more convenient than wood. Coal is both
the most abundant fossil fuel worldwide and the most environmentally damaging.
From its mining to its consumption, coal takes a heavy toll on the land, water, and air.
In addition to mining impacts, it is a major source o f SOx, NOx, particulate, and CO2
(greenhouse gas). As the industrial technology shifted away from coal to one based on
petro-chemistry, coal lost many o f its important markets such as transportation and
buildings. The only m ajor market now left for coal is electric pow er production. The
decline in coal was precipitated by the convenience, cleanliness, and efficiency o f new
competing technologies (Melosie, 1992).
From coal to oil; The second energy transition replaced the coal-based
energy system with an oil-based energy system at the start o f the twentieth century.
There was a genuine reluctance at first to use oil as a heating fuel because o f the abun
dance o f coal and wood, the high price o f refined oil, and the lack o f suitable burning
equipment. These obstacles were eventually overcome and by 1910 about one-half of
total oil production was being burned as heating fuel by railroads, manufacturers, the
navy, and electric utilities. Strangely enough, gasoline was at first a waste product of
oil refining. However, right after the first internal combustion engine using gasoline
appeared, gasoline became the major source o f fuel in transportation. Unlike coal, oil
is neither abundant nor ubiquitous. All the industrial countries, including the USA,
rely on the Middle East for a significant portion o f their petroleum needs. Natural gas,
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like gasoline, was first considered a useless by-product o f oil production and was
normally flared at the well or vented directly into the atmosphere. It was not until the
late 1920s that safe and efficient natural gas-transporting technology became available,
enabling the gas industry to expand rapidly.
The third energy transition is now in progress. This new energy transition
is different from the previous o n e s." The major energy sources in the previous two
were superseded by new energy sources on the basis o f convenience, abundance, and
cost. But this time the situation is totally different. There are no obvious sources o f
cheap, abundant, and safe power to replace the current dominance o f fossil fuels
(MacKensie, 1992). For a b rief time in the fifties, an age o f cheap nuclear energy
seemed to provide a way out o f the fossil fuel era. However, with nuclear power
costing more than five times what it once did and construction being abandoned
worldwide, it has largely been discredited (Flavin, 1994). Based on this reality, any
new energy system must be built with a variety o f energy options such as renewable
energy and other new sources o f energy characterized by mixed forms o f high-grade
and low-grade energy sources. Low-grade energy is low entropy energy, which is
beneficial to natural ecosystems. High-grade energy is necessary for specialized
applications.
99 History does not teach lessons that offer solutions to current energy-related
problems, but it does provide insights that are useful in understanding an on-going
process o f energy-related change (Pratt, Joseph A. The Ascent o f Oil: The Transition
form Coal to Oil in Early Twentieth-Century America Energy Transitions, LongTerm Perspectives. AAAS Selected Symposia Series. Edited by Lewis J. Perelman et
al. 1981. Westview Press, Inc. (P.26)
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6.2.2
The Next Energy Transition

Despite apparent conflict, and differing viewpoints regarding the shape o f
the energy future, a consensus is being reached on the inevitability o f a transition

toward a sustainable energy system. A growing number of concerned experts are
reaching a powerful consensus on the driving forces for the next energy transition.
They agree that the next energy transition will not take place based on such factors as
abundance, convenience, and economics. Rather, shaping o f the future energy system
will hinge upon two new dominant principles: resource scarcity and environmental
concerns. These principles will be bome out in three ways: First, prices will increase
as resources become more scarce; second, environmental costs must be accounted for,
if not by prices, then by policies; third, institutional change will be required for the
transition to a sustainable energy future. Each o f these driving forces deserves detailed
discussion.
6.2.2.1
Resource Constraints and Responses in Energy Demand

Resource constraints'. Conventional energy sources such as oil and natural
gas are becoming more scarce. Their availability is expected to come under pressure
during the middle part o f the next century unless global energy consumption patterns
are not drastically changed. The lack o f fossil fuel reserves would place less o f a
burden on the energy system if energy efficiency, energy conservation and renewable
energy sources were incorporated into the total energy mix. The earlier these actions
are taken, the greater the extent to which energy security will be guaranteed.
In the coming years, more and more countries, who were once oil export
ing or self-sufficient countries, will turn into oil-importing countries. This major shift
in the global supply curve will create uncertainty over oil supplies and will place up-
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ward pressures on prices (WEC, 1993). In addition, the costs o f exploring for, and
extracting, oil and natural gas are also expected to rise as activity concentrates upon
areas with harsher natural conditions (e.g., Siberia and some continental oil and gas
reserves) and upon marginal reserves once abandoned as uneconomic.
G eovolitical Constraints'. Adding to the already unbearable pressure from
limited reserves are geopolitical constraints. Reserves o f fossil fuels, particularly oil
and natural gas, are concentrated in a few regions and countries. Most o f these regions
and countries are perceived to be subject to geopolitical forces which may disrupt
supplies or create price volatility. As already known, major oil and gas reserves are
located in the Middle East. Only Arab oil producing countries, the so-called AOPEC
(Arab Organization o f Petroleum Exporting Countries) will continue to be oilexporting countries well into the next century. As a result o f their market dominance,
they will be able to easily control oil prices. Oil prices, then, will be completely at the
mercy o f a small group o f unpredictable and uncontrollable AOPEC nations who are
often hostile to the m ajor Western oil importing countries. Consequently, it is likely
that the future oil supply will be more often disrupted by the unstable geopolitics in
this region.
Demand Side Response: Projected energy demand could hit supply capac
ity o f conventional energy sources in the early twenty-first century. This conclusion
becomes obvious when we consider population growth in developing countries and the
decreasing reserve/production ratio.100 Alternative supply options that rely on sources
100 The existing R/P ratio in most literature is misleading in that they assume that pro
duction stay constant in the future. However, production will increase in the course o f
time as long as world economy is growing. Thus R/P ratio o f 40 years for oil reserve
should be incorrect unless oil reserve is assumed to be increasing over long time.
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other than coal and nuclear probably cannot be made available in sufficient quantities
within that timeframe. As aggregate energy supplies become hard-pressed to meet
global energy demands, equity in energy consumption will become a critical issue. As
supply constraints tighten, only rich countries and rich social classes will be able to
afford the high price premiums placed on scarce resources. This phenomenon is often
observed in developing countries.
The expanding use o f all energy sources fossil fuels (including tar sands
and oil shale), renewables and nuclear energyto meet the ever-increasing demand
for energy is not an optimal solution. The premise that civilization is sustained only
by increasing the consumption o f higher-grade energy sources is not tenable.101 This
myth is no longer valid as shown by the experience o f many developed countries
where the relationship between energy consumption and economic growth has been
de-coupled since the early 1980s (Wang et al., 1987). But the continued prevalence of
this myth in many developing countries including Korea, negatively affects the devel
opment o f sustainable energy policies. This myth, however, has begun to be unveiled
by the informed observers in Korea.
Two demand-side technologies to response to a growing scarcity o f energy
supplies are energy efficiency and conservation. The link between energy consump
tion and economic growth has been coupled as evidenced by real-world examples and
theory. The experience o f the two oil embargoes in the 1970s raised fears that a
reduction in energy consumption (or supply) would generally threaten economic
101 Bassala (1982) introduced the energy = civilization equation to explain the
prevailing myth that the more energy we use, the more economic growth we have. In
other words, economic growth cannot be sustained without continuing consumption of
significant amount o f energy.
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development. Many studies, however, have shown the adaptability o f an economy to a

gradual reduction in energy consumption if accompanied by increases in efficiency o f
energy use. In the last two decades the industrialized countries have all experienced
growth in GNP that has outstripped growth in energy consumption, indicating a steady
decline in energy intensity. Japan, for example, has attained a high level o f economic
growth by shifting away from energy intensive industries toward non-energy intensive
ones.
Another response is a growing awareness that what counts is not how
much energy is needed, but rather what services energy delivers, hi other words,
energy consumers are more concerned with the level o f service energy provides than
with pure energy itself. As Godemberg et al. (1995) argued, energy is an instrument of
sustainable development, or more specifically an instrument for socio-economic devel
opment. This reconceptualization o f energy as a service is a powerful new message to
support energy efficiency and conservation efforts in developing countries as well as
industrialized countries. It concerns not only the way we use energy but also current
patterns o f energy production and distribution. Consumer choice nowadays is not
limited strictly to how energy is used, but extends and affects the way energy is pro
duced and delivered. This is well exemplified in the case o f U.S. electric utility re
structuring where end-users can choose their electricity suppliers. A sustainable
energy future, thus, will be increasingly tied to and dependent upon consumer prefer
ence.
6.2.2.2
Environmental Concerns
Potentially, the most powerful force driving the transition to a sustainable
energy system is a growing concern over the environmental degradation brought on by
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the excessive use o f fossil fuels. The end-user o f energy is now beginning to recog
nize that market transactions do not capture m any o f real costs associated with energy
production, distribution, and consumption. In the past, energy suppliers had limited or
no responsibility for environmental problems incurred at various stages o f exploration,
production, processing, and delivery. Thus, the costs o f environmental damages asso
ciated with each stage were not fully reflected in fuel prices. Currently, not only in
developed countries but also in many developing countries, energy supply facilities
have encountered major opposition founded on environmental concerns air, water,
and soil pollution, climate change, aesthetic impacts, etc. It is now clear that environ
mental concerns are no longer peripheral, but rather they are central to choices o f
energy technologies. In response to these develop-ments, various techniques and tools
have been developed to assess the environmental costs such as benefit-cost analysis
(BCA), contingent valuation methods (CVM) and hedonic value methods (Dixon et
al., 1988; and Field, 1994). Even though these techniques may be primitive and at
times too arbitrary and subjective, they indicate significant progress in assessing once
completely neglected costs.
Environmental degradation is not merely a cost-benefit issue that can be
sorted out through careful accounting. It has also become closely related to and bound
up with issues o f social equity and justice. The distribution o f the costs and benefits of
large-scale energy projects in both space and time is a critical issue. Many large-scale
energy supply projects such as oil refineries, power plants, and district heating
facilities have the characteristic that the benefits occur in one place or time, while
major costs occur elsewhere in space or time without any adequate mechanisms for
compensating the losers. The distribution o f costs and benefits poses major political
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issues, both internationally and domestically. In this context, local peoples partic
ipation in decision-making processes regarding large-scale energy supply projects
becomes one o f the preconditions for addressing the equity issue.
6.2.2.3
Institutional Change
In addition to the two responses to resource scarcity issues and environ
mental concerns discussed so far, a change in energy-related institutions is called for.

The past two energy transitions, from wood to coal and from coal to oil, were relative
ly easy as they were propelled solely by market forces. These transitions were smooth
and they did not require government intervention. Competitions between rivalries
were unrestrained, with flows and exchanges in the market dictating the ultimate
outcomes. In this context, the most important decisions were made by energy indus
tries and consumers based on cost and convenience. This pattern, however, will not
continue to work once resource constraints and environmental externalities are taken
into account. Thus, the next energy transition cannot be market-driven, unless radical
changes in the structure o f the current market are undertaken.
Complete reliance on the free-market as a guide to past energy transitions
is the primary reason for the serious environmental we now face. A great deal of
waste resulted from the unrestrained competition between oil and coal. In the absence
o f a major candidate to meet the future energy demand, there is a growing concern that
the problems associated with the current energy regime will intensify unless the gov
ernment intervenes in the energy market. The governments lack o f either the insti
tutional capacity or ideological rationale for monitoring and guiding the last two
energy transitions suggests the extent to which public intervention will be required in
the next energy transition. This transition calls for creating new institutions as well as
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reinforcing existing institutions that have been crafted within the context o f an open,
democratic political system. In this way, fair rules will regulate competition between
different energy alternatives and will facilitate a peaceful transition to a sustainable
energy future.
6.3
6.3.1
Energy Options for a Sustainable Future in Korea

Energy Efficiency and Conservation
As discussed in chapter 3, energy efficiency and energy conservation are
the two m ain demand-side options for sustainable energy in Korea. Energy efficiency
is one o f the m ost effective measures to reduce not only energy demand but also the
level o f air pollutant emissions. For example, the carbon intensity o f world economic
production dropped by more than 20 percent during the period 1970, and 75 percent o f
this was achieved due to energy efficiency measures (Munasinghe, 1996).
After the two oil crises, Korean energy efficiency continued to improve
until 1988 showing a decreasing trend in energy intensity o f GDP from 0.53 in 1981 to
0.49 in 1988.102 Entering thel990s, however, energy intensity has begun to increase,
due to the promotion o f energy intensive industries. Koreas energy intensity is much
higher in comparison with other major industrialized nations: three times that o f Japan
and two times those o f France and Germany. This gap indicates that Korea still has
much room left for energy efficiency improvement. According to KEEI and CEEP,103
102 Energy intensity here is in terms o f total energy consumption in thousand TOE
divided by GDP in million US dollars.
103 Center for Energy and Environmental Policy, University o f Delaware, USA. CEEP
initiated a study under the project name o f Joint Institute o f Sustainable Energy and
Environmental Future for Korea (JISEEF).
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25-30 percent o f energy demand could be saved through implementing policies to

improve energy efficiency.
There are a myriad o f technological options that Korea could potentially
utilize in order to improve energy efficiency. Among the supply-side high-efficiency
technologies, advanced power generation technology has the potential to produce a
44% saving in energy (Levine et al., 1991). Besides supply-side options, significant
reductions in energy demand can be achieved by increasing the efficiency o f end-use
products. High-efficiency technologies that had been developed in the industrialized
countries during the post oil-crisis era can be easily applied to end-use appliances and
equipment in developing countries. According to Amory Lovins (1990), more than
40% o f energy demand could be reduced through utilizing the high-efficiency tech
nologies readily available in the market.
6.3.2
Fuel Switching
Fuel substitution in the industrial and transformation sectors is an import
ant element in building a sustainable energy future in Korea. At present, natural gas is
seen to be a good candidate for fuel switching away from coal or oil. Natural gas can
be used as a transitional fuel in the effort to establish a sustainable energy system.
Natural gas is environmentally less harmful than other fossil fuels and nuclear energy.
It has good applications for the electric power industry and transportation, which are
the two most energy consumptive sectors in the economy. Natural gas-fired power
generation typically achieves a 30-50 percent reduction in carbon emissions over a
coal-fired generation system o f similar size.
Korea has been highly successful in fuel switching. A significant portion
o f electricity generation is currently powered by LNG. LNGs share o f Koreas fuel
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mix in power generation reached 13.4 percent in 1997. KEPCO has a long-term plan
to raise LNGs share o f the fuel mix to 25 percent by 2015. District heating and town
gas manufacturing are also major consumers o f LNG. LNG is expected to meet 17
percent o f the total primary energy demand in 2020.
Renewable energy does not share the bright future o f LNG. Renewable
energys share o f total energy demand is expected to reach a m ere 3% in 2020, based
on the simulation model in this dissertation. Even less encouraging is a forecast by the
KEEIs report, Basic Long-Term Plan fo r E nergy Demand and Supply, 1998. Expand
ing the role o f renewable energy in Korea calls for an almost immediate and radical
change in energy policy and consumer behavior. In one very optimistic scenario, Boo
(1993) estimates that, given the appropriate technological and financial support, new
and renewable sources o f energy could meet more than 10% by 2020.104 A more
detailed discussion o f this estimate will be provided in the following section.
6.3.3
New and Renewable Energy Sources

