Title of paper
Economic and environmental assessment of carbon tax reform to meet Japan’s INDC in Paris
Agreement using E3ME macro-econometric model

Authors*Soocheol Lee1, Unnada Chewpreecha2, Hector Pollitt3 and Satoshi Kojima4

Objective
The aim of this study is to determine the carbon cost(carbon tax rate) that will be required tomeet 2030 greenhouse gas reduction targets stipulated in Japan’s INDC should the 2030 energy
mix announced by the Japanese government in April 2015 be realized, and to estimate theeconomic impact of such a tax. We also estimate the economic impact on GDP, employment,
trade, and other parameters, should tax revenues from such a carbon tax be recycled to the
public through reductions in consumption tax, income tax and lump sum subsidies to thehouseholds.

Methods adopted
Quantitative analysis in this paper is performed with reference to the E3ME(Energy-Economy-Environment Macro-Econometric model) developed by Cambridge Econometrics.This applied
multi-national, multi-sectoral econometric model is global in nature, but our analysis is carriedout at the national level.
This study investigates baseline scenario and 4 different policy scenarios to meet Japan`s
2030 CO2 reduction targets of 24.9% reduction in energy-related CO2 accordingly (compared to2005 level).
Table 1: Scenario descriptions
Scenarios
Base line

Descriptions
No carbon target, no policy to reduce CO2 emission by 2030.

Scenario
Scenario 1

Only a carbon tax(with lump-sum transfer of tax revenue to households) has been
introduced to meet the CO2 and approximately meet the electricity mix targets in
2030.

Scenario 2

1

In addition to a carbon tax(Scenario 1), revenues from carbon tax are recycled toProfessor, Meijo University, 2. Senior researcher, Cambridge Econometrics, 3.Director,Cambridge

Econometrics, 4. Principal Researcher, Institute for Global Environmental Strategies

reduce income tax.
Scenario 3

In addition to a carbon tax(Scenario 1), revenues from carbon tax are recycled toreduce consumption tax.

Scenario 4

In addition to a carbon tax(Scenario 1), 10% of revenues from carbon tax are recycled
to energy conservation investment and leftover revenues from carbon tax (after
deduction to pay for energy conservation investment) is recycled to reduce
consumption tax.

Major findings
In Scenario 1 there is a decrease in GDP due to the carbon tax’s contractionary effect.
However, under Scenario 2~4 this impact is much lowered and clearly show positive stimulus in
economy but lower consumer demand due higher price as a result of carbon tax. In all scenarios
Japan also benefits from a lower fossil fuel import bill. There is a net increase in imports in
scenarios where energy conservation investment took place as some investment goods areimported.
In the last three scenarios there is a 10% energy conservation saving in the electricity sector(compared to baseline), which lowers electricity use. This savings is assumed to be the result of
an increase in public sector investment expenditure which is funded by carbon tax revenues.
Our analysis show that Japan can meet its energy target while increasing GDP above baseline
by recycling revenue gained from a carbon tax in such as in Scenarios 2~4.
This analysis could further be expanded by investigating the other channels through whichrevenue could be recycled, such as social security benefits, corporation tax or further investment
in energy efficient technologies.
Further analysis could show that one of these, or a combination of these, could lead to higher
GDP results. However, this would not detract from the main message of this report that Japan
can introduce a carbon tax without having negative effects on its economy.

References
Andersen, MS and P Ekins (2009) Carbon-Energy Taxation: Lessons from Europe. Oxford,
IEA.
Cambridge Econometrics (2014) ‘E3ME Manual, Version 6.0’, available online atwww.e3me.com
Soocheol Lee, Hector Pollitt and Kazuhiro Ueta(2012), “An Assessment of Japanese Carbon
Tax ReformUsing the E3MG EconometricModel”, Scientific World Journal, volume 2012, ID
835917, 1-9.
Soocheol Lee, Hector Pollitt and Park Seung-Joon(eds)(2015)“Low Carbon, Sustainable Futurein East Asia-How to Improve Energy System, Energy Taxation and Policy Cooperation”
Routledge.