Economic Impacts of Carbon Tax in a General Equilibrium Framework: Empirical Study of Japan

Abstract

This study tries to find new insights of implementations of carbon tax policy as a suitable way to reach the long-term zero-carbon plan. This paper explores how carbon tax can affect the macroeconomy in Japan through the structural vector autoregression (S-VAR) technique conducted for the quarterly data throughout 2005–2020. A theoretical general equilibrium model backs the empirical analysis. The major findings reveal that any increase in energy price from the carbon tax will lead to an increase in interest rate, exchange rate, and consumer price index while there is a negative relationship between energy price increase from carbon tax and real gross domestic product (GDP) in Japan. Carbon Policy Refolution ([Formula: see text]), refunding carbon tax revenues, and adaptation of long-term policy of net zero GHG emissions by 2050 with the current situation of Japan’s power sectors are the major practical policies of this study.