There are a number o f future energy sources that could replace the two
major current energy sources in Korea, oil and coal. Four technologies have emerged
as living up to many significant expectations for short-term policy goals in Korea:
biomass, solar thermal, photovoltaics, and wind. For the longer term, fuel cells,
geothermal, hydrogen, and nuclear fusion are often referred to as promising new
energy sources to fill the supply gap when oil and gas are phased out.
According to Boo (1993), the economically recoverable supply potential
o f new and renewable energy sources in Korea amounts to 21m illion TOE. This
104 Boo, K. J. 1993. Commercialization o f Renewable Energy Technologies. KEEI.
195
potential, i f harnessed, could m eet more than 20% o f the current final energy demand.
Table 6.1 describes the new and renewable energy potential in Korea. The total
resource base amounts to 117 billion TOE, most o f which is accounted for solar
energy. It is unlikely, however, that all o f this potential will be utilized. Among the
sources o f new and renewable energy, solar thermal and municipal waste-to-energy are
the most promising. In the following section a more detailed description o f each
renewable energy source and its applicability in the Korean context is given.
Table 6.1
New and Renewable Energy Potential in Korea (Unit: Million TOE)
Resource Base
Technically1
Recoverable
Reserve (A)
Economically
Recoverable
Reserve (B)
(B/A)*100
Solar Energy
11,600.00
2,800
10.10
0.36
Wind Power
16.89
2.6
1.56
61.8
Micro-Hydro
0.64
0.46
0.32
69.7
10.47
5.11
3.67
71.8
Municipal/Indust
rial Waste
4.55
3.55
2.47
69.6
Tidal Power
4.69
4.35
2.85
56.1
117,314.30
28,160.20
20.97
0.74
Biomass
Total
Note: 1 Renewable potential that can be recovered by the current technology.

2 Technically recoverable potential that can be economically recovered.
Source: Boo, K.J. 1993.
Biom ass: Biomass is probably the oldest type o f renewable energy in
human history. Solar energy is stored through the process o f photosynthesis in plants
and can be converted back into usable energy through the combustion o f plant
196
material. Biomass has dual advantages: it is available everywhere; and it balances the
carbon dioxide consumed during photosynthesis and the carbon dioxide released
during combustion. Thus, the use o f biomass would make no net contribution to the
existing carbon dioxide in the atmosphere if it were produced at a sustainable rate
(Weinberg etal., 1990).
Traditionally, biomass has been used in the form o f firewood for space
heating and cooking. New uses for biomass have also been developed in the past two
decades: as a feedstock in the creation of alcohol fuels and for electricity generation.
Two types o f alcohol, methanol and ethanol are produced from biomass. The principal
market for alcohol fuel is the transportation sector. Whether mixed with gasoline or
substituting for gasoline, alcohol fuels achieve a significant reduction in CO and NOx
emissions. Brazil, United States and Japan are the leading countries in R&D and
commercialization o f alcohol from biomass. Brazil is the first nation to attempt to
substitute the gasoline with alcohol from sugar cane.105
Electricity generation based on biomass can be cost-effective by employ
ing the gas turbine. As a combined power and heat generating option, gasified
biomass generates electricity and hot exhaust gas which is then used to produce steam
for industrial processes or district heating. In this way, energy efficiency can be
105 This national program o f alcohol to substitute gasoline became stalemated when
world crude oil prices (in real terms) dropped to the level o f the pre-oil crisis era and
commodity prices o f sugar rose in the mid-eighties. However, the Brazil government
could create another profitable market for alcohol: electricity generation. At Brazilian
distilleries the economic benefits o f electricity and heat co-production could make
alcohol competitive with current, low oil prices. A t the present level o f cane produc
tion, gasifier-gas turbine system could produce about half as much power as is now
generated by all sources in the 80 developing countries that produce cane (Weinberg et
al., 1990).
197
increased by as much as 60-80%. In fact, a biomass-fired combined cycle turbine

probably could be commercialized more quickly than coal-based combined cycle
generation, because biomass is easier to gasify and generally contains little sulfur.
Biomass potential in Korea is second only to solar energy; but immediate
availability o f biomass is greater than that o f solar energy. According to the Table 6.1,
the recoverable potential o f biomss, including industrial and municipal wastes,
amounts to 6.2 million TOE. In recognition o f this potential, the Korean government
has been implementing a variety of policies to utilize bio-energy.
Solar Energy: Typically, solar energy is harnessed in two ways: via solar
thermal technologies and photovoltaics. A variety o f solar thermal technologies have
been developed: solar hot water systems, solar thermal electricity generation, and solar
space heating. Solar space heating and solar hot water systems are presently the most
widespread forms o f solar energy in commercial and residential uses. Solar thermal
electricity generation is another way to utilize solar energy. It employs reflective solar
collectors that track the sun and concentrate its heat and light. The concentrated sun
light heats a fluid, which is used in a power-generating cycle. Solar thermal systems
are only operable and feasible in vast sunny areas, such as the deserts in Nevada and
California in the U S.106
Photovoltaics (PV) is another way to utilize solar energy. In a PV panel,
photons absorbed in a semiconductor (solar cell) produce an electric current. PV is a
quiet and clean energy source in need o f minimal maintenance and well suited to
remote or arid regions. Its scale-flexibility is another strength o f PV. PV is applicable
106 Several commercial solar-thermal electric plants, having a total generating capacity
o f 275 megawatts, have been installed in California Mojave Desert.
198
to the rooftop o f a building, a residential house, or a large-scale electric generation

plant. PV can also be connected to a grid network as a distributed utility applica
tion.107
Solar energy potential in Korea is significant, since solar insolation in
Korea is above the worlds average. As shown in Table 6.1, the resource base o f solar
energy amounts to 11.6 billion TOE o f which 10.1 million TOE is regarded as
recoverable. This supply potential accounts for nearly 50% o f the entire renewable
energy potential. Various programs were worked out to promote dissemination o f
solar energy technologies during thel980s and they were successful to some extent.
However, beginning in the latel980s falling oil prices started to discourage public and
private efforts in this direction. As government incentives were curtailed, consumers
enthusiasm for solar energy weakened. Despite disappointing performance in solar
thermal programs, serious attention is still being paid to PV applications in remote
islands and in niche markets such as street lighting and parks. The potential demand
in these niche markets is estimated as substantial.
Wind Power: Windmills have been used to grind com since ancient times,
and they are still widely used to pump water up from wells on the US western farms.
A new way to utilize wind power was found in electricity generation. Electricity
generation by wind power is popular in the coastal areas o f northern European
countries, such as Denmark and Germany, as well as in California where wind is
107 Research has shown that a utility and its customers can benefit from targeted
building integrated PV (BIPV) applications in the areas where a grid system's trans
mission costs are high due to congested lines. A distributed utility (DU) analysis that
evaluates localized benefits can identify high-value PV applications in an emerging
competitive electricity market. CEEP's research suggests that DU benefits can increase
benefit-cost ratios an additional 10-30% (Letendre et al., 1998b).
199
abundant. These areas have so-called wind farms, with typical generating capacities o f
several megawatts.108 Various types o f wind turbines have been developed: twoblade, three-blade, and Darius type. New wind turbines are not like traditional
windmills; they have large propeller blades mounted on high towers, with generating
capacities o f several hundred kW. Due to this economy o f scale, electricity generation
costs associated with wind power have decreased close to the level o f conventional
sources o f electricity generation.
The wind power potential in Korea is assessed as significant, totaling 17
million TOE. Technically proven supply potential is smaller, but still large, amount
ing to 2.6 million TOE. Recognizing this potential, the Korean government offers a
variety o f incentives to promote R&D activities as well as the commercialization o f
wind power. However, the performance of wind power so far has not been encourag
ing due to the failure to design a wind power system suitable to the characteristics o f
the wind resource in Korea. Currently, new types o f wind power systems with dif
ferent blade types, blade sizes, and tower heights, are being developed by the Korea
Institute o f Energy and Research (KIER) and a private company, Korea Fiber Inc., to
take advantage o f Koreas wind resources.
Hydropower: Hydropower is one o f the m ost highly utilized renewable
energy sources. Hydropower is classified into conventional large-scale hydropower
and small-scale hydropower. Hydropower is a very clean type o f electricity gener
ation, but recently, large-scale hydro-dams have become targets o f environmental
w in d farms at Altamont Pass, California, contain 7,500 wind turbines owned and
operated by independent companies who sell the electricity to Pacific Gas & Electric.
During the 1980s mass production techniques and improved deployment and operat
ing strategies cut the cost o f electricity from wind tenfold.
108
200
concern. Frequently discussed problems include: the loss o f large land areas to hydro
electric facilities, the potential for catastrophic dam failure, and various health and
ecological worries.109 Y et if electricity is used wisely such that growth in demand is
slow, small-scale hydropower could meet a significant fraction o f future electricity
needs (Weinberg et al, 1990). No new large-scale conventional hydropower is planned
in Korea for various reasons, but small-scale hydropower by itself still has a modest
supply potential o f 0.64 million TOE, the smallest among renewable energy potentials
in Korea (see Table 6.1).
Other Prom ising New Energy Sources'. In addition to the renewable
energy sources above mentioned, fuel cells and hydrogen are also promising future
energy sources in the long-term. In fact, fuel cells and hydrogen are complementary
since the principal input fuel in fuel cells is hydrogen. Hydrogen has long been touted
as the fuel of the future. If an inexpensive way o f producing hydrogen from the vast
sea were found, our energy future would be secure. One o f the keys to the efficient use
o f hydrogen is the fuel cell, which is thought o f as the silicon chip o f the hydrogen
economy (Lessen and Flavin, 1994). Hydrogen generates electricity and some heat,
with water when combining with oxygen in a fuel cell. As in the case o f PV, fuel
cells are applicable in any scale from a car engine to a combined heat and power
(CHP) plant. Many homes and commercial buildings could have reversible fuel cells
which are capable o f producing hydrogen from electricity and vice versa.
109 Recently, the Korean government, in the face o f the severe environmental protest,
had to cancel the multi-purposed hydropower project planned for the Dong-Kang
River in the Kang-Won Province where pristine natural beauty and ecological diversity
are well preserved.
201
Based on the above discussion o f the supply potential for each new and
renewable energy source, long-term projections o f future energy sources can be under
taken. Long-term estimates o f the future energy sources are generally conducted
within two time frameworks, the near long-term (10-20 years) and the far long-term
(30-50 years).110 The watershed event in these two time frameworks is the timing o f a
decline in oil production, hi the near long-term framework, the only technologies that
can play any quantitative role are those which are readily available in the market. We
are already familiar with all the essentials o f these technologies; it is the speed with
which they can be introduced where most o f the doubts come in. The far-term time
framework is more remote and also contains technologies o f the kind that are now
found in the research and/or development stage. Here the uncertainty is much greater,
o f course, but we still know enough to be able to draw some qualitative conclusions.
6.3.4
Integrated Resource Planning (IRP)

A nations energy programs are generally implemented to achieve national
economic development. Accordingly, it is essential that energy programs are planned

and implemented vis-a-vis those of other parts o f the economy. Because energy is
closely interconnected with economic activities, energy should be cost-effectively
deployed in the economy. This requires an integrated approach that helps decision
makers formulate policies and respond to market signals in order to encourage effi
cient energy production and use. Such an integrated approach to decision-making
emphasizes a hierarchical conceptual framework for sustainable energy development
110 A similar division o f the long-term time framework is found in the study by Mans
Lonnroth, et al. Energy in Transition, A Report on Energy Policy and Future Options.
1980. University o f California Press. Berkeley, Los Angeles.
202
that can be implemented through a set o f energy supply and demand management
policies (Munasinghe, 1996).
All the options mentioned in the previous section could be systematically
integrated into one concept: integrated resource planning (IRP). The concept o f ERP
was developed in the United States as a part o f an objective-oriented and user-driven
energy planning strategy. In contrast with traditional approaches, which considered
energy supply and demand management as separate entities, the concept o f integrated
planning requires consideration o f the tradeoffs between both types o f alternatives on a
common basis. As a result, energy users can benefit from the best allocation o f
resources by energy suppliers. Today, this concept has been widely adopted by
governmental energy regulatory agencies in North America and is also gaining accep
tance in Japan and Western Europe.
IRP is an evolving concept that should be modified and refined by changes
in economic, energy, and social conditions. For example, IRP would be conceptually
enriched by adding advanced concepts such as concern for the environment and social
equity. IRP should be designed to assess a variety o f demand- and supply-side
resources to meet customer energy service needs cost-effectively and equitably. Thus,
the key characteristics o f IRP ought to include explicit consideration o f DSM tech
niques, environmental costs, and the social goals o f equity and democratic partici
pation.
6.4
Barriers to the Transition towards a Sustainable Energy Future

