A Dual Input-Output Approach for Optimal Tax-Subsidy Policy to Reduce Greenhouse Gas and Air Pollutants Emission: Comparison in 1997 and 2000

Abstract

In this study, we present an expanded input-output model, which determines the optimal level of economic activities and their lowest emission of air pollutants. The objective is to maximize the welfare function with respect to the emission taxes, being subject to the emission standards of the air pollutants. By making the emission standards strict step by step, we can analyze the feasibility and implementation potential of reduction scenarios by the numerical simulations. The model is applied to the Japanese economy by comparing the simulation results for the years 1997 and 2000. This comparison reveals the types of changes experienced by the Japanese economy in order to achieve the GHG emission reduction target of the Kyoto Protocol. It also reveals the alternative pollutant reduction policy in these years. We analyze one type of greenhouse gas and two types of air pollutants which are CO2, SOx, and NOx generated by the consumption of fossil fuels and ignore other anthropogenic greenhouse gases. The prices change so as to reflect social costs of the air pollutants through the optimal emission taxes. We consider that these optimized emission taxes are collected by the government and used for the running cost of abatement industries. The taxes will also help to subsidize industries whose activities become unsustainable due to the introduction of the emission tax, in order to avoid generation of idle capital and unemployment labor.