A computable general equilibrium analysis of environmental tax reform in Japan with a forward-looking dynamic model

Abstract

The Japanese government plans to reduce greenhouse gas emissions by 80% by 2050. However, it is not yet clear which policy measures the government will adopt to achieve this goal. In this regard, environmental tax reform, which is the combination of carbon regulation and the reduction of existing distortionary taxes, has attracted much attention. This paper examines the effects of an environmental tax reform in Japan. Using a dynamic computable general equilibrium (CGE) model, we analyze the quantitative impacts of an environmental tax reform and clarify which types of environmental tax reform are the most desirable. In the simulation, we introduce a carbon tax and consider the following four scenarios for the use of the carbon tax revenue: (1) a lump-sum rebate to the household, (2) a cut in income taxes, (3) a cut in corporate taxes and (4) a cut in consumption taxes. The first scenario is a pure carbon tax, and the other three scenarios are types of environmental tax reform. Our CGE simulation shows that (1) environmental tax reform tends to generate more desirable impacts than the pure carbon tax and that (2) the strong double dividend is obtained in some cases. In particular, we show that a cut in corporate taxes leads to the most desirable policy in terms of GDP and national income.

Impact of Carbon Tax Increase on Product Prices in Japan

“…Agriculture, forestry, and fisheries sectors also lost their tax exemptions and refunds, but this was offset to some extent by the effect of lower gasoline and diesel delivery taxes. Although direct comparisons cannot be made due to differences in carbon tax prices and assumptions, these trends were similar to those reported in a previous study [11].…”

“…Using the process-based LCA database, impacts on product prices were analyzed at the product level. While previous studies using the Input-Output table [9,10] had an analytical granularity of approximately 400 categories and the CGE model had 27 categories [11], this study, using the process-based database, was able to achieve approximately 4700 categories. As shown in Figure 1, there was a large range of price changes among products, even within the same industry sector.…”

“…Nadirov et al, (2020) [7] clarified that increasing carbon taxes affects consumer behavior, resulting in a significant shift from petrol to diesel fuel vehicles in 17 countries. Product price changes associated with the introduction of carbon taxes and the associated impacts on households have been studied in various countries, including the United States [8], Japan [9][10][11], France [12], and Thailand [13]. Studies using multi-region input-output tables (MRIOs) clarified that the impact of carbon pricing on households varies according to the income level of a country [14,15].…”

The impact of environmental taxes on economic benefits and technology innovation input of heavily polluting industries in China

“…Therefore, such enterprises are at a competitive disadvantage compared to enterprises in the same industry that choose to maintain the status quo; that is, not upgrading to green technology. However, in the long run, environmental taxes will have a positive impact on the economic benefits of enterprises (Yi et al, 2021;Landa Rivera et al, 2016;Takeda and Arimura. 2021;Fisher and van Marrewijk, 1998).…”

Risk-Opportunity Analysis for Transformative Policy Design and Appraisal

“…Part of the answer may lie in the inadequacy of the tools most commonly used to guide decision-making processes (Farmer et al, 2015;Mercure et al, 2016). The problem of reducing global emissions of greenhouse gases pose three challenges that standard and prevailing welfare economics policy assessment methods are generally not in an adequate analytical position to address (cost-benefit analysis, CBA (Stern, 2007;EPA, 2014;EC, 2015;Nordhaus, 2017;HM Treasury, 2020b), and partial/general economic equilibrium analysis (Château et al, 2014;Kriegler et al, 2015;Weng et al, 2018;Takeda and Arimura, 2021)). These include the pervasive and transformative nature of the necessary changes including non-marginal elements (Fouquet, 2016;IPCC, 2018); the highly heterogenous interests of different actors, stakeholders and decision-makers (Geels, Berkhout and van Vuuren, 2016); and the high uncertainty regarding costs, benefits and path-dependence in the outcomes of policy strategies (Hughes, Strachan and Gross, 2013).…”