Malaya University
July 3-4

An Economic Assessment of Green Tax
Reform to Meet Japan`s NDC under
different nuclear assumptions using
E3ME Model-Implication for ASEAN countriesSoocheol Lee
Meijo University
slee@meijo-u.ac.jp

Co-authored by
Unnada Chewpreecha, manager,
Department of International
Modelling

Satoshi Kojima
Principal Researcher

Aims of the Study● The aim of this study is to estimate the carbon price (as a carbon tax

Rate) that will be required to meet the 2030 greenhouse gas emissions
reduction target stipulated in Japan’s NDC (Nationally Determined
Contribution) at COP21 under various nuclear mix in the power
generation.
● We estimate the economic impact of these taxes using E3ME model.

● This study also investigates ways in which the Japanese government canuse the revenues generated from carbon taxes. The ‘revenue recycling’
methods considered include reductions in consumption taxes,
Income tax and SSC from companies as a Green Tax Reform.
● The impacts of each revenue recycling method are estimated in termsof GDP, employment, trade, distributional effect and other parameters

World temperature, NDCs and CO2 reduction
NDC
World yearly
CO2 Emission(GtCO2)Current
policyNDCs case(2.7℃)

5

E3ME model and
Scenarios
Description

Basic Model Structures:
E3ME(Energy-Environment-Economy Macro Econometric Model)●
・E3ME (world) models are:computer-based econometric modelsdeveloped byCambridge University and Cambridge Econometrics…covering economy, energy and emissions…
…with detailed sectors (linked by IO tables)…
…and endogenous technological progress●
・They can be used for forecasting but are typicallyused for policy analysis… sometimes at national level, usually… international

The E3ME model: Dimensions• Econometric model• cover world 59 regions, including explicit representation of all G20 countries
and all EU Member States. The model has recently been expanded to cover
many East Asia and South East Asia regions explicitly including Japan,
China, Korea, Taiwan and Indonesia. Other ASEAN countries are grouped
together.
• based on the system of national accounts• includes intermediate and all components of final demand• detailed treatment of the labor market• 22 stochastic equation sets, also covering energy and prices• large sectoral disaggregation: 42 industries, 28 consumption categories• 12 different fuel types, and 19 separate fuel user groups• 14 atmospheric emissions• long and short-term specification• annual solutions to 2050
• For more details see www.e3memodel.com

Figure 1 E3 linkages in E3ME

FTT:
Power

FTT:
Transportation

FTT:
Industry

Figure 2
Technology Choice and Diffusion by FTT:Power Sector linked to
E3ME modeltt + ΔtFTT（Future Technology Transformation）Model was developed by J-F Mercure,J.-F. Mercure, Energy Policy 48, 799-811 (2012)
collaboration work with Cambridge Econometirics

Figure 3
Technology Choice and Diffusion by FTT：Transportationtt + ΔtJ.-F. Mercure, Energy Policy 48, 799-811 (2012)

Low-carbon, Sustainable Futurein East Asia: Improving energy
systems, taxation and policy
cooperation

Edited by Soocheol Lee, Hector
Pollitt and Seung-Joon parkFigure 4 CO2 emission trend and 2030 reduction target
GermanyJapan

CO2 emission of Japan

2030 target(2013: 1,235 Mt)-26% comparing
to 2013
CO2 emission of Germany(2013: 760Mt)
Korea(2013: 236 Mt)-40% comparing
to 1990

Figure 5 Japan CO2 in the Reference Scenario, Asia/World Energy Outlook 2015
Indonesia 100.0% comparing to 2014
CO2 emission of ASEAN in 2014=1258 MtCO2
ASEAN 85.1% comparing to 2014
Malesia 47.3% comparing to 2014
(mtCO2)China 11.6% comparing to 2014
1250

1200

1150

-8.9%
1100

In the IEEJ Reference
Scenario, Japan’s CO21050

emissions are reduced by
1000
2013

2020

2030

8.9% in 2030 compared to2013.

Source(s): Asia/World Energy Outlook 2015 (IEEJ 2015).

