South Korean government to increase tax on bituminous coal to reduce fine dust pollution

Posted on : 2019-03-20 16:48 KST Modified on : 2019-03-20 16:48 KST
New measures expected to reflect environment costs of certain fuel types
Yeonghueng Power Station in Incheon’s Ongjin County is the only coal-fired power station in the greater Seoul metropolitan area. (Hankyoreh archives)
Yeonghueng Power Station in Incheon’s Ongjin County is the only coal-fired power station in the greater Seoul metropolitan area. (Hankyoreh archives)

Starting in April, the tax that South Korea places on bituminous coal will increase from 36 won to 46 won (US$1=1,130.62 won) per kilogram, while the tax on liquefied natural gas (LNG) will be cut sharply from 91.4 won to 23 won. The reversal in the tax burden on bituminous coal and LNG, which are both used to fuel power plants, will greatly increase the utilization of high-efficiency LNG plants. The distorted prices of electricity-generating fuels have impeded efforts to move away from coal and raised levels of particulate matter in the air, and the adjustment of the tax regime represents the first step toward rectifying those prices. Moving forward, there are plans to reflect other environmental costs in the price of electricity-generating fuels.

South Korea’s Ministry of Trade, Industry and Energy (MOTIE) announced that a revision of the enforcement decree of the Petroleum and Alternative Fuel Business Act had been adopted in a cabinet meeting on Mar. 19. This revision will massively reduce the import fees on electricity-generating LNG from 24.2 won to 3.8 won per kilogram as of Apr. 1 while continuing to waive import fees on bituminous coal. The adjustment of the individual consumption tax that was included in a revision to the tax code announced in July 2018 will be taking place as well, raising the tax per kilogram of bituminous coal from 36 won to 46 won and lowering the tax on LNG from 60 won to 12 won. The tariffs on these two fuels (0 won for bituminous fuel and 7.2 won for LNG) will be kept in place.

By adjusting the tax regime for bituminous coal and LNG, the government seeks to rectify distortions in the market by having environmental costs and other externalities built into the price of fuel. MOTIE statistics show that the processing cost of particulate matter from bituminous coal (2.0 won/kg) is cheaper than for LNG (3.4 won). But it costs much more to process sulfur oxides, which are a source of particulate matter, when they are released by bituminous coal (40.3 won) than when they are released by LNG (3.3 won), and nitrogen oxides released by bituminous coal are also much more expensive to process (42.5 won) than those released by LNG (35.9 won). Despite this fact, the tax regime had been set up to give an absolute advantage to coal power generation.

The adjustment of the tax burden is expected to bring some change to the order in which power generators are brought online. The sequence by which power stations in the country are activated goes from low to high, based on the price at which electricity is sold in real time on the power exchange, known as the system marginal price (SMP). The typical sequence is nuclear, coal and LNG.

“The change in the tax system doesn’t completely reverse the order in which coal and LNG are supplied to the grid. But if coal and LNG were previously as distinct as oil and water in the sequence, there will now be times when high-efficiency LNG power stations are activated before low-efficiency coal power stations,” said a MOTIE official. The government expects a decrease in the utilization of less-efficient older coal stations to reduce fine particulate matter (PM 2.5) by 427 tons a year.

Several steps are still left before the distortions in fuel prices can be fully corrected. The government is planning to reflect other environmental costs, including the cost of processing pollutant-reducing chemicals and the cost of the carbon emissions trading system, in a series of stages. This represents an attempt to replace a generation unit price that’s simply calculated from the price of the fuel with a levelized cost of energy (LCOE) that accounts for externalities. But the government has no plans to adjust the tax regime for uranium, which is exempted from tariffs, the individual consumption tax and import fees.

“Since the tax regime was adjusted so as not to affect tax revenues, there are no factors for the time being that would cause a hike in electricity prices,” a MOTIE official said.

By Choi Ha-yan, staff reporter

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