Potential cost savings from internal/external CO₂ emissions trading in the Korean electric power industry

Korea plans to introduce an emissions trading scheme for the controlling greenhouse gas emissions in 2015. Using Shephard's (1970) output distance function, we first estimate the shadow price of CO₂ for power generators in the Korean fossil-fueled electric generation industry. Then, by assuming that each power generator is required to reduce CO₂ emissions by one ton, we compute the potential cost savings from internal trading among generators within the same plant and from external trading across plants at prevailing market prices. The results indicate that, on average, the generators paid $14.63 to abate one ton of CO₂ emissions in 2007. Plants realized additional gains through external trading. In particular, cost savings from trades between different fuel-fired plants were substantial.