KLRI : KOREA LEGISLATION RESEARCH INSTITUTE

Ⅰ. Backgrounds and Necessities of Research

▶Backgrounds

○The international effort to transform into a carbon-neutral society and to realize a carbon-neutral society

-As the special report ‘Global Warming of 1.5 ºC‘’ published in 2018 by the International Panel on Climate Change (IPCC) highlighted the impact of global warming, climate change has become an international issue to all nations should respond together. 

-Even though various efforts to reduce impacts of climate change have been made, greenhouse gas emission form carbon dioxide fossil fuel use has not been decreased. 

-A number of countries impose the carbon tax so that it could help to reduce fossil fuel use which is pointed out as a main cause of climate change.

○Korea declared its policy roadmaps to achieve the goal of carbon neutrality by 2050 and joined in the international effort to turn into a carbon neutral society. 

-On October 18, 2021, the Korean government updated ‘2030 Nationally Determined Contribution (NDC)’, an emissions reduction goal of 40 percent from 2018 levels by 2030.

-Despite the government's ambitious goal of carbon neutrality, it is ture that Korea ranks ninth in energy consumption in the world. In addition, the transition to a carbon-neutral society is not easy as industries that emit large amounts of carbon account for a large portion of the Korea’s industrial structure.

-Against this back drop, ways have been discussed to reduce greenhouse gas emissions and realize a carbon-neutral society at the same time by preparing systems such as a carbon tax.

▶Necessities and Purposes

○Purposes of this study

-There are many number of previous studies that analyzed the need to introduce a carbon tax from an economic point of view.

-However, regarding the fact that the carbon tax is also a tax and the principle of no taxation without law provided in the constitution, any tax could be levied only when it is provided in the tax law. 

-Nevertheless, not many studies and research have reviewed the taxation system for carbon emissions from a legal point of view. Therefore, it is necessary to look into carbon neutrality from a taxation point of view.

○Purpose of the study

-It is needed to review how the carbon emission taxation system could be reorganized taking into account of the purpose of individual tax laws.

-Comparing carbon taxation systems of other countries, it is necessary to closely look into what could be supplemented in reorganizing the taxation system for carbon emissions in the future.

 

Ⅱ. Main Contents

▶Concept and Legal Nature of Carbon Tax 

○Concept of Carbon Tax

-It is true that the concept of carbon tax is not internationally standardized or unified, but the concept functions as ‘a mean of bearing environmental costs by the society.’

-In the past, taxation on carbon emissions caused by the use of fuels that cause warming, such as fossil fuels, was made according to the flexible taxation system. However, in recent years, the taxation on carbon emissions has been calculated by taking into account the impact on the environment.

-Since taxation on carbon emissions means an increase in financial burden on industries, some argues that the introduction of a carbon tax might cause price rise while weakening competitiveness. Nonetheless, the recent international trend seems to acknowledge the necessity of a system such as a carbon tax in the process of the transition to a carbon-neutral society, even though the scope and scale of the carbon tax would be discussed separately. 

○Legal Characteristics of Carbon Tax

-Since the carbon tax levies on carbon emissions, it has been discussed whether the tax should be used as an objective tax only for the purpose of transitioning to a carbon-neutral society.

-Even if it is not an objective tax, it could be used on the road to the transition to a carbon-neutral society. Therefore, the legal nature of the carbon tax should be considered as an area that belongs to the legislative discretion of each country's legislators.

-In addition, the carbon tax is not required to be an objective tax.

-A carbon tax is a means to reduce carbon emissions and has the characteristics of a type of carbon pricing system like the emission trading system and the carbon border tax.

▶International Discussion on Carbon Tax

○Examples to deal with challenges of introducing carbon tax

-The introduction of the carbon tax may lead to increase in the tax burden on taxpayers, so countries discussed ways to deal with possible challenges of introducing the carbon tax. First, lowering the tax rate of other tax items such as income tax is to alleviate the burden. Second, the carbon tax rate would be raised gradually in consideration of the tax resistance of taxpayers.

-Lastly, the name of carbon tax is not used directly and it is not levied as a separate tax, there is a method of additionally taxing it based on other taxes as a tax on carbon emission.

