Korean Energy Economic Review ISSN:1599-7057(Print) 에너지경제연구

The purpose of this paper is to study the demand for energy in manufacturing sectors of Korea and to evaluate the impact of carbon tax on energy related CO2 emissions. The theoretical model utilized in the analysis is the two-stage translog cost function. The model is estimated using time series data over the period 1991-2004. The results indicate that substitutability between capital and labor, substitutability between capital and energy but complementarity between labor and energy. The substitutability between coal, gas, oil, and electricity shows different patterns over industry. A carbon tax of 50,000Won per tone of carbon results in a considerable reduction in direct and indirect CO2 emissions from their 2004 level. This implies that a carbon tax on Korean manufacturing is an environmentally effective policy for mitigating global warming, although a costly one.