Steel Decarbonization Pathways under Carbon Revenue Recycling: A Hybrid Bottom-Up and Top-Down Framework with Endogenous R&D in Korea

The steel sector is the largest industrial source of CO2 in Korea, and the technologies that could decarbonize it- hydrogen direct reduction, electrolytic ironmaking, and CCUS, among them- remain pre-commercial. With paid allocation under the Korean ETS scheduled to reach 25% by 2030, how auction revenue is used is becoming a central design question. We examine whether recycling that revenue into sector-specific R&D alters the steel technology pathway, and at what macroeconomic and fiscal cost. 

We link a bottom-up steel technology model with a recursive-dynamic CGE model of the Korean economy. The bottom-up model covers eleven production routes, three incumbent and eight pre-commercial, calibrated to 2023 production shares using positive mathematical programming. Each pre-commercial route accumulates a knowledge stock from public and privately chosen R&D; once the stock exceeds a route-specific threshold, the route becomes available, and its capital cost declines with cumulative output. The CGE model distinguishes public and private R&D as separate sectors, and the two models exchange fourteen variables annually until convergence. 

Under a common carbon-tax path (30 to 150 USD/tCO2 by 2050), we compare three uses of the revenue: retention (TAX), an equal-size production-tax rebate (REB), and recycling 50% into steel R&D (RND). Because REB returns exactly the amount RND spends, the RND–REB comparison isolates the R&D channel. 

The carbon tax alone activates one of the eight new routes. Recycling activates all eight between 2026 and 2048, raises their share of 2050 output from 19% to 36%, and reduces 2050 steel CO2 by a further 8.7%. Both return options keep GDP above the TAX path; the rebate minimizes welfare loss, while recycling minimizes GDP loss and lowers steel prices after 2040. Roughly 84% of the recycled revenue is recovered through the larger tax base it induces.