○Taxation status on carbon emissions at home and abroad

-Korea levies the traffic, energy and environment tax and individual consumption taxes as taxes on carbon emissions.

-Although the traffic, energy and environment tax, mainly levied on gasoline and diesel. is an objective tax implemented in accordance with a temporary law and the 4th largest tax revenue in Korea. 

-The fact that the traffic, energy and environment tax centered on gasoline and diesel while it is the 4th largest tax revenue shows that taxation on transportation fuel is an import income for the government. 

-The traffic, energy and environment tax was originally introduced as a tax to finance road transportation and was levied on the basis of the user-pays principle. Energy and environment were later added to tax subjects. However, since those tax subjects were added following the polluter pays principle, there is a problem that two taxes with different logic coexist in one tax category.

-The individual consumption tax was introduced as a corrective tax in consideration of the regressiveness of the tax arising from the single VAT rate.

-Although the individual consumption tax targets fossil fuels, it is pointed out that each tax rate does not reflect the impact on the environment. Therefore, a separate revision is required in the future.

-Furthermore, the traffic, energy and environment tax and individual consumption tax are levied on gasoline and diesel, the individual consumption tax is not following the supplementary provisions of the ｢Traffic, Energy, and Environment Tax Act｣. The reason is thought to be a measure to alleviate the burden on the national economy.

○Discussion on Legislation of Carbon Tax in Korea 

-In the 2010s, there were discussions about whether a separate carbon tax law should be newly established in accordance with the enactment of the ｢Framework Act on Low Carbon, Green Growth｣. Considering the legislative discussions in foreign countries, it is required to levy tax on electricity in Korea in the future as well.

-Recently, there are discussions around the world to enact the carbon tax law to achieve the goal of realizing a carbon-neutral society. In particular, a bill is on the discussion table to alleviate the regressiveness of the tax by returning the carbon tax to taxpayers in the form of carbon dividends.

▶Reorganization of the taxation system for carbon emissions

○Consider the necessity of taxing carbon emissions and the burden of taxpayers

-Considering the statistics that Korea consumes considerably more energy compared to other foreign countries while the consumption of fossil fuels decreases when the price of fossil fuels is high, it might be reasonable to gradually increase the tax rate on greenhouse has emission for the purpose of realizing a carbon-neutral society through greenhouse gas reduction,

-Considering the previous discussions in Korea, it seems that it is not easy to reduce the tax rate of other tax items such as income tax to alleviate the tax burden that is increased due to the introduction of the carbon tax as in foreign countries. Therefore, it would be reasonable to adopt a method of gradually increasing the tax rate for the taxation of carbon emissions.

○Reorganization of the taxation system centering on corrective taxes such as individual consumption tax

-It is necessary to review measures to actively utilize corrective tax taking into account of individual tax laws, and the nature and purpose of their introduction.

-When comparing the current traffic, energy, and environment tax with the individual consumption tax, the individual consumption tax was introduced as a corrective. On the other hand, the traffic, energy and environment tax was initially introduced as a way to lessen the user's burden rather than a corrective tax.

-Considering the nature and purposes of legislation of each tax law, it is needed to operate a taxation system on carbon emissions focusing on individual consumption tax rather instead of the traffic, energy and environment tax.

-As for the individual consumption tax, it is not an objective tax unlike the traffic, energy and environment tax. So it may enhance the efficiency of fiscal management.

-The traffic, energy and environment tax will expire in 2024. Therefore, it is necessary to discuss the separation of the traffic, energy and environment tax based on the user-pays principle and the carbon tax following the polluter-pays principle in consideration of the nature of taxation after the sunset period.

 

Ⅲ. Expected Effect

▶Legislation of tax laws considering legal aspects in the reorganization of the taxation system for carbon emissions

○This study will be useful in understanding the importance of considering the purposes of legislating individual tax laws and taxation with regard to carbon emissions.

○This study establishes a taxation system based on the constitutional principle of tax law as the tax burden is carried out in consideration of individual tax laws and tax purposes and legislative purpose. ○ This study could contribute to considering the tax burden before establishing a taxation system based on the constitutional principle of tax law and purposes of taxation.