After a long period of government intervention in the energy market, the Korean government has realized that the costs of its intervention are greater than the benefit as the economy got more complicated and more integrated into the world economy. The objective of the energy tax reform is to establish a transparent set of taxing principles, in order to internalize externalities from energy consumption. The expected effects of the reform is to motivate energy conservation and to promote R&D on energy conservation technologies which will ultimately result in the strengthening of industrial competitiveness and the reduction of urban air pollution. (C) 2003 Elsevier Ltd. All rights reserved.