The discussion so far has focused on the inevitability o f an energy
transition and the characteristics o f a future sustainable energy system. We must now
ask, how can we accelerate this process? Many strategies have been proposed for this
203
purpose. Most o f the literature addresses structural as well as behavioral change

through the reform strategy as well as the institutional strategy. Before this issue is
fully addressed, it is appropriate to identify the major barriers to a smooth transition to
a sustainable energy future.
Despite the fact that a new energy transition is under way, many experts
continue to believe that the world is still firmly stuck in the fossil fuel age. The two
oil crises o f the 1970s accelerated efforts to shift to other energy sources. It seemed
plausible at that time that nuclear power and coal would take over the position enjoyed
by oil. By the early 1980s, however, the world began to focus on the extensive
environmental damage that resulted from the heavy use o f fossil fuels, such as acid
rain and climate change. Recognizing the forceful resistance to a new energy
transition, Flavin (1993) argued that the key challenge is political and that energy
policies must be overhauled to encourage a major energy transition. However, many
barriers exist that will make it difficult to reshape energy policies. These barriers are
institutional (energy regime), economic, and behavioral or attitudinal. Among them,
institutional barriers are the most difficult to overcome. The following are the major
aspects o f the institutional stalemate that has resulted from excessive dependence on
the conventional energy system.
Energy = Civilization: Since the industrial revolution, development based
on technology has meant more production o f goods and services through more con
sumption o f resources and energy (Basalla, 1980). Global environmental degradation
has been caused by resource depletion and energy consumption on a large scale. As
long as development is evaluated in terms o f quantitative indicators such as GNP and
income, these associations are inevitable. It is like a chain reaction that can not be
204
stopped without eliminating one o f the links. We must de-couple the relationship
between economic growth and energy consumption or else economy-driven energy
consumption will inevitably produce environmental degradation.
Enerev Regim e'. The fossil fuel energy system represents a powerful
energy regime." Langdon Winner (1982) argued that to provide the variety o f goods
and services that sustain modem societies, such societies have created elaborate sociotechnical systems that link production, distribution, and consumption in coherent
patterns. These institutions, he continued to argue, together with the physical tech
nologies they employ, can be characterized as a regime under which people who use
energy are obliged to live. Conventional energy regimes built under social contracts o f
this sort have some interesting political features. They tend to be extremely large,
complex, centralized, and hierarchically managed. They are only concerned with
stable revenue generation and profit maximization. This megalomania and sophis
ticated technology, based on the obsession with efficiency and economies o f scale, has
contributed to the supply o f cheap and reliable energy (Winner, 1982).
Each energy regime has faced a different set o f constraints, determined by
its natural setting, resource endowment, labor organization, technology, and social
structure as a whole. These constraints are not fixed; they are in the process o f
constant change and evolve along with the rest o f society. Energy regimes, after
having transformed from wood through coal to oil, are now undergoing a transition
from fossil fuel to a cleaner and safer energy system
Institutional Inertia: An energy regime is embodied and perpetuated in the
form o f institutions. Current energy institutions, built upon fossil fuels and nuclear
power, came to control the social, political, and economic systems by which energy
205
production, transportation, and consumption are governed. The current institutional

structure resists change and tries to protect the entrenched interests o f its members.
W ithin such a system, the activities o f work, management, finance, planning, market
ing, and the like are coordinated in highly developed institutional arrangements under
which people who use energy are obliged to live.
Because the value system and the belief system o f a society are incor
porated into institutions, it is virtually impossible to change the institutional structure
o f society overnight. Every institution has an in-built resistance to a change, an inertia
that must be overcome. To some extent, the legislative and executive offices o f the
government are responsible for this institutional inertia. Institutional rigidities (inertia)
and the consequent unwillingness o f policy-makers and politicians to develop the
means to attain their stated ends are among the causes o f incompatibility between the
words and actions (W EC, 1993: 43).
Any energy system requires some form o f organization a pattern o f co
operation among individuals and institutions that together form a social pattern. If
another new energy system emerges, this imposes another form o f cooperation and
rules, which implies that the social patterns associated with the old energy system must
be changed. Here lies a cardinal component o f institutional inertia: the sunken costs
o f individuals with their present working routines and present competence. This
human capital resists change (Mans et al., 1980)
6.5
Strategies of Energy Transition for Korea

Based on the above observations and analyses, including the results o f the
simulation analysis, several institutional development options can be suggested. These

are:
206
1) Strengthen existing national institutions based on the identification

and evaluation o f barriers and policy options, including the Korea
Energy Management Corporation (KEMCO), the Korea Energy
Economics Institute (KEEI), and the Korea Environment Institute
(KEI);
2) Develop strategies for key policy actors, such as the government, the
energy industry, research institutes and universities, and financing
institutions;
3) Promote a new institutional framework for the new energy system,
based on efficiency and renewable energy sources; and
4) Construct a market approach that considers the internalization o f
externalities such as environmental costs, risks, and safety assessment
costs by implementing energy and carbon taxes.
These options can be combined into two approaches: 1) reform strategies
and 2) institutional strategies. A more detailed discussion o f these two approaches is
provided in the next two sections.
6.5.1
Reform Strategy
The reform strategy implies that a new energy transition should be imple
mented under existing institutions. Reform strategies include demand-side manage

ment (DSM), environmental-extemality based pricing, and natural resources account
ing (Reppeto, 1992). For example, in buildings, the implementation o f tighter energyperformance codes and a DSM program would go a long way to reduce energy con
sumption. However, reforming the established order is difficult because those who
have entrenched interests are not always willing to surrender their political and econ
omic interest in the face o f change. Similarly, the conventional energy regime has
shown a stubborn resistance to the demand for reform. Thus, stronger strategies are
needed for implementing sustainable energy development.
207
Energy efficiency and conservation provide good examples in this sense

and have been mentioned throughout this dissertation with regard to the potential and
need for increased efficiency in energy supply and use. Energy consumers, however,
are often times reluctant to take the necessary steps to curb their consumption.
Furthermore, energy policy-makers frequently shy away from introducing effective
measures which m ay seem politically unpalatable. Energy processors and those
utilizing energy-intensive equipment are frequently constrained in the steps they can
take to improve efficiency (WEC, 1993).
Neoclassical economists strongly advocate the reform. They base their
analysis o f sustainability concepts such as sustainable growth, sustainable devel
opment, and sustainable resource use on neo-classical economic theory. As will be
discussed in detail in the market role section o f this dissertation, neo-classical
economic theory advocates free market mechanisms with minimum governmental
intervention. However, in contrast to their implicit belief in efficient market oper
ation, history tells o f innumerable cases o f market failure.
6.5.2
Institutional Strategy
The institutional strategy implies that institutions themselves should be
changed or replaced by new ones. It is impossible to introduce the new energy system
under existing institutions. As previously mentioned, the introduction o f a new energy
technology calls for a change in the rules. That was the case when nuclear power was
first introduced and the same holds for LNG. New energy sources are no exception.
New energy technologies such as renewable energies, fuel cells, and
hydrogen cannot compete under the existing institutional environment. Therefore, as
many experts advocate, structural changes in institutions should precede a new energy
208
transition. This view is consistent with Lovinss hard and soft path debate (1977),
Munasinges concept o f institutional change for sustainable development (1995), as
well as MacKenzie (1992) and Byrne (1992). MacKenzie (1992) argues that the
greatest challenge to improving energy efficiency worldwide is not technical, but
institutional. Mackensie emphasizes the importance o f identifying creative incentives
to encourage more widespread use o f high-efficiency electric equipment. A new set of
institutional relations, according to Byme (1992), is required to support the goals o f
sustainable energy systems.
Having said all this, how is it possible to change current energy institu
tions in preparation for a sustainable energy system? This inquiry is perhaps the most
challenging and the most difficult to answer. However, before answering this
question, we must first examine the characteristics o f an energy institution.
6.5.2.1
Characteristics of Energy Institutions

The substantive character o f energy decisions in any particular nation is a
product o f the values and objectives embodied within its institutions and expressed in
the relations amongst those institutions. The key institutions within an energy system
are depicted in Figure 6.1. This figure also portrays the configuration o f the general
relationships amongst institutions that result in energy decisions. Policies, markets,
technologies, and attitudinal and behavioral orientations o f decision-makers are
important elements in the functioning o f all energy institutions (Byme et al., 1991).
Exploiting the benefits o f energy efficiency and environmental protection
requires an institutional transition guided by a different development that focuses upon
sustainability. This development orientation is a new, emerging one that has recently
been endorsed by both the UN-sponsored World Commission on Environment and
209
Development, the creators o f Our Common Future, and by the Rio Summit o f 1992.
The sustainable development orientation defines the current challenges to development
in terms o f worldwide energy resource depletion and environmental degradation.
National
Rule Making &

Monitoring
Financial
&
Institutions
Local Govt
Energy Industry
NatI &
Local
Regulatory
Authority
Existing
Energy
Supplier
E nergy &
S e r v ic e s
Rule" & Regulation.
Sustainable
Energy
Suppliers
E nergy &
S e r v ic e s
IntM
Organization
(UNDP,
World Bank)
Figure 6.1
Technologies
Intemafl Cooperation,
Technology Transfer
Sustainable Energy
Decisions of Energy
Sectors
Industrial
Residential
Commercial
Electricity
Transportation
Research
Institute &
University
Institutions Influencing Sustainable E nergy System (Modified from

Byme, Wang et al. Toward Sustainable Energy, Environm ent and
Development: Institutional Strategies fo r Indonesia, South Korea,
M alaysia and Thailand. Project Sponsor: SMAP/WORLD BANK)
To date, development of the energy industry has been dominated by a

combination o f markets and government policies, as illustrated in the energy transition
from a coal-based to an oil-based energy system. Recently, it has been argued that
210
market mechanisms can be used to attain a smooth energy transition, so long as free
and perfect competition is guaranteed. However, markets by themselves, as currently
structured, cannot bring about a transition to a sustainable energy system. Policy
reform will be needed, along with institutional change. I f both o f these elements can
be brought together, they can spur the creation o f a new market structure. That will
promote the development o f a sustainable energy future.
An institutional transition to a sustainable energy future in Korea should
be based on five basic principles: the removal o f various energy subsidies; a recon
figuration o f markets and government roles; full cost pricing (including externalities);
a redefinition o f efficiency and equity; and democratic participation in energy
decision-making. Each o f these elements will be discussed in detail below.
6.5.2.2
Removal of Subsidies
Energy prices are widely subsidized, particularly in developing countries.
Korea is no exception. As briefly discussed in Chapter 3, keeping energy prices low is

one o f the major objectives o f the Korean energy policy. For this purpose, a variety o f
subsidies exist from the energy production stage to the end-use stage. In the past, a
significant portion o f the annual budget has been allocated as a subsidy to the coal
industry. One o f the principal financial sources o f this subsidy was the so-called oil
business fund, which is collected by levying an ad valorem tax on imported oil.
Energy subsidies have long been blamed for discouraging efficiency and
conservation in energy delivery and use, as well as inducing excessive consumption
and waste. One o f the m ost serious consequences o f subsidies is a distorted energy
pricing system. Price subsidies for fossil fuels hinder the introduction o f cleaner
processing o f existing fuels and the development o f alternative, cleaner forms o f
211
energy. Energy prices frequently do not even cover production costs, let alone the
wider social and environmental impacts o f energy use.111
The removal o f price subsidies requires willingness as well as the financial
ability to achieve this end. It also requires significant institutional and behavioral
modifications. Institutional modifications include the removal o f a variety o f fiscal
and regulatory incentives favorable to conventional energy fuels, but less favorable to
renewable energy sources, and the removal o f improper building codes and standards.
Behavioral changes include: a movement away from the unfavorable attitudes toward
sustainable energy systems, particularly w ith regard to energy efficiency, conservation,
and renewable energy; elimination o f the perceived risks o f investing in a sustainable
energy system; elimination o f information gaps; and an increase in environmental
awareness.
Energy prices, artificially kept low by subsidies, function as m ajor barriers
to building a sustainable energy system. W ithout an increase in energy price, waste
and profligacy will continue to persist, and new investments in improved and new
forms o f energy and energy-saving technologies will not be promoted. It is a standard
micro-economic theory that, as the price o f an exhaustible resource, generally speak
ing, continues to increase over time, its demand will decrease until it reaches zero.
The zero level o f demand is a factor o f the stock, the demand, and the production cost
o f the resource (Shin, 1990).112
111 It has been estimated, in OECD and other studies, that commercial energy prices in
general are subsidized at an average rate o f between 30% and 50% in the economies in
transition and in most developing countries. Energy prices are generally less
subsidized in the more advanced developing economies. (WEC, 1993:58.)
112 Shin, Eui-Soon. Resources Economics. Second Edition. Pahk-Young-Sa. 1990:
144
212
A sharp rise in energy pricing, however, is sometimes not desiralble. For

example, it is particularly not practicable in poverty-stricken or potentially unstable
societies. The low-income class would be the hardest hit by energy price hik:es, where
as the upper class would be less affected. Thus, there is an equity problem i n the
access to scarce resources. Energy price hikes lead to uneven patterns in en erg y con
sumption, resulting in another inefficient allocation o f scarce resources. Therefore,
close attention must be paid in designing an energy pricing system. This issu e will be
addressed further in the section on efficiency and equity.
6.5.2.3
Reconfiguration o f Markets and Government Roles