Figure 6 Japan CO2 targets in 2020 and 2030 compared to the IEEJ`s Reference Scenario(mtCO2)CO2 emission baseline of IEEJ

1300
1200
1100
1000

Japanese 2020
CO2 target

900
800

Japanese 2030
CO2 target

700

2013

2020

Reference scenario

2030

TargetAccording to the NDC agreement,
Japan is committed to reducing its
energy-related CO2
emissions by 24% in 2030
compared to 2013.
The Japanese 2020 CO2 target of 3.8% from 2005 levels is alreadymet in the Asia/World Energy
Outlook’s Reference Scenario
and therefore in E3ME’s
baseline (see Figure 4).
For this reason, the carbon taxes
are only introduced graduallyfrom 2021 onwards tomeet the 2030 targets in our
scenarios.

Malaysia`s NDC• Malaysia’s total GHG emissions represent about 0.6% of global emissions in 2011.
Malaysia intends to reduce its greenhouse gas (GHG) emissions intensity of GDP
by 45% by 2030 relative to the emissions intensity of GDP in 2005. This consist of
35% on an unconditional basis and a further 10% is condition upon receipt ofclimate finance, technology transfer and capacity building from developed
countries.

Indonesia`s NDC
・Indonesia’s NDC includes an unconditional 2030 GHG emissions reduction target(including land-use, land-use change and forestry (LULUCF) emissions) of 29% below
business-as-usual (BAU) and a conditional 41% reduction below BAU by 2030 (withsufficient international support).

Singapore`s NDC
Singapore’s INDC states that it intends to reduce its Emissions Intensity of GDP by 36%
from 2005 levels by 2030, and stabilise its emissions with the aim of peaking around2030.

Figure 7 Power generation share in the Reference Scenario, Asia/World Energy Outlook 2015
100%

Biomass(5%)
Solar(4%)
Hydro(8%)

90%80%

Nuclear 13%

70%
60%

Natural gas(36%)

50%
40%

Oil(5%)

30%
20%

Coal(28%)

10%
0%

2013

Coal

2020

Oil

Natural gas

Hydro
Geothermal
Solar, Wind etc
Source(s): Asia/World Energy Outlook 2015 (IEEJ 2015).

2030

NuclearBiomass and waste

<special Figure1>Power generation share in the Reference Scenario
World

Source(s): Asia/World Energy Outlook 2016 (IEEJ 2016).

ASEAN

<special Figure2> World petroleum demand (2014~2040)
World Bunker
AfricaMiddle East
EU

Transportation
Petro-chemistry

Middle South America

Household,othersNorth America

Industry

Other Asian Pacific

Energytrasformation

India
China

Source(s): Asia/World Energy Outlook 2016 (IEEJ 2016).

<special figure3> energy self reliance outlook in ASEAN countries

LNG
self
sufficiency

Petroleum self sufficiency
Source(s): Asia/World Energy Outlook 2016 (IEEJ 2016).

<special figure4> Energy related investment outlook in ASEAN
Accumulated amount by sector(2016~2040)
Energyconservation:220

Annual average required amount

Petroleum,Gas
production:790

Power Grid
:480

Electricity
generation:570

Transportation,
Oil refinery:230(by World Bank)

Source(s): Asia/World Energy Outlook 2016 (IEEJ 2016).

Table 1 Scenario descriptions
Scenario

Description

Nuclear share

Baseline

Consistent with the Reference Scenario in the Asia/World Energy Outlook 2015 (IEEJ).

13% (IEEJ)

Scenario 1

Carbon tax to meet Japan’s NDC target in 2030. No revenue recycling.

20%

Scenario 1.1

Carbon tax to meet Japan’s NDC target in 2030. Revenue recycled via consumption tax (VAT).

20%

Scenario 1.2

Carbon tax to meet Japan’s NDC target in 2030. Revenue recycled via income tax.

20%

Scenario 1.3

Carbon tax to meet Japan’s NDC target in 2030. Revenue recycled via employers’ social security contribution 20%

Scenario 2

Carbon tax to meet Japan’s NDC target in 2030. No revenue recycling.

10%

Scenario 2.1

Carbon tax to meet Japan’s NDC target in 2030. Revenue recycled via consumption tax (VAT).

10%

Scenario 2.2

Carbon tax to meet Japan’s NDC target in 2030. Revenue recycled via income tax.

10%

Scenario 2.3

Carbon tax to meet Japan’s NDC target in 2030. Revenue recycled via employers’ social security contribution 10%

Scenario 3

Carbon tax to meet Japan’s NDC target in 2030. No revenue recycling.

