The Competitiveness Issue of the Japanese Economy Under Carbon Pricing: A Computable General Equilibrium Analysis of 2050

Abstract

Using a computable general equilibrium (CGE) model, this paper investigates the impact of carbon regulations on the Japanese economy. We use an 11-sector, 15-region global dynamic CGE model with a time span from 2011 to 2050. We assume that Japan (along with other developed regions) reduces CO2 emissions by 80% by 2050 and analyze the impact on the Japanese economy. In particular, we consider multiple scenarios of CO2 reduction rates in less developed regions and analyze how changes in CO2 reduction in these regions affect Japan. In addition, we also consider multiple scenarios of the use of a border adjustment policy and analyze its impact. Our simulation results are summarized as follows. First, an 80% CO2 reduction in Japan generates large negative impacts on the Japanese economy in terms of both the macroeconomy and individual sectors. Second, changes in the reduction rates in less developed regions have only a small impact on Japan. Third, the use of border adjustment in Japan has a small impact on the GDP and welfare of Japan overall but a large impact on output in the energy intensive sectors. When future climate change policies in Japan are discussed, much attention is usually paid to climate policy in less developed regions. However, the second result of our analysis suggests that climate change policy in less developed regions has only a small impact on Japan. In addition, the third result indicates that the effectiveness of border adjustment is limited.