M arket R ole: Ensuring that national energy demand can be m et t n the most
cost-effective way will require energy markets to function effectively. This w ill de
pend on a number o f factors including the achievement o f a high degree o f m ark et
liberalization, albeit within government regulatory frameworks, and the identification
and implementation o f appropriate institutional improvements. Such im provem ents
are required in order to eliminate constraints on access to capital, improve th effi
ciency o f resource allocation, and create unlimited access to information. Thtese im
provements will foster the effective functioning o f energy markets.
There has been an endless debate between the proponents o f the imarketbased approach and the government intervention approach. Proponents o f m arketbased approach base their arguments on the neo-classical economic theory. T h e y
argue that the optimal allocation o f scarce resources can only be achieved by a thor
oughly free market, which is reinforced by the recent emergence o f new liberalism . In
contrast, the government intervention approach is based on classical econom ic theory,
represented by political economy, which encourages a government role in aclhieving an
213
efficient allocation o f scarce resources. Neither o f these approaches alone is appro

priate for addressing the future energy transition in Korea.
According to proponents o f market mechanisms, an energy transition will
be accomplished by the invisible hand o f the market, regardless o f government inter
vention. They explain this process by applying the concept o f the backstop technol
ogy. When a certain dominant energy source reaches its peak in production and its
reserves are declining, its scarcity will be reflected in its price. The subsequent price
increase will then induce the exploitation o f a more expensive energy source. They
argue that this unbounded reliance on market mechanisms is the m ost efficient and
least-cost way o f allocating resources. Any manipulative measures by the government,
they argue, would jeopardize this smooth and natural process (Dasgupta, 1986; Solow,
1979; and Hotelling, 1931).
On the other hand, the government intervention approach contends that
market mechanisms are themselves not perfect, particularly when dealing with energy
problems. In addition, proponents o f this approach maintain that, because the energy
industry has a strong tendency for monopoly, it is hard for new entrants to enter the
market. This lack o f open-access to the market will block a smooth energy transition.
Therefore, government intervention is necessary in the energy market (Byme, 1983;
Peet, 1992).
Both markets and governments play a crucial role in the modem market
economy. Even if Korean energy industries are regulated by the pub he, the market
still plays an important role in efficient energy resource allocation. Since the market is
deemed as a conduit o f government policy, it can also be considered as an institution
regulated by the public. In this regard, the crux o f energy policy lies in the extent to
214
which government intervention should be exercised in the operation o f markets. The

scope o f government intervention is a key issue in the heated debate concerning the
current market liberation and deregulation o f the Korean energy industry. Although
the current market liberation and deregulation o f the energy industry is an inevitable
process, a minimal level o f government intervention in energy pricing, taxation, and
the creation of incentives should be maintained throughout this process.
Government Role'. In order to ensure the efficient operation o f markets and
to avoid market failure, government intervention is necessary. Effective competition
on the basis of efficient market operation would spur innovation in energy efficiency
and renewable energy technologies. Effective competition also precipitates the
process o f fuel-substitution. If a consensus is reached that a sustainable energy future
can be attained through greater energy efficiency and a wider array o f energy forms,
including environmentally benign renewable energy sources, then governments must
ensure both full-cost energy pricing and effective competition.
There is a caveat for government intervention in the energy market: the
government needs to ensure that pricing and competition take place on the basis o f fair
rules, hi other words, the Korean governments should ensure that all forms o f energy
are priced to reflect their full costs, including a full account o f externalities such as
environmental costs. They also need to ensure that direct (explicit) and indirect
(hidden) barriers are lifted for new and renewable energy forms. Having said all this,
possible government failures are sometimes unavoidable. Despite sincere government
efforts to ensure fair rule and a level o f playing field, perverse outcomes are often the
case.
Governments have an important role to play in maintaining competition
by instituting appropriate policies to curb monopolies, mergers intended
215
to reduce competition and restrictive practices. The record o f govern

ments in history is in this respect to be found more in the breach than
the observance, because all too often governments themselves have
created and supported monopolies and restrictive practices. (WEC,
1993: 61).
Synthesis'. As already mentioned, an efficient market coupled with good
policies precipitates a shift to a sustainable energy system (see Figure 6-2). Energy
markets will respond to external impacts with internal structural change, hi the case of
the energy system, external impacts (changes in exogenous variables) include tech
nological innovations, environmental impact assessments, energy supply shocks (i.e.,
Existing Energy
Regime
Socio-Polititcal,
Economical
Institution
Existing Market
Dominant Players
- Fossil Fuels
- Nuclear
External Impacts
Changes in
Exogenous Variables
- Environmental
Impact
- Technological
Innovation
- Resources Limit
- Grassroots
Exit
Entrant
New Energy
Regime
Socio-Political,
Economical
Institution
Figure 6.2
New Market
Dominant Players
- Renewables
- New Energy
- Efficiency
Dynamics of Energy Market Structures
216
oil embargoes), and resources limitations (in the longer term). These external impacts
can be internalized to induce a structural change in the existing market. If this were
the case, the old market, dominated by fossil fuels, would be forced to adapt to new
rules and new energy forms such as renewables (solar thermal, PV) and new sources o f
energy (hydrogen, fuel cells, etc.). Institutional change will accompany this structural
change in the old market, supporting a new energy regime, and new political, social
and economic institutions. This process will result in the establishment of a new equi
librium in the market.
6.5.2.4
Full Cost Pricing: Consideration of Externalities

Another important element o f the institutional strategy for a sustainable
energy future is full cost accounting in energy pricing.113 Before the oil crises o f the
1970s, energy pricing was based completely upon the direct costs incurred during
exploration, production, processing, and delivery. However, after the oil crises, this
exclusive reliance on internal cost considerations for choices concerning competing
energy systems has come under increasing scrutiny. For example, as air pollution
from combustion processes caused serious damage to the forests o f many European
113 Environmental costs (externalities) ought to be internalized into the energy pro
duction cost calculation. As a result, the conventional energy supply system will be
given up for a sustainable energy system. This process may take two paths leading to
sustainability. One is the path that depends upon market mechanisms (heuristic
inductive approach) and the gradual internalization o f environmental costs. Theoret
ically, it is supported by backstop technology, in which case it takes a longer time to
transform market mechanisms, which are heavily dominated by the conventional
energy paradigm. Second path depends upon institutional change or reform (norm
ative approach). It requires strong governmental intervention, such as taxation
(environmental taxes, green taxes), international cooperation (GEF: Global Environ
ment Fund) in terms o f technology transfer and joint research agreements, and
subsidies to DSM programs and renewable energy development.
217
countries, many studies began to focus their analyses on these external costs o f energy
consumption. The m ain problem evident from these sorts o f analyses is that
environmental damages brought on by energy consumption are not confined to the
spot o f consumption activities, but they are often transferred to third who did not
benefit from the energy consumption in question.
These phenomena are well documented by many reports on transbound
ary disputes, such as dispute over acid rain caused by heavy coal consumption in
power plants in the Northeastern United States and in Europe. The nuclear accident at
Chernobyl has also shown that even nuclear power can produce widespread social
costs. A number o f e m in e n t economists have recognized the discrepancies between
the energy costs o f a business (internal costs) and the total energy costs to society.
Pigou (1912) was the first to point out and propose a tax to balance out these dis
crepancies, later named a Pigovian tax. Criticizing the weakness inherent in the
Pigovian tax, a Nobel laureate, Ronald Coase (1960), developed an ingenious solution
to the externality problem by introducing a new concept wherein the right-to-pollute
becomes a property right. This concept was later named the Coase theorem. How
ever, these market-based approaches are limited in that they provide solutions via
market efficiency only, without considering social efficiency. John Peet agrees:
. . . (T)he problem is that since social efficiency (in a market sense) will
be achieved only if social costs (private plus external) are taken into
account, we can conclude that the market system will not achieve effi
ciency on its own; some means o f imposing the requirement to inter
nalize externalities must be introduced. (1992: 119)
From the discussion above it is undeniably clear that energy production,
particularly electricity generation based on fossil fuels or nuclear power induces
218
substantial social costs and these cost, or externalities, m ust be internalized.114 Solu
tions based on the pure market approach are not sufficient because o f transaction costs
and the inevitable delays between cause and effect. Here the discussion returns to the
original idea o f Pigou, i.e., a tax levied to internalize social costs.
In general, levying taxes for certain policy purposes, such as influencing
energy supply and demand patterns, is a valid approach for governments to adopt
(IEA, 1992). By naming these taxes green taxes, Sandra Postel argues that:
Perhaps the single most powerful instrument for redirecting national
economies toward environmental sustainability is taxation. Taxing
products and activities that pollute, deplete, or otherwise degrade
natural systems is a way o f ensuring that environmental costs are taken
into account in private decisions whether to commute by car or
bicycle, for example, or to generate electricity from coal or sunlight.
(1991: 181).
In Chapter 5 energy and/or carbon taxes were proposed to arrest ever-increasing levels
o f energy consumption in order to reduce CO 2 emissions. It was also recommended
that tax revenues should be reinvested. But where and how? This issue will be thor
oughly addressed in this section. This issue is becoming more important since it is
directly related to securing funding for energy efficiency, energy conservation, and
renewable energy technologies.
114 It is widely believed by economists that creating markets in externalities by assign

ing people property rights to pollute the environment will result in individual pollut
ers being held accountable for at least some o f their actions. However, there is no
well-defined structure o f private property rights in many cases (Young, 1982: 12).
Another problem is that, because o f the inevitable delays between cause and effect
(such as in transmission of effects and time for results to become clear), it can never be
socially optimal to leave the settlement o f disputes over external effects in private
hands (Peet, 1992: 119).
219
In recent years, taxes intended to curb energy use anod/or environmental

pollution have been hotly debated, especially carbon taxes. T here are a number o f
practical objections to carbon taxes. To be effective their level w ould have to be set
much higher than generally anticipated. Furthermore, carbon em issions are not the
only emissions from energy use, not even the only greenhouse g a s emissions. How
ever, taxation o f energy more generally is even more problem atic. W hy should those
using, or seeking to obtain, the services which energy provides b e penalized by a
general tax on energy? A general tax on energy penalizes those form s o f energy with
limited environmental impact equally with forms having much greater impact. Can
energy taxes be fine-tuned in such a way as to reflect accurately th e environmental
impacts and other externalities o f their provision and use?
If energy or carbon taxes were to be introduced, th e y should be structured
in such a way that their revenue does not go into general governm ent funds. Instead,
such taxes should be revenue-neutral (that is, tax burdens elsewhere should be reduced
so that there is no net increase in taxation). The revenue from carbon taxes should be
earmarked for specific purposes: to raise energy efficiency; to encourage cleaner coal
and other technologies; to accelerate the development o f new eneargy sources and
alternative fuels; to introduce traffic calming schemes; to reduce th e dependence on
the private automobile for transport, and so on. This is what the K orean government
should implement as an effective policy for a sustainable energy future.
It is well documented by numerous studies that carbom taxes have a good
chance to reduce overall energy demand and patterns o f primary energy use. But
carbon taxes would have to be set at very high levels to have any significant effect.
Imposing such a high level o f taxation would be politically difficult. Several studies
220
have suggested that at least a US$300/ton carbon tax would be required to signific
antly curb fossil fuel demand and reduce CO 2 emissions (Kemfert et al., 1997). There
is also a widespread tendency to overlook the many taxes and duties already imposed
upon fossil fuels. As shown in Table 3.11, Korea currently has very high proxy carbon
taxes with gasoline duties and taxes in the form o f excise taxes. The Korean excise
tax on gasoline accounts for more than 50% o f the total gasoline price. This level o f
taxation is several times the maximum level normally proposed for a carbon tax.
Some doubt also exists as to whether or not carbon taxes set at a politi
cally realistic level would have a significant impact on either electricity or transport
demand, the two most rapidly growing energy sectors. Simulation results in Chapter 5
concluded that the reductions in transport and electricity demand produced by energy
and/or carbon tax are modest in comparison to other sectors. This dissertation has
supported the use o f an energy and/or carbon tax on the basis o f a well-found linkage
between energy use and CO2 emissions as well as the empirical results o f the simulat
ion model. However, this empirical analysis cannot determine the impacts o f taxation
on each and every economic group in society. Are these impacts evenly spread out
over the entire spectrum o f social classes or do they place greater burdens on partic
ular groups? This inquiry will be addressed in the following section.
6.5.2.5
Efficiency vs. Equity

Economic efficiency and social equity are different concepts based on
different ideological perspectives. Economic efficiency generally means an efficient

allocation o f resources to attain an economic goal on the basis o f cost-efifectiveness. It
is basically a static and ahistorical approach based on an acceptance o f status quo.
Economic efficiency doesnt care about the state o f the current social structure or how
221
it came to be. Most theories o f neoclassical economics rest on the assumption that
individuals exist as separate, autonomous (self-interested), and homogenous entities.
And they are the basic unit o f economic decision making, Homo economicus. These
economic individuals behave only on the dominant principle o f efficiency and profit
maximization. The sum o f individual efficiency and profit maximization equates to
total efficiency and profit maximization for society as a whole. This economic
ideology based on rational individualism and efficiency, though relatively new in
human history, has rapidly spread throughout the world.
Another development that supports the economic ideology outlined above
is the evolution o f property rights and tradability. An efficiently functioning o f market
presupposes that everything must be privately owned and tradable. The Coase theo
rem, described earlier, also rests on this assumption. Coase (1960) theorized that
social costs from externalities could be efficiently allocated between concerned parties
only if property rights (the rights to pollute in his argument) were assigned to natural
resources such as water, soil, and air.115 However, many eminent authors (The
Ecologists, 1993 and Peet, 1992) have seriously questioned whether natural resources
can be privatized, let alone tradable. John Peet argued that the initial assignment o f
property rights tends to be associated more w ith local power ploys and corruption than
with equity and long-term environmental factors (1992: 135).
115 Hardin (1968) also suggested that the remorseful consequences o f the tragedy o f
the commons could be checked by mutual coercion mutually agreed upon, or in
other words, by the institution o f private property. For Hardin, the solution lies in
setting limitations to freedom through privatization o f the commons (i.e., forests, open
pastures, etc.) and regulation o f those aspects o f the commons that are difficult to
privatize (global commons, water, air, etc.).
222
As opposed to economic efficiency, social equity is more concerned with

social efficiency. It seeks to maintain social cohesion and stability through equitable
distribution o f scarce resources. Its primary concern is equity between the rich and the
poor, and between the core and the periphery, and between current and future genera
tions. Nevertheless its concern extends to inter-generational equity. Norgaard (1992)
contended that social efficiency (equity) should be first resolved before economic
efficiency is even discussed. Social equity is value-laden and politically and morally
oriented, whereas economic efficiency is value-neutral, amoral and ahistorical. Econ
omic efficiency has nothing to do with equity, which is fairness in, or the absence o f
discrimination in, the allocation o f resources. Economic efficiency, Pareto optimality
in particular, is an individual-directed criterion that excludes any ethic o f collective
values, especially those involving future generations (Peet, 1992: 56).
It therefore becomes clear that social equity in the first place must be
considered before the problems o f economic efficiency can be addressed. Market
economists themselves admit that markets cannot take into full account things like
equity and fairness or the needs o f future generations. For example, if prices do not
reflect the full costs of energy production and consumption, then market efficiency is
nothing more than a grossly inexact approximation of optimum social efficiency.
Despite these limitations, economic tools are still effective in dealing with the costeffectiveness o f competing options. Thus, if social equity issues can be resolved
through political negotiation, empowerment o f marginalized people, and consideration
o f the rights o f future generation in energy decision making (which will be discussed
in the following section), then economic efficiency can be addressed.
223
6.5.2.6
Democratic Participation in Energy-Related Decision M aking