0%

Scenario 3.1

Carbon tax to meet Japan’s NDC target in 2030. Revenue recycled via consumption tax (VAT).

0%

Scenario 3.2

Carbon tax to meet Japan’s NDC target in 2030. Revenue recycled via income tax.

0%

Scenario 3.3

Carbon tax to meet Japan’s NDC target in 2030. Revenue recycled via employers’ social security contribution 0%

Model Results andAnalysis

3-1. Carbon prices and CO2 reduction

Figure 8 Carbon Price for the scenarios
Carbon tax rates (2010$/tCO2)80

S3~S33(nuclear 0%)

70

S2~S23(nuclear 10%)60

S1~S13(nuclear 20%)

50
40
30
20
10

0
2021
S1

2022

2023

2024

2025

S11

S12

S13

S2

2026
S21

Source(s): E3ME Analysis

2027
S22

S23

2028

2029

2030

S3

S31

S32

S33

The E3ME model
estimates a carbon tax
rate a range of $50$75/tCO2 for all
Scenarios. The carbon
tax rates are slightly
higher in some scenariosof same nuclear powermix as the E3ME model
captures rebound effects
on energy demand fromhigher economic activity
in the scenarios.

Figure 9

Japanese Petroleum-Coal Tax and Carbon Tax
JPY 2,800/kl

JPY 1,860/ton

JPY 1,370/ton

CarbonTaxintroduced
2012

JPY289/CO2 t

Converted to CO2

JPY 2,040/kl

Carbon tax
rate+ current
tax rate

JPY 1,080/ton

JPY 700/ton

Figure 10 Japanese Energy Taxation System

Carbon tax
introduced in2012(0.76 yen/ℓ)

Table 2 Japan 2030 impact on CO2 emissions by broad energy users(% difference from baseline)
Nuclear 20% scenario

Power andothertransforma
tion
Industries
Transport

Households
Other finaluses

Nuclear 0% scenario

Nuclear 10% scenario

S1

S11

S12

S13

S2

S21

S22

S23

S3

S31

S32

S33

-20.5

-20.5

-20.6

-20.5

-18.2

-18.4

-18.3

-18.2

-16.8

-16.9

-16.8

-16.9

-20.7

-20.6

-20.6

-20.8

-25.3

-25.0

-25.3

-25.5

-27.9

-27.8

-27.8

-28.2

-5.4

-5.2

-5.2

-5.3

-6.3

-6.1

-6.2

-6.2

-7.1

-6.9

-6.9

-7.0

-2.4

-2.2

-2.2

-2.3

-2.9

-2.5

-2.6

-2.8

-3.2

-2.8

-3.0

-3.1

-6.8

-7.0

-6.9

-6.8

-8.5

-8.7

-8.6

-8.5

-9.5

-9.8

-9.6

-9.5

Source(s): E3ME Analysis

Table 3 Power generation mix results, % share of total generation
Nuclear 20% scenario
EnergyTechnology

Baseline S1

Nuclear

13%

Oil

5%

Coal

28%

Gas

36%

Solar

4%*

Hydro

8%

Biomass

5%

Wind

-

Geothermal

1%

S11

S12

S13

Nuclear 10% scenario
S2

S21

S22

S23

Nuclear 0% scenario
S3

S31

S32

S33

20%

20%

20%

20%

10%

10%

10%

10%

0%

0%

0%

0%

5%

5%

5%

5%

5%

5%

5%

5%

5%

5%

5%

5%

16%

16%

16%

16%

17%

17%

17%

17%

17%

17%

17%

17%

40%

40%

40%

40%

44%

44%

44%

44%

49%

49%

49%

49%

4%

4%

4%

4%

6%

6%

6%

6%

7%

7%

7%

7%

11%

11%

11%

11%

12%

12%

12%

12%

12%

12%

12%

12%

2%

2%

2%

2%

3%

3%

3%

3%

6%

6%

6%

6%

1%

1%

1%

1%

2%

2%

2%

2%

3%

3%

3%

3%

1%

1%

1%

1%

1%

1%

1%

1%

1%

1%

1%

1%

Note(s): * Solar and Wind. Source(s): E3ME Analysis

3-2. Macroeconomic impacts

Figure 11-1 Potential effects of a carbon tax

Figure 11-2 Potential effects of revenue recycling

Figure 12 Japan GDP impacts, % difference from baseline
Consumption tax
reduction

