□ Amendment to Excise Tax Act of 2014 could help slowing down the electricity dependent phenomenon that appears recently in Korea by increasing the electricity tariff.
○ However, the optimal strategy in this tax reform would be to wait until 2017 to adjust LNG tax rates, because before the year 2017, there is a possibility that lowering LNG tax rates could place a downward pressure on electricity tariffs when SMPs and adjusted settlement prices are synchronized.
□ The excise tax on coal of flexible rate 18Won/kg and basic rate 24 won/kg from the 2014 amendment might be not enough to blunt the electricity dependent phenomenon, especially when a declining trend of SMPs is expected.
○ Since the purpose of imposing tax on coal is for internalizing the external effects such as pollution price, the tax rate on coal should be higher than one on LNG (60 Won/kg).
□ According to the sensitivity test based on the slightly upward adjusted electricity demand forecasts of the 6th Basic Plan, SMPs and adjusted settlement prices are forecast to stay higher than the reference scenario.
However, the overall trend of SMPs and adjusted settlement prices is expected to be downward.
○ This points to the fact that the current version of the tax reform will still have a limited impact on controlling electrification even if there will be higher demand for electricity.
○ Therefore, in the long term, it is necessary to adjust upward the tax rate on coal, although it might be hard to correct the tax rate in the short term.
○ And yet, attempts to estimate accurate external should be made first before starting tax reform discussions.
□ The analysis based on the assumption that electricity demand will be higher than the 6th Basic Plan implies that the expected power reserve ratio of the 6th Basic Plan is unlikely to be met.
○ Our estimation indicates that electricity demand in 2027 would be higher than that of the 6th Basic Plan by 16.12 percent. Accordingly re-estimated SMPs and adjusted settlement prices still cannot turn the downward trend in electricity price.
○ This reveals the fundamental problem of the methodology employed in the national power plan, which is to treat power prices as an exogenous variable and lay out power supply plans based on them.
○ Power price should be treated as an endogenous factor because it clearly comes under influence of power demand, supply capacity, and electricity generation mix.
○ The current methodology is prone to estimation errors in power
demand, could cause situations in which power capacity runs short or power reserve gets too large.
□ This study extended to cover nuclear-fuel tax in an attempt to incorporate all possible electricity sources in Korea and to take into consideration controversies over the necessity for nuclear-fuel tax.
Including nuclear-fuel tax in the analysis does not necessarily mean that we recommend nuclear-fuel tax.
○ It seems beyond the scope of this study to discuss whether to introduce nuclear-fuel tax or not.
○ Nevertheless, if there is social consensus that nuclear-fuel tax is needed, then we will need a full extensive discussion among interest groups.
○ We should carefully choose between tax and levy as a form of taxation.
In our opinion, nuclear-fuel tax would be better to take form of tax instead of levy.
○ This is because external costs of nuclear power such as accident-risk response costs incur irregularly, rather periodically.
○ When external costs of nuclear power are incorporated as a form of excise tax, the tax revenues would be subject to general budget every year. In case of a serious nuclear accident, the government will have to issue national bonds to cover the costs. This is understood as double taxation.
□ The tax reform was assessed to have impact on macroscopic variables
and income redistribution, by increasing prices and reducing GDP.
○ Lower income brackets are more likely to suffer decreases in nominal income, which contributes to regressive redistribution.
○ Considering that excise tax is an indirect tax, a negative effect on income distribution is nothing surprising. Although, the principle of tax neutrality, which this study didn’t uphold, would have mitigated the negative impact to some extent.
○ The most efficient way of taxing while upholding tax neutrality would be a future research subject. Our suggestion is that since the energy tax reform could bring about regressive redistribution, we need to resolve these negative effects on the macroeconomy and income redistribution by providing income supports or offsetting other taxes by energy taxes.
□ What distinguishes this study from previous ones is the realistic analytic tool that accounts for Korea’s electricity market operational architecture.
○ In addition, one of the greatest strengths of this study is the year-by-year approach, which enables a mid- and long-term policy planning.
○ One of the limitations of this research is that the power market in Korea is under much influence of political decisions and that the research cannot expect political uncertainties.
- For example, it is extremely hard to forecast a series of factors that
determine electricity wholesale prices, including adjusted settlement prices, power policies, and power tariff regulations.
○ Also, we acknowledge that the research did not incorporate electricity policy programs being discussed, such as Vesting Contract.
□ We are not able to control several uncertain variables such as the power plant and grid construction delays, renewable energy and greenhouse gas reduction policy, nuclear power plant construction and life extension policy direction, and power supply and demand policy, and energy and environmental policy conditions etc. In a further research, these limitations may have to be dealt with sufficiently.