Structural change of the manufacturing sector in Korea: Measurement of real energy intensity and CO2 emissions

In terms of energy use, it is well known that energy intensity in the manufacturing sector is higher than any other sector. In Korea, the energy intensity of the manufacturing sector has deteriorated since the late 1980s. This phenomenon is quite unique compared with the trend of energy intensity in other countries. In this study, we closely examine the structural composition of Korea's manufacturing sector from 1981 to 1996, its energy intensity, and its implications for carbon dioxide (CO2) emissions by introducing the measurement of real energy intensity. The conventional index of energy intensity is not appropriate for aggregate industries. Since the aggregation of industries in the manufacturing sector includes structural change, it would be better to separate the effect of structural change. Hence, in this study, we apply a decomposition methodology for energy intensity based on the 'Divisia Index'. At each industry level, energy intensity is a mixed measurement of pure energy efficiency improvement and fuel substitution. We also calculate real energy intensity at each industry level. Based on our analysis, we derive carbon dioxide (CO2) intensity and analyze the factors that affect CO2 emission in this sector. During 1988-1993, the energy intensity of the manufacturing sector in Korea deteriorated. Industrial structural change, the real energy intensity in this sector became even worse during this period. The primary reason for this phenomenon was that the share of energy intensive industries, such as steel, cement, and petro-chemical industries increased. Second, during the same period, liquefied natural gas (LNG) rapidly penetrated this sector, so that the CO2 intensity improved. We find that harmonization of economic development strategies and environmental consideration is crucial for sustainable development. Based on our study, we derived some policy implications. Integration of industrial policies and energy efficiency improving programs is quite important, as well as the acceleration of fuel substitution to less carbon (C) intensive ones. Integration of local and global environmental policies plays an important role for mitigating CO2 emissions.