The effects of Paris agreements on Korean economy and trade analyzed by the computational general equilibrium method considering firm’s heterogeneity

Purpose: During the Paris Convention, Korean Government made commitment to curb carbon emission by 37 percent by the year of 2030. Since then there has been constant debate, both in media and academia, as to whether attempts to reduce carbon emission would spell the concomitant economic slowdown. The purpose of this paper is to build a Computable General Equilibrium (CGE) model to see the effects of emission decrease on Korea economy. Design/methodology/approach: To answer the above question, we build a comprehensive framework to gauge the economic impact of Paris Convention through the lens of Computable General Equilibrium (CGE) model using Armington and Melitz model. Findings: Contrary to conventional wisdom, Korea’s economic performance in terms of welfare remains robust when the carbon emission is reduced. Broadly speaking, Korea’s welfare does not contract significantly in part due to expansion at the export market. For instance, the energy intensive industry (EIT) is affected most directly from the Paris Convention commitment and yet it experiences growth in export. On the contrary, the authors find that the general economic impact on Korea’s output is negative. The additional experiment using Melitz model shows that as the carbon reduction is enforced, both the number and the average productivity of the exporting firms increase in the EIT sector, which the authors refer in the paper as the “Melitz Effect.” Practical implications: This paper shows that what can be occurred in Korean industries by emission decrease commitment. Social implications: One byproduct from restricting carbon emission is the surge in the electricity price. This is due to the fact that industries have to shift away from traditional fuels such as oil to electricity for energy. Therefore the authors propose that industrial policies aimed at balancing electricity price should accompany the plan to reduce carbon emission. Originality/value: For Korean economy, the effects of emission reduction is researched using Armington and Melitz model at the same time. Especially, this is the first research case using the Melitz model in this Korean topic.