Impact of changes of allocation and price in emission trading scheme on the electricity market: Korean case study

This study examines how key design elements of the Korean Emissions Trading Scheme (K-ETS)—benchmarking method, auctioning share, and carbon price—affect the electricity market, with a focus on generation mix and firm-level profitability. We develop an integrated modeling framework linking emission allowance allocation, carbon-cost internalization, and electricity dispatch, and apply it to eight policy scenarios for Phase IV of the K-ETS (2026–2030). To clarify policy mechanisms, the combined effects of ETS reforms are decomposed into their individual contributions. The results show that switching from a fuel-specific to a uniform benchmark reduces free allocations for fossil fuel–based generators and lowers profitability across all generation companies, with disproportionately larger losses for coal-intensive portfolios. Increasing the auctioning share raises the marginal cost of carbon-intensive generation and modestly incentivizes cleaner technologies, but its overall system impact remains limited. In contrast, higher carbon prices exert the strongest influence by increasing the carbon-inclusive heat rate cost of coal relative to gas, enabling partial coal-to-gas substitution and reshaping the distribution of generation and profits across firms. These effects are distributionally non-neutral, favoring generators with cleaner portfolios. Sensitivity analyses confirm that these qualitative findings are robust across alternative market conditions, although effect magnitudes vary. From a policy perspective, the results indicate that benchmarking reform alone is insufficient to induce large-scale environmental dispatch in Korea's cost-based pool(CBP) electricity market with limited cost pass-through. Meaningful decarbonization requires a coordinated policy package combining higher carbon prices, expanded auctioning, and complementary electricity market reforms.