Who bears the burden of a tax on carbon emissions in Japan?

Abstract

We develop a simple general equilibrium model in the style of Harberger to analyze the distributional effects of the proposed “environment tax” on carbon in Japan. We derive closed-form equations that show how a change in the tax rate affects the economy-wide return to capital, wage, and output prices. The two main features of the economy that determine the sources-side incidence of the tax are the factor intensities of the polluting and nonpolluting industries and the elasticity of substitution in production between polluting inputs and labor or capital. The input that is a better substitute for pollution usually bears a lower burden of the tax than the other input, although we find conditions under which this is not true. If the polluting sector is relatively capital intensive, then capital can bear a higher burden of the tax. Calibrating this model to the Japanese economy, we find a trade-off between these two effects. Polluting industries are more capital intensive, but capital is likely to be a better substitute for pollution than is labor.