Energy Subsidies: Lessons Learned in Assessing their Impact - UNEP

Energy Subsidies in Korea
8. Energy Subsidies in Korea
The current system of energy subsidies in Korea distorts energy markets and runs counter
to the country’s energy-policy goals of enhancing energy security, promoting economic
development and protecting the environment. Fundamental reform of energy subsidies, as
well as of the system of energy taxation, is needed urgently. Coal mining and new and
renewable technologies are the main recipients of direct subsidies. Subsidies to coal mining
amount to around $500 million per year. There are major cross-subsidies in the electricity
and gas industries too. Differential tax rates on oil products, which are much more highly
taxed than other energy sources, also distort the energy market.
Energy-subsidy and tax reforms will need to minimise potential adverse social and
economic effects. The benefits of reform are expected to outweigh the costs. The question
is how to implement reforms in a socially equitable way. Reforms that benefit mainly the
rich would be difficult to justify, no matter how great the resulting gains in economic and
energy efficiency.
8.1 Introduction
There are major subsidies in the Republic of Korea’s energy sector. Coal mining and new and
renewable technologies are the main recipients of direct subsidies. There are major crosssubsidies
in the electricity and gas industries too. These subsidies distort inter-fuel
competition. Differential tax rates on oil products, which are much more highly taxed than
other energy sources, also distort the energy market. Taxation, rather than direct subsidies or
price controls, is the primary form of government intervention in the Korean energy market.
Tax revenue is used to secure stable supplies of energy as well as to enhance economic
development.
Korea has limited energy resources, so it relies heavily, and increasingly, on imported
energy. 65 Securing a stable supply of low-priced energy to support economic growth has,
therefore, been a key objective of Korea’s energy policy since the 1960s. The Government
uses a diverse array of subsidies and differential tax rates to help achieve this goal.
The 1997 financial crisis, which drove the Korean economy into a recession unparalleled
since the 1960s, caused a dramatic slump in primary energy use. In 1998, consumption fell
by 8.1% – even more than GDP, which fell by 5.8%. This was a sharp turnaround compared
to the growth of 5.9% in energy use and 5.0% in GDP in 1997. In 1999, however, the Korean
economy bounced back from this recession with energy consumption picking up by 9.3% and
GDP by 10.7%. Despite this economic recovery, the Government has recognised the need to
deal with structural problems in the energy sector. It has launched a programme of
restructuring of the energy sector, including privatisation of the state-owned monopoly
electricity company, Korea Electric Power Corporation (KEPCO), and is proceeding with a
major overhaul of the system of energy subsidies and taxation.
65 Imports as a share of total primary energy supply grew steadily from 47.5% in 1970 to 97.1% in 1998.
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