Carbon Pricing:
Theory and Practice“Carbon Pricing for Net Zero/Utilizing Market Mechanism”
RIETI/IEEJ/EUJC Webinar
January 27th, 2022

Toshi H. Arimura
RIETI Faculty Fellow
Professor, Waseda University
Director, Research Institute for Environmental Economics &Management
This research is supported by RIETI CBAM Project & the Environment Research andTechnology Development Fund(JPMEERF20172007 & JPMEERF20202008) of theEnvironmental Restoration and Conservation Agency of Japan.

1. Carbon Pricing in Theory• Carbon Pricing（Putting price on CO2）
1.

Carbon Tax

2. Emissions Trading Schemes (ETS)Internalize the negativeexternality• CP can minimize the cost for Society given the target• Market mechanism works efficiently.
• Firms or consumers can just focus on prices of goods and service

EnergySavings

Impacts of CP
Fuel Switching

Innovations＆Changes inTransportation

From Coal to Natural Gas
Carbon
Price

CP

Coal
Price

Oil
Price

High Carbon

CPHydrogen
Bike Share

LNG
Price

Low Carbon

Renewable Energy

Innovation
https://kakakumag.com/money/?id=13710

2

Carbon Neutrality in 2050
Emissions

2019

2050

1.21billion ton

Emission +Removal: Net Zero

Other GHGs

Emission
Reduction

HeatElectricityEnergy Related CO2

Trading requiredin 2050

Emission
Sink &Removal

RemovalETS in the LongRun?

Net Zero becauseof the trading
emitters andsink& removal
players

Based on Ministry of the Economy, Trade and Industry
32.1 Effecitiveness of Carbon Pricing (ETS)
Impacts of Tokyo ETS on CO2 Reduction (From 2009 to 2013)

CO2 Emissions ETS
Power Price
Increase by
12.4%

Carbon Pricing inJapan Ch.8

Electricity Price
IncreaseOffice
Buildings

University
Buildings

6.8%

4.0%
-

6.2%

Power Saving Order-7.3%
Tokyo ETS works!

More than half ofthe reduction from ETS

More than 10% reduction inthe manufacturing sector（Yajima et al.2021)

Arimura &Abe(2021)

Saitama ETS in Chapter 7 by Hamamoto

Carbon Pricing
in Japan Ch 6

Arimura & Matsumotoed.(2021)
https://link.springer.
com/book/10.1007/9
78-981-15-6964-7

4

2.2. Competitiveness & Leakage (1)Grandfathering (Free Allowances)
Can sell the extra
permits if they
reduced a lot

BurdenReduced

Small
BurdenBig Burden
With
Auction5

Emission
Reduction（Innovation）

Emission
FreePermits

OutputCarbonIntensity

FreePermits

Big
Reduction
in Burden（Reduced）
Emissions52.2. Competitiveness & Leakage (2)Output Based Allocation for Sectors withCarbon Leakage Concerns
OBA works better
than Carbon Tariff

BurdenReducedTakeda, Arimura,Tamechika, Fischer& Fox (2014)

BurdenReducedeven moreCan earn more
permits if output
increases
Emissions

FreePermits

OutputFischer & Fox(2007)

CarbonIntensity

Outputincrease

FreePermits
Based onOutput

6Output
6Arimura, Kawase &Yomogida（2012）

2.3 Uncertainty of Prices
Transition of Permit Prices in Tokyo ETS
14,00012,000Change in prices of Excess Emission Reductions and Renewable Energy Credits(JPY/tCO2)

Bilateral Trading Only

12,50012,0009,850

10,2509,600

10,0009,400
8,500
10,000
8,000
9,600
9,000
9,300
8,000
8,100 7,600
5,500
6,000
7,000

10,000

4,000
2,000
0

From Tokyo Metropolitan
Government

Renewable
Energy Credits

8,800

5,600 5,600

4,500
3,500

1,500

600 650600 600

Approx.
53 US$

Excess Emission
Reductions
Approx.
6 US$
7Price Floor

Safety Valve

Market Stability Reserve2.4 Effective Carbon Rate: New Carbon Tax?
Tax Revenue(240 BillionYen) is used forenergyefficiency &renewable

Since
2012

Easy toimplement

New Carbon Tax?
Tax for Climate Change Mitigation(289 Yen per ton of CO2)

Crude OilPetroleum
Products(779 Yen)

New Carbon
Tax?
LPG, LNG(400 Yen)

New
Carbon tax?
Coal(301 yen)

Revenue toRevenue topromote
promotebattery,battery,hydrogen orhydrogen or
CCUS?
CCUS?

Petroleumand coaltax

Tax Rate per ton of CO2
Based on the Carbon Pricing Committee under Ministry of the Environment, Japan8

ESG Investment&Financial Sector

2.4. Voluntary Credit Market:
Discussion under METI【GX League】
Firms with an ambitious GHG emission target
can participate in this GX league. They pledge
their goal/targets and deliver emission
reductions.
Creation of Carbon Credits
Carbon Credit Market

Participation
by individualfirm (not byindustrialassociations)

If they cannot
deliver thereduction, they
may face CP?
Credit Purchase

Non Fossil Fuel Credits

JCM

J-credit

Voluntary credit
Create a single market of voluntary credits, which help to increase thesupply of credits with quality.

Based on METI’s recourse.

93. Summary
1. In theory, carbon pricing canreduce emission efficiently.
2. In practice, there are some
practical issues. However,
government can provide
remedies for each issue.
3. Could the GX league and a
voluntary credit market lead tothe expansion of renewableenergy or the long-term goal ofCN?
Arimura & Matsumoto Ed.
10References• T,.H.Arimura & S..Matstumo ed. (2020) “Carbon Pricing inJapan“ Springer
https://link.springer.com/book/10.1007/978-981-15-6964-7• S.Takeda & T.H. Arimura (2021) A computable generalequilibrium analysis of environmental tax reform in Japan
with a forward-looking dynamic model. Sustain Sci (2021).
https://doi.org/10.1007/s11625-021-00903-4• S. Takeda, T. Horie & T.H.Arimura (2012)”A Computable
General Equilibrium Analysis of Border Adjustments under theCap-and-Trade System: A Case Study of the Japanese
Economy,” Climate Change Economics, Vol.3, No.1,pp.(1250003)1-30.
• S. Takeda, T.H.Arimura, H. Tamechika, H, C. Fischer & A. K.
Fox (2014) “Output-based allocation of emissions permits formitigating the leakage and competitiveness issues for theJapanese economy,” Environmental Economics and Policy 11Studies, Vol.16, pp.89-110.