Using a computable general equilibrium model, this paper compares the macroeconomic consequences of two clean car policies in South Korea. The Korean Government planned to introduce a tax-subsidy plan (2014 tax-subsidy plan) promoting low greenhouse gas (GHG) emission car (clean car) sales in 2015. This policy was replaced with a subsidy-only plan after a government-sponsored study in 2014 claimed that this policy would cause significant production and employment loss in the auto industry, without much GHG reduction. This argument was, however, solely based on partial equilibrium analysis, and failed to consider the potential revenue-recycling effect of the 2014 tax-subsidy plan. By applying a simple computable general equilibrium (CGE) model, we found that the revenue-recycling effect of the 2014 tax-subsidy plan was large enough to compensate for the negative shock to the auto industry. With reasonable values of elasticity of substitution parameters, we found that the 2014 tax-subsidy plan could increase the gross domestic product (GDP) by 0.104% while the clean car subsidy program that replaced 2014
tax-subsidy plan would cause a GDP loss of 0.015%. Our results suggest that the policy swap from the 2014 tax-subsidy plan to the 2015 subsidy-only policy may have done more harm than good to the Korean economy.

[Key Words] Clean Car, Bonus-Malus, Subsidy, Revenue Recycling, CGE, General Equilibrium Science