Does Korea's carbon emissions trading scheme enhance efficiency for sustainable energy and utilities?

A carbon emissions trading scheme (ETS) should theoretically increase investment in sustainable energy and utilities, promoting energy efficiency in line with sustainable development and energy transition goals. However, whether Korea's ETS improves or impairs energy efficiency for sustainable energy and utilities is disputed. This study addresses this debate, using panel data from 16 sectors in Korea from 2011 to 2020 and employing a dynamic difference-in-differences (DID) method to estimate the effect of Korea's ETS on total factor energy efficiency and its influencing mechanisms. The main findings are as follows. First, while the effect appeared statistically insignificant in the analyses of the industry as a whole, improving energy efficiency demonstrated a moderate effect for the agriculture industry in terms of research and development investment, fixed assets, and operating income when performing heterogeneity and moderation effect analyses. Second, a company's production dependence on labour is unfavourable to improving energy efficiency through ETS. Lastly, the adverse impact of labour dependence is more prominently observed in light industries, particularly in durable goods and agricultural sub-sectors. Therefore, this reaffirms that the key to increasing energy efficiency is to adjust Korea's ETS flexibly, considering the characteristics of each industry.