Traditional D ecision M aking Process: Traditionally, energy policy in
Korea has been monopolized by the central bureaucracy. Thus, the Korean energy
system is determined by technocrats, not the people. Decisions over m ajor energy
facility siting issues are characterized by bureaucratic control centralism, and power
relations among the elite. As a result, the lay public is barred from directly influencing
the public policies that affect their lives. Complicating the decision-making process
further is the fact that the benefits and costs of energy projects are not evenly dist
ributed among the population. This uneven distribution o f costs often precipitates
intense disputes among competing localities.
Technological and economic centralism dominates contemporary energy
and development policy in Korea. The technocratic elite governs this top-down and
authoritative energy regime, which is typified by the nuclear program .116 This tech
nocratic dominance entails one-way decision-making by the government, characterized
by a top-down and hierarchical approach. Thus, there is no public participation in the
Korean energy system, as there is in European countries such as Germany and Great
Britain. Instead, the formal review system and independent regulatory agencies are
supposed to represent and guarantee the public interest. Public participation and
public scrutiny are limited to consultation on the detailed application for licenses for
operating electric power plants.
116 The evolution o f highly centralized and technicized power complexes, built up
over many decades, has prepared South Korea for an extensive nuclear program
involving power reactors, research reactors and nuclear fuel cycle facilities. Central
ized arrangements for nuclear power plant construction and equipment manufacture
have been rationalized as necessary for the reduction o f national dependence on
imported oil, and as a basis for continuous economic and technological development
and the preservation o f a competitive edge in the global economy.
224
Only a select group has participated in the traditional public policy

decision-making process: a technocratic elite comprised o f members o f the business
and industrial communities, as well as the national government. This group represents
only limited interests. The local com m u n itie s that ought to be included in the public
policy decision-making process have been continuously excluded and marginalized.
Furthermore, the people most vulnerable to the hazards o f science and technology are
usually the most alienated from scientists and technocrats, whom they view as
apologists for the power structure that creates their problems. Thus, the technocratic
elite have even more o f an incentive not only to shield their decision-making process
from public scrutiny, but also to monopolize critical information within their ranks.
It is not unusual that most hazardous energy facilities are distant from
metropolitan areas, located in remote areas with sparse populations. Siting o f a largescale energy facility rests on the assumption that the project is inevitably associated
with high levels o f risk. Thus, part o f the siting process involves trying to find ways to
minimize the potential risks and social costs, should an accident occur. In this way,
geographic and demographic subpopulation who are deemed to be more expendable
than other populations are marginalized and discriminated against. Public attitudes
have been dominated by the perception that environmental damages caused by
hazardous energy facilities are necessary evils for continued economic development
and that some sectors o f society ought to be sacrificed for this great cause. Thus, the
disempowerment o f the subpopulations mentioned above was justified in this way.
Emergence o f a New Decision M aking Process: The conventional energy
regime, however, is now being challenged by a series o f environmental movements
initiated by local communities and grassroots activities. Ahn-Myun-Do nuclear waste
225
storage facility and Yongkwang nuclear power plant triggered this new wave o f envi
ronmental movements. For now, these movements and protests are performed in the
absence o f existing legal support. Nevertheless, messages and concerns from the
citizens and grassroots organizations are being incorporated into the decision-making
process through informal channels. This is a preliminary stage in the institutionaliz
ation o f a democratic decision-making process. Increasing democratic participation in
energy-related decision-making even further will become more crucial as disputes over
energy facility siting have intensified since the inauguration o f the local autonomy
system in 1995.
As discussed so far, an evolving society requires modifications o f the
traditional framework for decision-making in the energy policy arena. It requires a
reconfiguration o f power relations based on new variables. As shown in Table 6.2, the
players, power relations, information dissemination, and the decision-making process
should be reconsidered within a new context. In the transition to a sustainable energy
future, new and old variables are intertwined. A new energy transition would unfold
only if new and old variables were reconfigured in the process o f institutionalization.
Unlike the conventional model, a new decision-making model can be
characterized by a variety o f players from the central and local governments, compa
nies, and citizens. The new decision-making process should be led by consensus,
horizontal organization, public acceptance, and self-determinism instead o f clandestine
operations, top-down organization, hierarchical decision-making and monopolization
of critical information, which define traditional decision-making models. These new
dimensions in the decision process are possible only if effective public participation is
generated through unrestricted access to information and communication.
226
Table 6.2
Typology of Decision-Making (DM) Model
Traditional D M M odel
D em ocratic D M M odel
Players
Limited participants
All concerned parties
Power relationship
Vertical, hierarchical
Horizontal, multi-lateral
Information
Monopolized
Accessible to all parties
Decision process
Top-down
Public Acceptance
6.6

This chapter discussed the possible transition to a sustainable energy
system, including a discussion o f future energy options in Korea. The past two energy
transitions were motivated by economics and convenience. But, the next energy
transition will be motivated by resource depletion and environmental imperatives.
Overall, the course o f the next energy transition will be shaped by constraints,
demand-side responses, environmental concerns, and institutional change. The
soundest strategy is to be prepared for the worst. The energy future depends upon our
choice.
There are many potential sources o f future energy. Efficiency and con
servation are perhaps the most effective options until oil and gas production decline.
Renewable energy options, such as biomass, solar, and wind power will play a limited
role in the short-term serving only to complement fossil fuels; however, the role o f
renewable energy and new energy forms such as fuel cells and the use o f hydrogen will
increase in response to the depletion o f oil and gas reserves. Integrated resource
227
planing (IRP) will be the m ost cost-effective method for integrating supply- and
demand-side management technologies in the transition to a sustainable energy future.
Barriers to the next energy transition were also discussed. The strongest
barrier to the next energy transition is the current institutional structure. Historical
evidence provides us w ith insights into transforming the institutional structure. Two
approaches are suggested: the reform strategy and the institutional strategy. The
reform strategy proposes only m inor modifications o f the existing energy institutions
whereas the institutional strategy aims to change or replace existing energy institu
tions. The institutional strategy is based upon the following elements: the removal o f
subsidies; the reconfiguration o f market and government roles; full cost energy
pricing; and a reconceptualization o f equity, and the energy decision-making process.
One o f the m ost important aspects o f the institutional strategy is the recon
figuration o f market incentives to ensure a smooth transition to a sustainable energy
system, hi this regard, several policy instruments such as energy taxes, carbon taxes,
and various incentives and disincentives could be employed to internalize the exter
nalities incurred by fossil fuel consumption. However, the equity issue m ust be ad
dressed before economic efficiency issues in order to ensure a fair and just allocation
o f scarce resources. One o f the keys, in this respect, is to ensure direct democratic
participation in decision-making process. Figure 6.3 summarizes the overall aspects of
the transition to a sustainable energy system in Korea.
In conclusion, the institutional strategy is the primary concern o f this
dissertation. Among the multiple aspects o f the institutional strategy, the reconfigur
ation o f markets and government roles, as well as full cost energy pricing, are in the
forefront, hi essence, a synthesized three-way approach that combines market
228
efficiency, government intervention, and energy and/or carbon taxation is recom

mended as the most effective way to attain the goal o f a sustainable energy future.
Meanwhile, in order for such an economic approach to succeed, the equity issue must
Realities
Strategies
Goals
Conventional Energy System
Policy Tools
Sustainable Energy System
R e m o v a l o f su b sid ie s u n favorab le
F air com petition b e tw e e n
-M a r k e t distortion
to e n e r g y efficiency and
c on ven tion al e n e r g y a n d
- Inefficient allocation o f r e s o u r c e s
r e n e w a b le s
effic ie n c y /re n e w a b le s
V arious s u b s id ie s c r e a te
Inefficient ro les o f m arket a n d
R econfiguration o f m arket an d
go v ern m en t
g o v e rn m en t roles
Limited c o s t pricing
Full c o s t pricing including
S y n th e siz e d A p proach o f
m arket an d g o v e r n m e n t
sy n e r g y e ffe c t
T ran sp aren cy in E n e r g y P rices
O nly direct c o s t c o n sid e r ed ,
- Environm ental c o s ts
C r e a te s m arket en v iro n m en t
Indirect so c ia l c o s t s n o t c o n sid e r e d
- R isk -a sso cia ted c o s t s
favorable for e ffic ie n c y /re n e w a b le s
E co n o m ic e ffic ie n c y -b a sed allocation

- o f sca rce resou rces
- n o t socially eq u itab le
First, so c ia l equity a d d r e sse d ,
E q u ity-b ased A llocation o f sc a r c e
th en , e c o n o m ic efficien cy
c o n sid e r ed
r e s o u r c e s le a d s to s o c ia l ju stice,
C entralized E n ergy D e c isio n M aking
c o h e s iv e n e s s , and stability
D em ocratic D e cisio n M aking
- Supp ly-orien ted
E m p ow erm en t o f m arginalized
- D iscentralized S y s te m
- Limited participants
p e o p le , local com m unity, and
- All c o n c er n e d parties
- M onopolization o f inform ation
g r a ssr o o ts m o v em en ts
- A c c e s s ib le to all p arties
- Public A c c e p ta n c e
- T op-d ow n d e c isio n p r o c e s s
Figure 6.3
Institutional Strategy for Sustainable Energy Future
229
be addressed. Equity in the allocation o f scarce resources as well as in the allocation

o f costs and risks associated with the siting o f hazardous energy facilities can be
resolved through democratic participation in energy decision-making processes.
The speed o f an energy transition would depend upon how quickly and
effectively the market respond to governments policies as well as the types o f policies
that are enacted. For example, the size o f a carbon tax will determine its impact on the
energy system. An appropriate carbon tax can be determined by analyzing the econ
omic impacts calculated by the simulation model. Thus, the simulation model devel
oped in this dissertation is expected to play an important role. Again, this issue must
not be addressed solely on the basis o f economic efficiency, but must be first resolved
in terms o f equity. Where and how to use taxes are also related to the social equity
issue. To avoid unnecessary conflicts, taxes should be earmarked for certain purposes.
For example, taxes could be used for R&D activities or for clean energy technologies.
These issues should be resolved through a democratic decision-making process.
230
Chapter 7
CONCLUSION
This chapter summarizes the theoretical surveys found in Chapters 2, 3,
and 4, the empirical analysis found in Chapters 4 and 5, and suggested strategies for a
sustainable energy future found in Chapter 6. In addition, it recapitulates the major
arguments put forth in this dissertation and suggests areas for further research.
7.1
Realities and Issues

Over the last three decades, Korea has attained a level o f material wealth
much envied by much o f the Third World through adopting the economic growth
model o f the Western developed countries. The ideology o f material growth =
progress fueled this process, while neo-classical economics provided the theoretical
support for this ideology. The implicit assumption o f neo-classical theories is that
natural and environmental resource scarcity problems can be solved by market mech
anisms and technological development. This ideology has long been challenged
throughout the world and even in the West because it creates more problems than
benefits. Korea, however, seems still stuck in this out-dated ideology, although the
Korean government has slowly begun to recognize that unrestricted reliance on
economic growth entails environmental degradation as well as social problems. As
discussed in Chapter 3, environmental indices in Korea are getting worse in proportion
to material wealth. As a result, people are beginning to realize how much they had to
sacrifice in return for material wellbeing. The time has arrived to break out o f the
231
current unsustainable pattern o f development and redirect the development path into a
sustainable one.
Korea is now undergoing a transitional period in socio-political structure,
with the advent o f local autonomy and the emergence o f a nation-wide grassroots
movement. These two challenges have the potential to empower local communities
and bring about dramatic social reforms as clearly seen in the successful cases o f the
recent anti-nuclear and labor union movements. Sustainable development has been a
m ajor part o f their social and political platforms. O f particular note, a nation-wide
grassroots movement led by the Korean green organizations, has energized the effort
to develop environment-friendly public policies.
While grassroots activities that challenge the unsustainable energy path are
gaining momentum, environmental degradation from fossil fuel use shows no clear
indication o f slowing down. As seen in Chapter 3, some environmental indices are
showing signs o f deterioration. There are a variety o f reasons for this. The most
blamed culprit is a poor institutional structure that is unable to effectively deal with
these pernicious issues. In order to institutionalize the expressed aspiration o f the
grassroots movement for a sustainable energy future, a consensus must be reached on
an operational definition o f a sustainable energy system. This dissertation has
attempted to provide theoretical support for this purpose.
7.2
Theories
Building a conceptual framework for a sustainable energy system provides
us with a philosophical guiding light for developing a sustainable energy system in

reality. Concepts o f sustainability have evolved along with an emerging recognition o f
the limited carrying capacity o f the earth. The sustainability debate triggered by
232
Meadow et al.s seminal work, Lim its to Growth (1972), has engendered many
theories. Sustainability has been interpreted differently depending whether it is seen
from an economic, ecological, or sociological perspective. The economic perspective
focuses on the efficient allocation o f scarce resources. The ecological perspective is
more concerned with the carrying capacity o f the environment. The sociological
perspective is oriented toward the equitable allocation o f scarce resources.
Several attempts has been made to integrate the economic, ecological, and
sociological perspectives. These include the multi-criteria approach (Munasinghe,
1993), ecological economics (Daly, 1990; Norgaard, 1992; Pearce, 1990), and an
integrated analysis o f optimality, survivability, and sustainability (Pezzey, 1992). This
dissertation, following Pezzeys argument, attempts to synthesize the three perspec
tives on sustainability by placing equity at the core o f a sustainable energy system.
Sustainability should create ecological balance, social equity, and effi
ciency in the use o f resources. These three goals are ordered and prioritized according
to their urgency with regard to sustainability. Achieving ecological balance requires a
recognition o f the carrying capacity o f the Earth, which limits the scale o f economic
activity. Carrying capacity is defined in terms o f the earths physical resource base as
well as its assimilative capacity, h i this regard, Pezzeys model o f sustainable paths
provides a clear-cut indication o f the ecological limits to economic growth. Equity
comprises the socio-political dimension o f sustainability. An equitable system main
tains an even and fair distribution o f scarce resources within and between generations.
After the goals o f ecological balance and social equity are resolved, efficiency can be
addressed. An efficient system applies traditional or newly developed methodologies
to attain an efficient allocation o f scarce resources. Within this conceptual framework,
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an empirical analysis o f the economic dimensions o f a sustainable energy was carried

out in this dissertation.
7.3
Results from Empirical Analysis: Modeling

A model is a simplified version o f reality but can provide insights into the
complexity of reality. Another purpose for model building is to provide empirical

