The government is reexamining the carbon tax on vehicles six months ahead of the implementation as its negative impact on local industries is determined to be more severe than expected. Besides, it is predicted that the new tax will bring greenhouse gas reduction effects below expectations, only to impose a burden on the national economy. The paradox of regulation is well founded in a joint report of the Korea Institute of Public Finance, the Korea Institute for Industrial Economics & Trade, and the Korea Environment Institute.
According to the report, the amount of carbon emissions cut by the tax is less than previous estimates. Specifically, it is forecast to be around 500,000 tons, though the government estimated it at 1.6 million tons for 2015 to 2020 during the establishment of a legal basis for the tax on the Framework Act on Low-Carbon Green Growth four years ago. The recent survey result of 500,000 tons assumes an upper limit of the charge of 4 million won (US$3,916) per vehicle.
Nonetheless, the Ministry of Environment is still asserting that the target can be met by increasing the upper limit. Auto industry participants are opposed to such increases, arguing that the ceiling of four million won is already burdensome.
Besides, the domestic auto industry could take a direct hit if the tax is put into place from as early as next year. The sales volumes of Hyundai Motor Company and Ssangyong Motors are estimated to be decreased by 3,800 (0.9 percent of the total) and 1,500 units (4.5 percent) as of 2015. The losses reach approximately 95 billion won (US$93.1 million) and 37.5 billion won (US$36.7 million) when the Sonata and Korando C, priced at 25 million won (US$24,476) each, are put into the calculation. Ssangyong is likely to suffer particularly great damage because it manufactures no hybrid vehicles and has an SUV-centered lineup.
In contrast, German and Japanese cars are expected to enjoy at least some increase in sales thanks to their hybrid and diesel technologies, while U.S. carmakers such as Ford are witnessing a drop in sales. Mercedes Benz, BMW, and other German automakers are predicted to further cement their presence in Korea by capitalizing on the subsidy with their popularity in Korea on the rise.
Another concern is the possibility of a trade conflict with the U.S., which is leading the Trans-Pacific Partnership (TPP). “There are some things that have yet to be done in the car industry before the complete implementation of the KORUS FTA,” said U.S. President Barack Obama during his visit to Korea last month. Those in the know say that the remark has to do with the carbon tax on vehicles.
It has been also pointed out that U.S. automakers could put greater pressure on Congress with this opportunity. They have insisted that the KORUS FTA is lopsided in favor of Korea and lays a burden on the trade balance.
“Bomus-Malus of France, which is the benchmark model of the carbon tax of the Korean government, is a de facto non-tariff barrier,” said another industry source, adding, “As such, the introduction of the carbon tax may be too much with the TPP and FTAs underway simultaneously with a number of countries.”
The government is mulling over how to tide this over in various ways. It will hold a public hearing in mid-June to finalize its stance. The easiest option is to postpone the implementation of the law. However, strong opposition is expected from environmental organizations and the Ministry of Environment in this case.