Carbon Pricing in Japan

Realizing a decarbonized society in consistent with the Paris Agreement, a fundamental transformation of the entire economic and social system is needed, and not only carbon intensive sectors but also all sectors and all stakeholders including households must be decarbonized. This chapter demonstrates increasing expectations for carbon pricing in Japan in this global policy context. After the review of the global trend of carbon pricing, historical progress of carbon pricing in Japan and the existing nation-wide carbon tax, i.e. the Global Warming Countermeasure Tax, is explained. There are also two sub-national carbon pricing schemes in Japan, Tokyo ETS and Saitama ETS, which are explained in Chaps. 6 and 7 respectively, and not focused in this chapter. We examine the claim that Japan has already implemented high level carbon pricing in terms of various forms of energy taxes. Based on the effective carbon rate which is defined by OECD as the sum of explicit carbon prices and fossil fuel taxes per carbon emission, the nationwide average effective carbon rate of Japan is lower than the average effective carbon rates of OECD countries and its key partner countries. The current carbon pricing schemes in Japan are too modest to realize decarbonization transition and there is a room to upgrade them to exploit full potential of carbon pricing. This chapter discusses adequate levels of carbon prices in compatible with decarbonization transition.

In Japan, the government has set a target for a reduction in greenhouse gas (GHG) emissions by 26% from 2013 levels by 2030. The commercial sector has the highest reduction target—39.8%—among all Japanese sectors. This chapter first presents the current GHG situation in Japan and Japanese climate policy in the commercial sector. Second, we introduce a nationwide survey that we conducted on the implementation of energy efficiency measures (EEMs) in office buildings with large-scale emissions in Japan. The survey results show that energy-saving technology adoption is more advanced in Tokyo than in other prefectures and that there is more space for the adoption of energy-efficient technologies nationwide. To accelerate EEM adoption to achieve the 2030 target, regulatory agencies must improve the way they promote energy audits and subsidies and provide information on energy savings.

Compared to the industry sector, the progress of energy conservation of the household sector is very slow. It is because the household sector is more diverse than the industrial sector, and regulatory enforcement is much more difficult. The government can stop firms’ operation if their environmental burden is too heavy but cannot stop household’s activities. Therefore, the government needs to find energy conservation policies that are supported by the public. Like other countries, the Japanese government has introduced various energy conservation measures to reduce the energy usage from households for the past several decades. It has introduced energy efficiency standards for energy-consuming durables and provided subsidies to promote energy-efficient products in recent years. At the same time, it has raised the price of energy in order to provide households with an appropriate incentive to conserve. In addition, it has promoted renewable energy usage in the household sector. Facing climate change, the Japanese government has not introduced energy conservation measures systematically but rather on an ad hoc basis. In this chapter, we review energy conservation measures implemented in the household sector in Japan. We then make policy recommendations to enhance the effectiveness of energy conservation measures in the household sector.

This chapter focuses on climate countermeasures in the Japanese transport sector. We introduce the Japanese complexed automobile tax system and then calculate the Japanese effective carbon rate (ECR) on automobiles. In addition to the discussion of the ECR, this chapter offers a simple examination of the efficiency of electric vehicles (EVs) from the viewpoint of cost-benefit because it is expected that EVs will become the most popular eco-friendly vehicle in the future. Two remarks are found in our analysis. First, although the carbon tax rate on fuel consumption is small in Japan, compared to the European countries, the ECR is rather high. For further improvement of climate policy, the Japanese government should shift its attention to vehicle usage from vehicle purchase and possession. Second, under the basic assumption (i.e., representative owners do not recharge their EVs at home but at outdoor fast chargers), the diffusion of EVs is not an efficient measure for reducing GHG emissions. If owners recharge their EVs at home once of every two charges, the net benefit becomes positive Therefore, the opportunity cost of waiting for recharges is a key factor in whether EVs can play a role in mitigating climate change.