support for theoretical framework. A policy simulation model is usefiil in identifying
the key policy variables and testing the impacts o f policy tools in search o f optimal
policies. The dissertation developed a policy simulation model o f energy-environment-economy interaction. Placing the socio-political dimension at the hub, the econ
ometric simulation model was designed to identify the interactive nature o f energyenvironment-economy. Six scenarios were constructed to examine the impact o f three
types o f taxation: excise, energy, and carbon taxes. Simulation results are consistent
with those o f other major studies including KEEFs.
Major findings can be summarized as follows:
1) Both energy and carbon taxes are effective in reducing energy
demand and CO2 emissions;
2) The economy adjusted itself by absorbing shocks from energy and
carbon taxation, requiring reinforcement by raising energy and
carbon taxes to attain a targeted goal; and
3) Energy and carbon taxes would be beneficial to both the private
sector and to the national economy, if levied and reinvested for
the purpose o f energy saving and CO2 emissions reduction.
It is also argued that in addition to the energy and carbon taxes, other government
interventions, such as incentive programs for energy conservation and efficiency
technology development and dissemination are needed to attain a targeted goal o f
reduction in CO2 emissions.
234
To achieve an optimal outcome care is needed in designing and reinvest

ing the funds raised from carbon taxes. Because Korea has already levied various
types o f taxes on energy consumption, resistance against a new tax would be severe.
It would be more so when the design o f tax structure is unacceptable in terms o f social
equity, hereby requiring more attention be given to equitable consumption o f energy
on the basis o f region and class. The low-income class is most vulnerable to price
rises. This problem could be partially solved by subsidies from the revenue collected
by energy and carbon taxes. Energy and carbon taxes should be earmarked and re
invested in the appropriate areas relevant to promoting energy efficiency and renew
able energy technologies. Only in this w ay objectives o f energy and carbon taxation
could be fulfilled.
Per capita carbon emissions resulting from a $10 equivalent carbon tax are
estimated to be 3.3TC and 3.5TC in 2010 and 2020, respectively. This amount is still
higher than the targeted level o f CO 2 emissions the Climate Change Convention is
expected to set for Korea. However, it is low enough to meet the world average of
equitable level o f CO 2 emissions for 2050 (3.3TC) calculated by John Byme et al.
(1998). They observed that the group o f higher income countries had CO 2 emission
levels o f more than 10TC per capita in 1997, whereas the lower income group had less
than 2TC. Thus, if this equity- and sustainability-based strategy were accepted by the
Climate Change Regime, Korea would be in a better position to meet such a sustain
able emissions standard having introduced a carbon tax o f this magnitude.
7.4
Goals and Strategies

The goal o f sustainable development is to build an ecologically sustain
able, economically efficient, and socio-politically equitable world. Since energy is an
235
instrument o f sustainable development, a sustainable energy system should be under

stood as being a component o f the sustainable development. Accordingly, the three
elements o f sustainable development, ecology (carrying capacity o f the earth), eco
nomy (efficiency-oriented), and socio-politics (equity-based), are directly applied to
sustainable energy development. Such an energy system aims to protect and regen
erate the environment, eradicate an inequitable pattern o f energy consumption, and
pursue an efficient allocation o f scarce resources. It is imperative, therefore, that the
future energy system be based on sustainable energy development.
Sustainable energy development is characterized by: 1) energy efficiency
and renewable energy, 2) diversification and decentralization; 3) social cost- pricing;
4) equity, and 5) energy service orientation. Each o f these characteristics is derived
from the aforementioned elements o f sustainable development. Energy efficiency and
renewable energy indicate a transition o f physical energy carrier in the sources o f
energy. A diversified and decentralized system signifies a transition from the current
centralized and monopolized energy system into a more democratic one. Social costbased energy pricing enables an assessment of true energy use value, leading to energy
conservation. A sustainable energy system seeks an equitable pattern o f energy
consumption between the rich and the poor and between the current and future genera
tions. A sustainable energy system also should be service-oriented, which is focused
on qualitative, rather than quantitative energy development, because energy use is not
a goal in itself, but rather a means o f maintaining and improving the quality o f life.
Having established this foundation for an alternative energy future, how

can Korea transform the current energy system into a sustainable energy system? This
236
dissertation suggests an institutional strategy for the transition to a sustainable energy

system. In each energy transition in the past, from wood to coal and from coal to oil,
institutional barriers were most difficult ones to overcome. As London Winner (1982)
argued, a socio-technical system is created to link production, distribution, and
consumption in coherent patterns. This powerful superstructure is embodied and
perpetuated in the form o f institutions which are being constantly reinforced and
augmented by adjustments in the market rules and legal arrangements.
Suggested institutional strategies for building a sustainable energy future
in Korea were summarized as follows:
Rem oval o f subsidies'. Under the conventional energy system, various
subsidies exist to promote supply o f fossil fuels. This practice
has created market distortion and inefficient allocation o f
resources. Removal o f these subsidies w ill provide a fair ground
for energy efficiency and renewable energy technologies.
Reconfiguration o f markets and government roles'. The existing ineffi
cient allocation roles between the market and government also
need to be reconfigured to facilitate the transition process to a
sustainable energy system. Reinforcement o f governments role,
in particular, is required to make the most o f market mecha
nisms.
Full-cost energy pricing: Full-cost pricing includes not only direct
costs incurred from production to consumption, but also ex
ternal and/or risk-associated costs. External and risk-associated
costs can be partially captured by introducing an energy or
carbon tax. Full cost pricing is intended to create a market
environment favorable for efficiency and renewable energies.
Equity-based energy policy: The conventional energy system relies
only upon economic efficiency principles for the allocation o f
scarce resources. However, it is imperative that social equity
should be first addressed, and then economic efficiency can be
applied. This will lead to social cohesiveness and stability.
237
Democratic participation in energy decision-makingr. The conventional

energy decision-making process is characterized by supplyorientation, limited participation, m onopolized information, and
top-down decision process. Democratic decision-making proc
ess requires empowerment o f marginalized people, local com
munity, and grassroots movements, which leads to consensus in
making o f sustainable energy policy.
The speed o f an energy transition would depend: upon how quickly and ef
fectively the market responds to the governments policies. This dissertation suggests
the use o f energy and carbon taxes as a market-based strategy to promote a sustainable
energy future in Korea. The way in which an energy or carbon tax is levied and used
will greatly affect the speed o f a potential energy transition. The simulation model
developed in this dissertation can play an important role in clarifying this relationship.
7.5
Inventing the Future: Can Korea Choose Its Own Energy Future?
The transition into a sustainable energy system calls for not only the trans
formation o f the physical hardware of the energy system, b u t also a transformation o f

the superstructure o f the energy system industrial organizations, market rules, and
institutions. As extensively discussed in Chapters 2 and 6, th e superstructure is more
difficult to change than physical hardware o f the energy system. It requires a paradigm
shift in political, as well as a shift in the institutional arrangements and ideologies
associated with an energy regime. Like a political regime, a future energy regime will
have a profound impact on all aspects o f human society because energy and society are
closely intertwined.
If the conventional energy system continues, K orea will eventually face
certain economic and environmental catastrophe and social disintegration. Environ
mental degradation caused by excessive economic growth and the consequent failure
to protect the environment will destroy communities, enterprises, and individual lives.
238
As Garret Hardin (1968) warned, unless the current destructive patterns o f economic
growth are not checked by a cooperative action, the process o f the environmental
destruction would place a firm grip on our destiny.117 The challenge before Korea is
to make a profound shift away from the current unsustainable conventional energy
system to a sustainable one. How does Korea move from the current energy system to
a sustainable energy system that engenders social equity, ecological health, and effi
cient resource use? Should Korea wait for a catastrophic end to the conventional
energy system or should Korea make an effort to change before catastrophe occurs? Is
Korea capable o f making this choice? Can Korea design its own energy future?
The future energy system is not predetermined, but, rather, it is a matter o f
choice. Korea must create change, for it w ill not come on its own. The demand for
energy is a matter in which individuals, nations, and the global community have
considerable freedom o f choice. There are many options open for Korea to build an
alternative energy system. Within the limits o f physical, social, and global realities,
Korea has the freedom to invent its own future. This is an even more creative activity
than simply choosing among alternatives, because it acknowledges that we can tread
paths that have not been trodden (Peet, 1992; Lovins, 1977). Shackle, rejecting any
deterministic view o f positivism, argued, W hat does not yet exist cannot now be
known. The future is imagined by each m an for him self and this process o f the imag
ination is a vital part o f the process o f decision (1972: 3). If the future, as Shackle
articulated, is unknowable, but exists in the vision o f human beings, the future can be
seen to exist within the unlimited expanse o f our imagination. Thus, our future energy
117 Garret Hardin called this as Mutual Coercion Mutually Agreed Upon, a social
arrangements that produce responsibility. He suggested for an institution o f taxes and
other coercive devices to escape the horror o f the commons.
239
development path is in no way predetermined; rather, it will be based on the path we

choose to envision.
Right now, choice seems to exist between Kuhnian paradigmatic shift and
Hegelian dialectic adaptation. Thomas Kuhns paradigm shift (1962) predicts a bleak
future. An anomaly o f change emerges unaware o f its revolutionary outcome, and
drives the existing paradigm to a catastrophic end. On the other hand, the dialectical
adaptation indicates a freedom o f choice about the energy future. Synthesis o f the
existing and the emerging energy paradigm could be achieved by relying on this
process. In this context, the ecological economics approach to the interaction between
society and the environment gives us a hope that we can choose our energy future
without unnecessary conflicts.118
Future Energy Path
What energy options are in store for Korea? Lovins (1977) described two
types o f energy paths: the soft path and the hard path. The hard energy path consists
o f energy policies pursuing the twin goals o f economic growth and growth in energy
consumption. The hard path energy system is supply-oriented and capital- and
technology-intensive. Fossil fuels and nuclear fission are relied upon to sustain
economic growth. Energy efficiency and renewable energy are relegated to a minor
role, devalued as insignificant until the mid-twenty first century. Emphasis is
overwhelmingly on the short-term energy supply. In contrast, the soft energy path is
118 For example, Richard Norgaards coevolutionary approach (1992). In the bio
physical systems world view, not only do complex systems show emergent properties
not present at lower levels o f organization but also there is the opportunity for
components to contribute to self-organizing change in the structure o f the whole
system (Peet, 1992: 187).
240
characterized by: 1) a renewable energy-orientation; 2) diverse energy sources and

technologies; 3) flexible and low technologies; 4) scalability and distributability; and
5) energy quality and service matched to end-use needs. Lovins contrasted these two
paths in terms o f their socio-economic and political implications:
The first path is convincingly familiar, but the economic and socio
political problems lying ahead loom large, and eventually, perhaps, will
prove insuperable. The second path, though it represents a shift in
direction, offers many social, economic, and geopolitical advantages,
including virtual elimination o f nuclear proliferation from the world. It
is important to recognize that the two paths are mutually exclusive.
Because commitments to the first may foreclose the second, we must
soon choose one or the other before failure to stop nuclear
proliferation has foreclosed both (1997: 25).
The hard energy path is doomed to fail because o f its inherent flaws: the
huge amount o f capital required to maintain the system; the risks associated with high
and uncontrollable technologies; and the environmental degradation caused by reliance
on fossil fuels and nuclear power. Nuclear power, in particular, presents pervasive
dangers in the form of nuclear accidents, arms proliferation and radioactive contam
ination. These dangers are no less fundamental threat to our society and nature that
any other disaster, including global warming. Nuclear power requires intensive capital
and technology borrowing from foreign countries, thereby replacing fuel dependency
with capital and technology dependency. More significantly, nuclear power faces
vehement public opposition in Korea.
From the discussion above, it is obvious that the only option left for Korea
is the soft energy path. However, this is easier to say than to act upon. Although
many concerned experts agree that the soft path approach is necessary to transform the
current energy system into a sustainable energy system, there are differing views as to
how and when it should be commenced. As discussed at the end o f Chapter 3, a sub-
241
stantial fraction o f the Korean population still thinks that Korea needs to pursue econ
omic growth until it reaches the level o f affluence achieved by developed countries.
They also argue that it will be not too late to take care o f environment after this goal is
attained. But the environment is hard to regenerate once it is damaged above a certain
limit. M any symptoms indicating that current economic activities have exceeded this
point o f no return can be found in the ecologically susceptible regions o f Korea ecol
ogically susceptible.
The most urgent question Korea now faces is not how much and what kind
o f energy will be needed to maintain current levels o f economic growth, but how much
economic growth is possible with the limited assimilative capacities and energy sup
plies. A n answer to this question is partly provided in this dissertation by the simul
ation model that describes the interaction o f economic growth and energy demand
based on a production function that calculates how energy supply constrains economic
growth. A more inclusive solution is possible only through an in-depth analysis o f the
Korean energy situation in terms o f socio-economics and socio-politics. Further re
search will be needed to accomplish this task.
Significant changes to the current energy system are now under way, due
to its technological and economic obsolescence, not to mention mounting environ
mental problems. The "small is better" revolution that transformed computation and
com-munication has a bead on our energy infrastructure. Alongside these technol
ogical changes, there are potent forces in the so-called new economy o f information
services that will command an increasing share o f investment while the industrial
economy rusts.
242
The new economic drivers will change the way we think about energy
and much else in the global economy. We will have the opportunity in the new
century to replace the technologies and economies o f scale that dominated the indus
trial era and concentrated the bulk of productive capacity in the hands o f a few
nations and corporations with those of diversity and participation. So-called e-commerce is flattered with more praise than it so far deserves. But the possibility exists to
combine the small is better ideology and open access internet technology with the
power of ideas to construct a dramatically different future in which economic and
technological decentralization, environmental conservation, and social equity are
rewarded rather than the current antitheses.
7.6
Suggestions for Further Research

