An Assessment of Japanese Carbon Tax Reform Using the E3MG Econometric Model

Soocheol Lee,Kazuhiro Ueta,Hector Pollitt

doi:10.1100/2012/835917

Soocheol Lee, Kazuhiro Ueta + Show 1 more

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https://doi.org/10.1100/2012/835917

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Abstract

This paper analyses the potential economic and environmental effects of carbon taxation in Japan using the E3MG model, a global macroeconometric model constructed by the University of Cambridge and Cambridge Econometrics. The paper approaches the issues by considering first the impacts of the carbon tax in Japan introduced in 2012 and then the measures necessary to reduce Japan's emissions in line with its Copenhagen pledge of −25% compared to 1990 levels. The results from the model suggest that FY2012 Tax Reform has only a small impact on emission levels and no significant impact on GDP and employment. The potential costs of reducing emissions to meet the 25% reduction target for 2020 are quite modest, but noticeable. GDP falls by around 1.2% compared to the baseline and employment by 0.4% compared to the baseline. But this could be offset, with some potential economic benefits, if revenues are recycled efficiently. This paper considers two revenue recycling scenarios. The most positive outcome is if revenues are used both to reduce income tax rates and to increase investment in energy efficiency. This paper shows there could be double dividend effects, if Carbon Tax Reform is properly designed.

Highlights

In recent years, the Japanese Government has proposed to introduce low-carbon policy instruments such as a carbon tax and emissions trading scheme (ETS) by introducing the bill of the Basic Act on Global Warming Countermeasures in 2009
The results showed a reduction in CO2 between 0.11 and 0.27% and an increase in GDP between 0.01 and 0.09% compared to baseline, with the revenues recycled through cuts in consumption or income taxes
This paper analyses the effects of carbon taxes on GHG emissions and the wider economy for the Japanese FY2012 Tax Reform Revision

Summary

Introduction

The Japanese Government has proposed to introduce low-carbon policy instruments such as a carbon tax and ETS by introducing the bill of the Basic Act on Global Warming Countermeasures in 2009. The effects of carbon taxes on GHG emissions and the wider economy are attracting the notice of many researchers and policy makers in this area. The Law Concerning the Promotion of the Measures to Cope with Global Warming, for example, became effective in 1998. This law required business circles and householders to try to reduce GHG emissions without any imperative policy instruments like carbon taxes or ETS. Reductions from households have depended on government-led campaigns such as Cool Business, which requests people to control their office and room air conditioner over 28◦C with light dress (e.g., no necktie and no jacket, etc.) during the summer season

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