The purpose of this chapter is to investigate the effects of some mainstream policy schemes in the power sector on the reduction of CO₂ emissions. The first part of this chapter is the analysis on the effects of promoting generation (fuel) efficiency of fossil-fuel power generation, specifically assuming more efficient coal-fired power plants that recently indicates increased presence in the Japanese power sector. Improvement in generation efficiency of fossil-fuel power plants is expected to reduce emissions of carbon dioxide mainly from a technological aspect. However, overall effects on carbon reduction in the whole industry would be ambiguous since it also depends on market structure. The increased efficiency in generation leads to an improvement in cost conditions of fossil-fuel power producers relative to their rivals. It enables them to expand their generation and market share. Analyzing the Cournot oligopoly model, it is shown that an improvement in fossil-fuel power generations produces two effects: the ‘saving effect’ and the ‘rebound effect’. The total CO₂ emission in the whole industry decrease if the former effect exceeds the other, and vice versa. In addition, it is indicated that a rise in the generation efficiency would increase a difficulty of implementing carbon tax. In the second part of this chapter, I study the combination of feed-in tariff and carbon tax; that would be worthy to investigate since they could possibly complement each other. FIT policy could be financed by the revenue of carbon tax, and a reduction in electricity supply by the carbon tax would be lessen by supporting renewable power generations under FIT. It is demonstrated that FIT had the combined effects: it fosters a competitive environment in addition to indirectly reduces CO₂ emissions. The result indicates that the combination of these policies would produce potential welfare gains.

The Tokyo Emissions Trading Scheme (ETS) is the first cap -and-trade program of CO₂ emissions in Asia, and it is unique in regulating commercial and service sectors. We examine the impacts of the Tokyo ETS on CO₂ emissions and energy consumption by universities in the first phase. Focusing on universities allows us to estimate the effects of the Tokyo ETS separately from the economic stagnation Japan experienced after the Great East Japan Earthquake in 2011 because universities are less likely to be affected by economic fluctuations compared to other sectors. In addition to the ETS, other factors may have achieved CO₂ emissions reductions in Tokyo in this phase due to the influence of the earthquake. To deal with the shortage of electricity supply after the Fukushima disaster, several measures were undertaken, such as rolling blackouts and power-saving orders, particularly in the Tokyo Electricity Power Company’s jurisdiction. To capture the characteristics for each university at the campus level and their experience with being regulation targets of the policies mentioned above, we conducted a mail survey for universities in Japan and obtained panel data that contain information about both regulated and unregulated universities over 5 years (2009–2013). The difference-in-differences approach reveals that the Tokyo ETS caused regulated universities to reduce their CO₂ emissions and energy consumption by approximately 3–5% relative to unregulated universities in the first phase. In addition, we find that the quantitative regulations, such as rolling blackouts and power-saving orders, also had an impact on the universities’ behavior.

This chapter investigates whether the Target-Setting Emissions Trading (TSET) Program launched in 2011 by Saitama Prefecture in Japan had an impact on CO₂ emissions during the first compliance period. Facility-level data are used to estimate the causal relationship between implementation of the program and changes in CO₂ emissions. The results indicate that the TSET Program spurred emission reduction efforts. In addition, this chapter shows that the TSET Program also functioned as an incentive for facilities that are not covered by the program to lower their energy consumption. These findings indicate that the TSET Program succeeded in encouraging emission reduction efforts by the facilities, even though the program includes no penalty for facilities that do not meet emission goals.

This chapter estimated the impact of the Tokyo emissions trading scheme (ETS) and Saitama ETS on energy consumption in the manufacturing sector using a facility-level panel data set compiled from the Current Survey of Energy Consumption, a nationwide survey on energy consumption conducted by the Agency for Natural Resources and Energy in Japan. To our knowledge, no study has used this rich data set to perform sophisticated econometric analyses. We found that the Tokyo ETS reduced electricity consumption by 16%. On the other hand, we did not find evidences of switching from dirty fossil fuel to cleaner fuel associated with the introduction of the Tokyo ETS. The impact of the Saitama ETS on energy consumption was not statistically confirmed based on our samples. Additional studies are needed to identify the different impacts of the ETSs between Tokyo and Saitama. We also found that Japan has been experiencing long-term decreasing trends in the number of manufacturing facilities and the volume of fossil fuel consumption, which may reduce Japanese CO₂ emissions in the long run.