This dissertation has attempted to develop a theoretical as well as an em
pirical model o f a sustainable energy future for Korea. Although considerable work
has been done on the conceptual framework o f a sustainable energy system, much
work remains much to be done. The operational definition o f sustainability put forth
in the theory section has yet to be fully tested through empirical analysis. Only the
interactive nature o f energy-economy-environment was empirically examined in this
dissertation. The equity issue that binds these three dimensions together was left
untested due to the lack o f required data, such as data on regional distributive patterns
o f energy consumption, income, and environmental quality. If the equity dimension is
incorporated into the simulation model, a more inclusive and deeper understanding o f
sustainability will be attained. This issue will require further research. It is hoped that
the present dissertation as it is will be considered as a building block for more realistic
and detailed theories.
243
In order for sustainability to be operational, a consensus needs to be

reached on an operational definition of sustainable development. As a matter o f fact,
OECD and UNDP have developed a series o f sustainable development indices.119
These indices, however, are not universally accepted as standard indicators o f sustain
ability. Moreover, because every country is in a different situation in terms o f their
resource endowment, energy consumption patterns, economic development stage, and
socio-political structure, it is meaningless to prescribe a universal set o f indices. As
suggested by Byrne et al, a world average o f 3.3TC per capita CO2 emissions can be a
feasible indicator in the case o f global warming, but this has been proposed as a
practical indicator for the distant year 2050. hi the mean time each country has
selected different goals and strategies as part o f their efforts to attain sustainable
developments, depending upon their relevant energy and economic conditions.
Lim itations o f Sim ulation M odel
The model presented in this dissertation is starkly oversimplified.120 The
analysis was confined to the pure monetary evaluation o f policy impacts in an energy-
119 See the report o f USIWG (the U.S. Interagency Working Group on Sustainable
Development Indicators), Sustainable Development in the United States: An Experi
mental Set o f Indicators', UNDPs 1999 report, Human Development Index for Sus
tainable Development Index; or OECDs 1998 report, Towards Sustainable Devel
opment, Environmental Indicators.
120 A misguided notion seems to prevail that the more sophisticated (the more mathe
matical) the model, the better the forecast. However, this is not always the case. Bill
Keepins criticism against the simulation model o f the International Institute for Ap
plied Systems Analysis (IIASA) is a good illustration. Concentrating on several major
dynamic variables such as energy stocks, flows and their costs, he built a simple
model. Then, he compared the output (he refers to this as scenariette) from this model
with the actual HAS A scenario. He found that the HAS A scenario almost coincides
with the scenariette. He argued that the complex computer models used in the
244
environment-economy nexus, which is a smaller focus than the scope o f study that was
originally proposed in the introductory chapter. For example, the model doesn't in
clude a socio-political module as a key structure. This shortcoming, however, can be
reconciled by utilizing several existing models that have been developed for this pur
pose. Though it is not claimed that the model developed in this dissertation is detailed
enough to explain the complete interactions between energy, the environment, and the
economy, it is believed that this model has identified several important aspects o f the
energy-environment-economy nexus and has taken a useful initial step in developing
policies that w ill lead to a sustainable energy future.
Even if the present model has several shortcomings, it still provides us
with basic insights into the dynamic character o f the interactions between energy, the
economy and the environment. In addition, it is a useful policy analysis tool in its
ability to model a complex reality. The policy simulation model is especially vital to
the creation o f viable policies. However, a number o f careful and discreet guidelines
should be established before employing its policy recommendations. First, dont rely
totally on the results o f simulation. It is merely a simplified model o f reality. Second,
policy makers should consider the conclusions from a particular simulation as only one
o f a number o f alternatives that deserve equal consideration in the process o f policy
creation.
quantitative analysis do not play a significant role in determining the final numerical
results o f the scenarios. Instead, these results are essentially carbon copies o f various
unsubstantiated assumptions and arbitrary projections that were supplied as inputs to
the mathematical analysis (Keepin, 1984).
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APPEDIX A:
MODEL SPECIFICATIONS
A s s i g n @ p r e f ix b
@ E c o n o m i c M o d u le
@ @ S t o c h a s t i c E q u a t io n s
L G D P = 0 . 5 9 1 0 4 7 8 7 6 4 + 0 .3 0 8 4 4 5 6 4 4 3 * L K S + 0 . 4 6 9 1 8 5 6 7 2 6 L T E M P + 0 .2 5 8 5 4 6 0 4 9 2 * ( L T O T l o g ( a e e i ) ) + [A R (1 > = 0 .4 3 1 1 2 7 1 7 7 5 ]
L G D P 1 = 4 . 1 9 0 2 1 3 7 5 6 + 0 .4 5 8 3 5 8 8 7 4 4 * L X P T - 0 .2 0 2 7 8 4 9 7 3 3 * L R P O I L ( - 2 )
C O N S = - 7 4 4 3 . 5 9 1 8 3 4 + 0 .8 4 8 4 5 7 8 0 8 * R D I S P I + [A R (1 > = 0 .6 6 5 3 6 9 9 6 1 3 ]
R D IS P I = 2 0 0 3 3 . 4 4 4 8 8 + 0 . 5 7 4 6 0 2 5 7 7 9 * G D P + [A R (1 > = 0 .7 9 5 5 7 3 0 5 5 2 ]
E M P 1 R = 0 . 6 3 9 2 3 0 1 7 3 7 + 0 . 5 1 4 4 1 8 1 3 6 4 * G D P 1 R - 0 .1 6 4 5 4 2 4 2 6 4 * L T 1 M E + [A R (1 > = 0 .6 9 6 0 7 9 1 8 4 9 ]
R W A G 1 = - 6 1 8 1 8 7 . 8 6 8 3 + 1 . 1 7 6 8 1 2 8 9 8 * R W A G + 8 5 4 9 6 5 .9 2 9 3 * E M P 1 R
R W A G 2 = - 1 3 1 3 8 1 . 7 2 1 6 + 0 .7 9 8 9 6 8 5 0 5 3 * R W A G + 6 7 7 6 6 0 . 3 1 9 3 * E M P 2 R
L T E M P = 0 . 4 8 7 5 3 0 4 0 2 1 + 0 . 0 4 1 8 3 3 6 1 5 0 9 * L R iN V + 0 . 0 4 5 3 2 5 2 2 5 1 * L R W A G + 0 .8 3 9 5 3 6 6 9 0 2 * L T L F 5 .9 5 6 0 8 7 2 4 6 e - 0 5 * T I M E S Q
T L F = - 1 4 7 4 7 . 2 2 5 0 8 + 0 . 6 6 1 0 8 3 6 0 6 1 * P O P + 2 1 0 8 .4 2 4 6 7 5 * L T I M E
R IN V = 9 2 6 3 2 . 2 4 9 6 2 + 0 . 0 0 0 5 0 5 5 8 6 9 1 3 2 * C X - 3 8 3 7 .5 0 5 9 0 1 *INT1 - 1 0 8 . 7 2 1 2 2 9 5 * R P O I L
X P T = - 5 5 5 7 2 7 0 2 2 . 6 - 1 2 8 9 1 6 .8 8 4 7 * E X C J P N + 4 4 .9 4 7 2 7 5 5 2 * G D P F + [A R (1 > = 0 .8 7 8 6 9 8 8 1 9 3 ]
@ @ I d e n t it ie s
g d p 1 r = g d p 1 /g d p
g d p 2 r = 1 -g d p 1 r
gdp2=gdp2r*gdp
e m p 1 = e m p 1 r 't e m p
e m p 2 = e m p 2 r * te m p
e m p 2 r = 1 -e m p 1 r
u n r = (tif-te m p )/tlf* 1 0 0
w a g = ( e m p 1 * w a g 1 + e m p 2 * w a g 2 ) /t e m p
w a g 1 = r w a g 1 * c p i 9 0 /1 0 0
w a g 2 = r w a g 2 * c p i9 0 / 1 0 0
r w a g = w a g /c p i9 0 * 1 0 0
tw b = te m p * w a g * 1 2
cx= con s+ xp t
k s = k s ( - 1 )*(1 -d e k r )+ r in v
g d p = e x p ( lg d p )
246
g d p 1 = e x p (lg d p 1 )
te m p = e x p (lte m p )
g d p 1 = e x p (lg d p 1 )
lx p t= lo g (x p t)
lto t= lo g (to t)
lk s= lo g (k s)
l r w a g = lo g (r w a g )
lrin v = fo g (rin v )
ltlf= lo g (tlf)
' w h ere
' ( E n d o g e n o u s V a r ia b le s )
* G D P ( 1 ,2 ): g r o s s d o m e s t i c p r o d u c t ( s e c t o r 1 , 2 )
' G D P 1 R : G D P s h a r e o f s e c t o r 1 in G D P
' G D P 2 R : G D P s h a r e o f s e c t o r 2 in G D P
R D IS P I: (R e a l) D is p o s a b le P e r s o n a l In co m e
' C o n s : n a t io n a l c o n s u m p t i o n e x p e n d it u r e
' K S : C a p ita l s t o c k in 1 9 9 0 p r ic e
' (R )IN V : (r e a l) v a lu e o f i n v e s t m e n t
' (R )X P T : (r e a l) v a l u e o f e x p o r t
T E M P : to ta l e m p l o y m e n t
' E M P 1 : e m p l o y m e n t in s e c t o r 1
' E M P 2 : e m p l o y m e n t in s e c t o r 2
' E M P 1 R : s h a r e o f s e c t o r 1 in t h e to ta l e m p lo y m e n t
' E M P 2 R : s h a r e o f s e c t o r 2 in t h e to ta l e m p lo y m e n t
' T L F :to ta l la b o r f o r c e
' U N R * : u n e m p lo y m e n t r a te
' W AG: average w age
' W A G 1 : w a g e in s e c t o r 1
' W A G 2 : w a g e in s e c t o r 2
' T W B : t o t a l w a g e bill
' ( E x o g e n o u s V a r ia b le s )
' G D P F * : s u m o f G D P s in 1 4 m a jo r e x p o r tin g c o u n t r i e s
' E X C J P N * : Y e n 's e x c h a n g e r a t e a g a i n s t d o lla r
' IN T 1*: in t e r e s t r a te in m a n u fa c tu r in g s e c t o r
' P O P * : p o p u la tio n
' C P I 9 0 : c o n s u m p e r p r ic e i n d e x
' D E K R : D e p r e c ia t io n r a te f o r c a p ita l
R P O IL : o il p r ic e ( g e n e r ic ) in 1 9 9 0 p r ice
@ E n e r g y M o d u le
@ @ S t o c h a s t i c E q u a t io n s
LOIL1 = 3 . 3 1 2 2 0 1 0 3 1 - 0 .2 0 8 6 0 8 8 0 7 5 * L R P O I L ( - 1 ) + 0 .7 5 3 4 2 5 0 3 6 3 * L O I L 1 ( - 1 ) + 0 .1 0 5 7 8 4 2 7 7 7 * L T I M E
L O IL 2 = - 9 . 5 0 0 8 4 7 8 0 2 - 0 .6 1 5 4 8 2 9 5 2 5 * L R P O I L ( - 2 ) + 2 . 1 2 3 4 8 4 2 5 3 * L G D P 2 - 1 . 1 0 0 6 9 6 1 67*L T IM E
O IL 3 = 6 2 1 0 . 9 3 2 8 5 7 + 0 .0 0 2 3 5 5 2 0 7 7 5 5 * V E H - 1 2 .2 3 2 7 8 5 2 8 * R P G S L W
C O L 1 = - 5 8 5 4 6 . 9 5 8 0 7 - 1 1 2 .5 6 9 6 9 4 * R P C O L + 7 0 8 8 . 6 7 4 5 6 1 * L G D P 1
L C O L 2 = 7 . 2 3 6 0 4 4 9 5 8 + 0 . 9 4 2 7 7 1 8 9 5 4 * L C O L 2 (-1 ) - 0 .6 0 4 4 5 6 5 8 6 9 * L R D I S P I ( - 3 )
L G A S 1 = 2 . 1 5 6 3 0 4 5 3 6 - 0 . 2 4 6 1 0 2 3 1 7 1 * L R P G A S W (-1 ) + 0 .7 5 6 4 8 6 5 6 3 2 * L G A S 1 ( - 1 ) +
0 .1 7 6 5 8 8 5 9 5 3 * L T I M E SQ
L G A S 2 = 1 .7 7 3 3 6 8 1 7 1 - 0 .1 5 4 3 6 0 9 2 6 7 * L R P G A S W + 0 .8 9 5 0 5 4 5 2 4 7 * L G A S 2 (-1 )
247
L G A S 3 = - 5 .4 2 9 6 2 9 2 1 3 - 0 .0 7 5 8 5 8 6 5 0 7 * L R P G A S W + 0 . 0 8 8 9 4 7 6 3 2 1 2 * L R P G S L W (-1 ) +
1 .0 2 9 9 0 4 5 9 9 * L G D P + [ A R ( 1 ) = 0 .2 2 0 8 2 0 6 7 2 1 ]
LELE1 = - 7 . 8 5 9 2 2 4 0 8 8 + 1 .5 3 7 7 0 1 5 0 7 * L G D P 1 - 0 .2 6 8 5 3 8 8 9 6 7 * L R P E L E ( - 2 ) +
0 .1 0 5 4 0 0 9 9 9 8 * L R P G A S W (-2 ) - 0 .0 9 1 6 7 4 0 9 2 2 3 * L T IM E S Q
L E L E 2 = - 6 . 9 3 6 8 6 5 9 1 4 - 0 . 9 9 9 7 6 0 0 2 6 5 L R P E L E + 0 .5 1 7 8 9 7 3 6 2 8 * L R P G A S W + 1 .4 6 6 6 4 8 4 0 1 *L R D ISP I
R P G A S W = 0 . 5 3 3 6 7 3 3 5 7 + 1 .3 7 2 9 3 4 7 3 8 * R P O I L - 3 . 9 0 6 0 7 9 6 2 4 T I M E
R P G S L W = - 9 . 3 7 5 8 4 7 8 7 + 1 , 0 1 9 0 9 3 3 2 4 R P O IL + 0 . 9 2 0 4 6 9 8 0 5 1 T I M E
R P E L E = 2 . 0 0 9 3 4 0 8 3 4 + 0 .1 8 2 4 6 6 1 2 3 9 * R P O I L + 0 . 7 1 9 5 1 1 7 1 1 1 * R P E L E (-1 )
R P C O L = - 1 0 .7 9 2 6 2 9 3 9 + 0 .0 6 8 9 7 4 1 6 7 5 9 * R P O I L + 0 . 9 9 1 6 2 6 7 5 7 8 * R P C O L ( - 1 ) + [A R (1 > = 0 .5 4 0 8 8 8 2 6 1 ]
LVEH = 3 . 1 9 8 6 2 5 4 5 4 - 0 . 1 9 4 9 7 7 5 2 0 1 L R P G S L W + 0 . 8 5 1 9 1 3 5 9 3 4 * L V E H (-1 ) + 0 . 0 1 3 2 8 9 2 4 1 9 4 T I M E
@ @ I d e n titie s
o il= o il1 + o il2 + o il3
c o l= c o l 1 + c o l 2
g a s= g a s1 + g a s2 + g a s3
e le = e le 1 + e le 2
fin = fin 1 + fin 2 + fin 3 + ta lt
fin 1 = o il1 + c o l1 + g a s 1 + e le 1
f i n 2 = o il 2 + c o l 2 + g a s 2 + e l e 2
f in 3 = o il3 + g a s 3
f in 4 = e le /e f 4 + h e a t 2 + t w n
o il4 = o il4 r * fin 4
c o l4 = c o l4 r * fin 4
g a s 4 = g a s 4 r * f in 4
h y d = h y d r * fin 4
n u k = n u k r* fin 4
to il= o il+ o il4
t c o l= c o l+ c o l4
tg a s= g a s+ g a s4
to t= tc x )l+ to il+ tg a s + n u k + h y d + ta lt
talt= taltr*tot
o il1 = e x p ( lo il1 )
o il2 = e x p ( lo il2 )
c o ! 2 = e x p ( lc o l2 )
g a s 1 = e x p ( lg a s 1 )
g a s 2 = e x p ( lg a s 2 )
g a s 3 = e x p ( lg a s 3 )
e l e l = e x p ( l e le 1 )
e le 2 = e x p ( I e l e 2 )
v e h = e x p ( lv e h )
o ilv e h = o il3 /v e h
v e h r = p o p /v e h
lfin 1 = lo g (fin 1 )
lv e h = lo g ( v e h )
248
ltim e = lo g (tim e )
lp o p = lo g (p o p )
lrp oil= log(rp oiI)
lr p c o l= lo g (r p c o l)
lr p g s lw = lo g (r p g s lw )
lr p g a s w = lo g (r p g a s w )
lr p e le = lo g ( r p e le )
lg d p 1 = lo g ( g d p 1 )
l g d p 2 = lo g (g d p 2 )
lr d isp i= lo g (r d isp i)
' W here
' ( E n d o g e n o u s V a r ia b le s )
' T O T : to ta l p rim a ry e n e r g y c o n s u m p t io n
F IN 1 (2 , 3 ) : fin a l e n e r g y c o n s u m p t io n in s e c t o r 1 ( 2 , 3 )
' F IN 4 : e n e r g y in p u t a n d c o n s u m p t io n in s e c t o r 4 (t r a n s fo r m a tio n a s e c t o r )
' OIL1 (2 ,3 ,4 ) : oil c o n s u m p t i o n in s e c t o r 1 ( 2 , 3 , 4 )
' C O L 1 (2 ,4 ): c o a l c o n s u m p t i o n in s e c t o r 1 ( 2 , 4 )
' G A S 1 ( 2 ,3 ,4 ) : g a s c o n s u m p t i o n in s e c t o r 1 ( 2 ,3 ,4 )
' ELE1 (2 ): e le c tr ic ity c o n s u m p t i o n in s e c t o r 1 (2 )
' R P C O L : r e a l c o a l p r ic e
' R P E L E : r ea l e le c t r ic it y p r ic e
' R P G S L W : r e a l w e i g h t e d a v e r a g e p r ic e o f f u e l s in tr a n s p o r ta tio n
' R P G A S W : r e a l w e i g h t e d g a s (L P G a n d to w n g a s ) p r ic e
' ( E x o g e n o u s V a r ia b le s )
' R P O IL : r ea l p e t r o le u m p r o d u c t p r ic e
' C O L 4 R : s h a r e o f c o a l in s e c t o r 4
' O IL 4R : s h a r e o f o il in s e c t o r 4
' G A S 4 R : s h a r e o f g a s in s e c t o r 4
' H Y D R : s h a r e o f h y d r o in s e c t o r 4
' N U K R : s h a r e o f n u k e in s e c t o r 4
' TA L T R : s h a r e o f a lt e r n a t iv e e n e r g y in to ta l e n e r g y c o n s u m p t i o n
' TIM E: tim e
@ E n v ir o n m e n ta l M o d u le
@ @ S t o c h a s t ic E q u a t io n s
L S O C = 1 .9 8 5 7 9 9 0 0 1 + 1 . 5 0 9 1 4 5 1 9 8 * L S O R - 0 .0 0 0 6 0 4 6 0 1 6 6 8 3 * R C C > S T 1 + 0 .0 7 7 7 9 7 3 8 7 9 6 * T I M E
L C O C = 3 . 7 1 2 0 9 0 7 7 4 + 1 . 0 7 9 3 1 7 8 3 7 * L B U S R - 0 . 2 6 9 0 0 4 8 6 5 2 LTIME
L N O C = - 2 .4 6 7 6 0 1 2 6 6 - 0 . 2 5 6 2 1 4 3 1 3 5 * L R C O S T (-1 ) + 0 .2 6 7 6 4 0 7 4 3 8 * L T I M E
L O Z N = - 4 .2 8 4 7 9 2 1 3 8 + 5 . 7 3 6 4 8 1 5 2 9 * L F O S R - 0 . 3 1 8 0 6 1 7 7 0 7 * L C O S T R + [A R (1 ) = - 0 .5 4 4 O 0 9 2 9 6 6 ]
A C D = 2 .2 9 6 9 1 8 1 3 6 + 3 .7 1 1 3 1 4 7 5 8 * F O S R - 1 4 .9 8 9 9 1 4 9 2 * C O S T 1 R (-2 ) + 0 .0 2 2 4 5 3 9 2 2 8 6 * T I M E
L B U S R = 6 . 4 5 7 6 7 0 3 9 - 0 . 7 0 9 2 9 0 5 1 6 3 * L R D IS P I(-2 ) + 0 . 6 5 6 3 5 6 6 8 6 8 * L B U S R ( - 1 ) +
0 . 3 9 8 2 9 1 742 5 * L T IM E
L S O R = 1 . 9 2 5 7 2 4 7 7 5 - 0 . 6 8 5 2 5 1 7 4 6 6 * L R P O IL - 1 .1 7 3 9 2 7 8 5 5 * L T I M E
L N O R = - 1 . 4 1 6 4 6 1 0 1 2 - 0 . 4 8 3 0 1 2 7 7 3 7 * L R C O S T 1 - 0 . 2 0 1 4 2 8 9 1 0 6 * L R P G S L W ( -1 ) +
0 .2 6 8 5 6 8 5 8 8 * L T I M E
249
L C O R = 0 . 8 9 0 7 1 8 0 3 6 6 + 0 . 8 8 9 7 0 1 1 7 5 7 * L B U S R - 0 . 0 9 3 5 0 1 2 7 3 3 8 * L R C O S T ( -2 ) +
0 .5 6 9 7 2 7 6 3 7 3 * L C O R ( - 1 )
@ @ I d e n titie s
c o 2 x = c o 2 r * fo s r * te i* g d p r * p o p
s o x = s o r * fo s r * te i* g d p r * p o p
n o x = n o r * fo sr * te i* g d p r * p o p
c o x = c o r * fo s r * te i* g d p r * p o p
f o s = t c o l+ t o il+ t g a s
c o 2 r = (tc o l* 1 . 1 7 3 + t o il* 0 .8 4 5 + t g a s * 0 .6 1 4 ) /f o s
fo s r = f o s /t o t
te i= to t/g d p
g d p r = g d p /p o p
bus=busr*veh
lr d is p i= lo g (r d isp i)
I r c o s t l = lo g ( r c o s t 1 )
lr c o s t= lo g ( r c o s t)
lc o s t r = lo g (c o s t r )
lfo s r = lo g (fo s r )
b u s r = e x p (lb u s r )
s o r = e x p ( ls o r )
n o r = e x p (ln o r )
c o r = e x p ( lc o r )
s o c = e x p (ls o c )
n o c = e x p ( ln o c )
c o c = e x p ( lc o c )
o z n = e x p ( lo z n )
' W here
' (E n d o g e n o u s V a r ia b le s )
S O C : su lfu r d i o x i d e s c o n c e n t r a t io n in t h e air
' N O C : n itr o g e n d i o x i d e s c o n c e n t r a io n in t h e a ir
C O C : c a r b o n m o n o x i d e s c o n c e n tr a t io n in t h e a ir
' O Z N : o z o n e c o n c e n t r a t i o n in t h e air
' A C D : P H v a l u e o f a c id rain
' C 0 2 X ( S O X , N O X , C O X , H C X ): c a r b o n d io x id e ( s u lf u r d io x id e s , n itr o g e n d i o x i d e s , c a r b o n d io x id e s ,
h yd rocarb on )
' e m is s io n s
' S O R (N O R , C O R , H C R ): s h a r e o f su lfu r d i o x i d e s (n it r o g e n d io x id e s , c a r b o n m o n o x i d e s ,
' h y d r o c a r b o n ) e m i s s i o n s in f o s s il fu e l c o n s u m p t io n
' V E H a n d B U S : p o p u la t io n o f v e h ic le a n d b u s
' F O S : f o s s il f u e l c o n s u m p t i o n
' F O S R : s h a r e o f f o s s i l f u e l in t h e to ta l e n e r g y c o n s u m p t i o n
TEI: p rim ary e n e r g y in t e n s it y
' G D P R : G D P r a tio t o p o p u la tio n
250
APPENDIX B:
Variable
gdpl
gdplr
gdp2r
gdp2
xpt
cons
rinv
rdispi
tlf
temp
emplr
emp2r
empl
emp2
wag
rwagl
rwag2
twb
MAPES (MEAN ABSOLUTE PERCENTAGE ERRORS)
MAPE
Variable
MAPE
Variable
2 .78
2 .33
2 .47
3 .49
5 .95
1.56
5 .70
1.28
0.28
0 .46
1.12
1.16
1.16
1.35
1.72
2 .98
1.21
1.97
unr
tot
toil
tgas
gdp
tcol
hyd
nuk
tei
fin
f ini
fin2
f in3
f in4
oil
oill
oil2
oil3
9 .41
2 .22
1.12
1. 89
1.78
2 .28
3 .12
3 .13
1.45
1.18
2 .67
3 .81
1.02
3 .10
1.41
2 .74
6.16
1. 01
oil4
col
coll
col2
col4
gas
gasl
gas2
gas 3
gas4
ele
elel
ele2
talt
rpgslw
rpgasw
rpele
rpcol
MAPE
3 .10
2.17
4.61
5.37
3 .10
3 .79
8 .66
5.52
2 .22
3 .10
1.89
4.39
3 .53
2.21
1.16
5 .17
2 .94
3 .06
251
Variable
Gdpr
fosr
co2r
sor
nor
cor
co2x
sox
nox
cox
busr
coc
noc
soc
ozn
acd
MAPE
1.78
0.45
1.83
2.77
4.67
7 .87
0.82
3 .81
5.35
8 .97
4.04
4. 18
3 .74
5 .90
4.40
0 .83
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ANALYSIS OF THE INTERRELATIONSHIP OF

