A Study on Policy Interactions between Cap-and-trade and Renewable Portfolio Standards in the South Korean Power Sector
Global communities are paying growing attention to climate change.
Greenhouse gases that cause climate change are a representative environmental bad in economics. As with goods, the efficient allocation of a bad is achieved through optimization behavior of market agents. Microeconomic theory predicts that consumers maximizing their utility as producers maximize profits can lead to the optimization of social welfare. However, this is conditional on the premise that no market failures exist due to, for instance, externalities. In case of market failure, the government can intervene in the market through policy instruments such as regulation to improve social well-being.
The South Korean government has been making efforts to address climate change through various policies. While tackling environmental externalities, regulations could impose heavy burdens on the industrial sector, which is the major source of greenhouse gas emissions. Hurting business can have a negative impact on the economy, discouraging more aggressive greenhouse gas abatement from industry. This implies that the cost-effectiveness of any climate policy should be thoroughly investigated.