GDP, % difference from baseline
0.8
0.6

S11
S21
S31

Income tax
reduction

0.4

S12
S22
S32

0.2
0

2021

2022

2023

2024

2025

2026

2027

2028

2029

-0.2

S13
2030
S23
S33

Recycling to SSC

-0.4

S1
S2
S3

No recycling

-0.6
S1

S11

S12

S13

Source(s): E3ME Analysis

S2

S21

S22

S23

S3

S31

S32

S33

By comparing results between
scenarios with no revenue recycling,
the E3ME results suggest that
the GDP impacts are most negative.
The GDP impacts are most positive
when revenues are used to reduce
consumption taxes follow by income
tax.
In these two scenarios, the reduction
in consumption and income tax
directly boosts households’ realdisposable income and encourages
higher levels of spending.
In SSC scenario, there are only small
improvements to GDP in thesescenarios compared to the scenarioswith no revenue recycling.

Figure 13 Japan output impacts at sector level in 2030, % difference from baseline
In scenarios where there is norevenue recycling, output in all
sectors fall, as the costs ofenergy input increase together
with lower demand fromconsumer.
In the revenue recycling
scenarios, the sectors that
benefit tend to be service
sectors, as they are highly
related to consumer sectors
The manufacturing and transport sectors suffer from higher
energy input costs as a resultof the carbon tax.
Source(s): E3ME Analysis

Figure 14 Impacts on real disposable income in Japan by income quintiles in 2030,% different from baseline
Impacts on real disposable income in Japan by income groups in 2030, % different frombaseline
2
1.5

1
0.5
0
-0.5
-1

-1.5
-2
S1

S11

S12

S13

S2

S21

S22

S23

S3

All households

first quintile

second quintile

third quintile

fourth quintile

fifth quintile

Source(s): E3ME Analysis

S31

S32

S33

The model results show thatthe impacts on real disposable
income for the lower income
groups tend to be worse thanthose for the higher income
groups.
The carbon tax affects lower
income groups more as thesegroups tend to spend a higher
share of their income onenergy (i.e. necessities).
But the gaps are smaller in thecases of consumption tax andemployers’ social security
contributions.

Conclusion

●Our analysis shows that Japan can meet its NDC CO2 by introducing
carbon tax while increasing GDP above baseline by recycling therevenues gained from carbon taxes.
→This is due to an stimulation of consumption, improved trade balance resulting
from reduction in fossil fuel imports, combined with low carbon investments.

● The E3ME results suggest that the GDP impacts are most negative
where nuclear share is zero and least negative when nuclear share is20%. Nevertheless GDP impacts among the different nuclear
scenarios are not so much large.
●The most effective method of revenue recycling in promoting GDP
growth is through a reduction in consumption tax.
→This method directly boosts consumption and indirectly increases
real household disposable income.
●Using revenue recycling to reduce income tax is the second mosteffective way to increase GDP.

●Using revenues to reduce corporation tax and employers’ social security
contributions lower costs to firms but have limited positive impacts on GDP
as we do not expect firms to pass on all the savings to their customers.

●The latter method, however, directly boosts demand for employment as it
makes labor inputs cheaper.
●Income distribution must also be considered when designing climate
policy. Our results show that different recycling methods can produce

uneven impacts on different income groups in Japan.
●Despite this, the main message of this report is that Japan can introduce a

carbon tax without having negative effects on its economy and, with carefulconsideration meeting Japanese NDC of Paris Agreement as a Green Tax
Reform, it could also alleviate negative impacts on sectors or income groups.

Figure 15 CO2 emission and GDP trend in Japan and Germany
Germany

Japan

Real GDP of Japan
CO2 emissionof Japan

Real GDP of Germany

Energy/green tax reform in 1999
(about 15% fuel taxation, 8%
electricity taxation,
And reducing SSC of companies)

CO2
emission ofGermany

Carbon tax will bring about economic
prosperity by stimulating low carbon
technology, encouraging low carbon
production and improving national
competitiveness.

J. Stiglitz
Professor of Colombia
University
Nobel Prize WinnerThank you for your kind attention!