A dissertation submitted to the Faculty o f the University o f Delaware in

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ANALYSIS OF THE INTERRELATIONSHIP OF

irecto ro f the School o f Urban Affairs and Public Policy

THEORETICAL FRAMEW ORK..........................................................................11

2.3.4.1 Deomocratic Energy System ........................................... 45

SUSTAINABLE ENERGY DEVELOPMENT IN THE KOREAN

POLICY SIMULATION M O D EL........................................................................ 95

4.2.3 Linear Programming Models........................................................ 101

MODEL ESTIMATION AND POLICY SIMULATION................................132

STRATEGIES FOR SUSTAINABLE ENERGY FUTURE IN KOREA

6.2.2.2 Environmental Concerns................................................. 190

MODEL SPECIFICATIONS.................................................................... 246

Major Socio-Economic Indicators in K orea.................................................55

Major Energy Indicators.................................................................................56

Primary Energy Consumption by Fuel T y p e................................................57

Final Energy Demand by Sector....................................................................61

Industrial Energy Consumption by Fuel Type............................................. 63

Residential/Commercial/Others Energy Consumption............................... 64

Fuel Consumption in the Transportation Sector..........................................66

Number o f Vehicles by T y p e ........................................................................ 67

Fuel Consumption for Power Generation.....................................................68

Table 3.10 KEPCO's Plan o f Power Plant Construction............................................... 70

Price o f Petroleum Products and Taxes in K orea........................................75

CO2 Emissions from Energy Consumption in K orea................................. 85

Table 3.14 Taxes on Fuel Types....................................................................................... 90

Subdivision o f Sectors.................................................................................. 110

MAPE Distribution o f the Simulation M o d el........................................... 138

MAPEs o f Selected Endogenous Variables................................................138

Assumptions for Exogenous Variables in BAU Forecasting.................. 143

Projected M ajor Economic Indicators........................................................ 145

Energy Demand and CO2 Emissions Projection...................................... 148

Projection o f Selected Environmental Indicators.................................... 149

Energy Contents, CO 2 Emissions Factors and Tax Rates ($5/bbl

Scenarios Set-Up for Policy Sim ulations................................................. 154

Impact o f Excise Tax on Primary Energy Consum ption........................ 158

Impact o f Energy Tax on Primary Energy Consum ption....................... 159

Impact o f Carbon Tax on Primary Energy Consumption.......................161

Impacts o f Energy and Carbon Taxes on Environment in 2020.............163

Impacts o f Energy and Carbon Taxes on the Economy.......................... 167

Economic Benefits o f Carbon Tax Reinvestment ($10/bbl Carbon

Economic Benefits o f Carbon Tax Reinvestment ($10/bbl Carbon

Economic Impacts o f 2000 CO2 Stabilization ($20/bbl Carbon

Impacts o f Carbon Taxes on Energy Consumption.................................175

New and Renewable Energy Potential in Korea......................................196

Typology o f Decision-Making (DM) M odel...........................................227

Objective o f Environmentally Sustainable Development.........................26

CO 2 Parity in the Year 2050.........................................................................27

Economic Parity in the Year 2050............................................................... 28

Optimality, Sustainability, and Survivability.............................................30

Sustainable Energy Development................................................................ 40

Interactions o f Energy, Economy, Environment, and SocioPolitics.......................................................................................................... 50

Trend o f Energy Consumption by Fuel Type............................................. 58

Trend o f Share by Sector in Final Energy Consumption........................... 62