To analyze the ripple effects of CO₂ emissions from the introduction of renewable energy power plants, this study developed input–output tables for analysis of next-generation energy systems (IONGES). The results revealed that the environmental benefits obtained from investing in power plants of the same capacity vary significantly depending on the type of renewable energy. Using the IONGES, under assumptions of three carbon taxation methods (upstream, midstream, and downstream), we calculated the taxable CO₂ emissions induced when producing each good or service and estimated the carbon tax burden associated with the final demand. We found that, in the upstream method, the taxation effects of one unit of carbon tax is concentrated in energy goods such as coal products and petroleum basic, while the effects are relatively dispersed in the downstream taxation method. If renewable energy is added to the government target level in 2030, taxable CO₂ emissions will decrease by 12–13.3%. Compared with the upstream taxation method, in the midstream and downstream methods, the CO₂ emissions induced by each final demand are distributed more evenly across various goods and services. Compared to the downstream taxation method, upstream taxation leads to higher CO₂ emissions from exports, but lower CO₂ emissions from household consumption. This is because energy-intensive industries such as machinery have high export ratios. We analyzed which expenditure categories contribute to the carbon tax burden associated with household consumption. In the case of upstream taxation, households mainly focus on reducing electricity consumption; in the case of downstream taxation, households reduce consumption of various energy-intensive goods and services.

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.

The 2 °C target of the Paris Agreement has stimulated the implementation of carbon reducing policies such as carbon taxes and emission trading schemes, which explicitly applies a price on carbon emitting fuels. However, OECD (2016) reports that the effective carbon rate must be at least 30 Euros per ton of CO₂. The effective carbon rate includes the implicit carbon price, e.g. energy taxes, along with the explicit carbon price. Previous studies have focused on the effects of explicit carbon prices. In this chapter, we will focus on the effective carbon rate and estimate the effects of carbon policies that increase the effective carbon rate to the 30 Euro threshold. We find that the short-term effect of a carbon tax that raises the effective carbon rate for all industries above 30 Euros will not only effect energy intensive industries, but also downstream industries that already have high effective carbon rates. Furthermore, we find that the carbon tax implemented in 2012 increase the average effective carbon rate, but increases the difference between taxed emitters and non-taxed emitters. Thus, tax exemption for energy intensive industries sacrifices economic efficiency.

Although Japan’s current carbon tax rate is much lower than the rates applied in European countries, the Japanese government may increase the tax rate in the near future, in order to strengthen measures to combat global warming. Since a country’s carbon-pricing policy does not distort its economy, it is considered to be an efficient policy measure. However, the burden of carbon pricing varies across regions and across households. Since low-income households generally allocate a larger proportion of their disposable income to energy costs than high-income households, the burden of carbon taxes on low-income households tends to be higher than for high-income households. In addition, households in cold regions spend more money for space heating, and those in rural areas spend more money for gasoline. Unless the government objectively analyzes the impact of carbon pricing and proposes convincing countermeasures to deal with these unequal impacts, the government is unlikely to obtain public support for a carbon tax increase. In this study, we analyze microlevel data from the Japanese National Survey of Family Income and Expenditure (NSFE) collected from 1989 to 2014, and examine how past energy price changes affected the welfare of different types of households. We then propose countermeasures to address the problems arising from the regressive nature of taxing energy use.

Carbon pricing is difficult to introduce in many countries because it is not easy to obtain public support for carbon pricing due to the burden associated with it. One way to overcome this difficulty is to rely on the double dividend of a carbon tax. If a government uses revenue from a carbon tax to reduce existing distorting taxes, such as corporate taxes or labor taxes, a carbon tax can improve economic efficiency while reducing greenhouse gas (GHG) emissions. This chapter examines the net burden of a carbon tax with revenue recycling (RR) for two types of stakeholders: firms and households. Using dynamic computable general equilibrium (CGE) modeling, we examine the carbon prices needed to achieve the emission targets set for 2030 and 2050. Then, we simulate two types of RR: corporate tax reduction and a reduction in social security payments. We compare the benefit of the tax reduction to the increase in the burden from the carbon tax in scenarios for 2030/2050. In the scenario of corporate tax reduction, by selecting firms from the land transportation sector and power sector, we examine how profit changes due to the carbon tax. We find that the tax burden for a firm in the land transportation sector can be eased greatly with the corporate tax reduction. In the scenario of the social security payment reduction, we find that some households are better off under carbon pricing despite expenditure increases due to the carbon tax. Thus, we show that RR can increase support for the carbon tax.