A Computable General Equilibrium Analysis of Environmental Tax Reform in Japan

The Japanese government plans to reduce greenhouse gas emissions by 80% by 2050. However, it is not yet clear which policy measures the government will adopt to achieve this goal. In this regard, environmental tax reform, which is the combination of carbon regulation and the reduction of existing distortionary taxes, has attracted much attention. This paper examines the effects of environmental tax reform in Japan. Using a dynamic computable general equilibrium (CGE) model, we analyze the quantitative impacts of environmental tax reform and clarify which types of environmental tax reform are the most desirable. In the simulation, we introduce a carbon tax and consider the following five scenarios for the use of carbon tax revenue: 1) a lump-sum rebate to the household, 2) a cut in social security contributions, 3) a cut in income taxes, 4) a cut in corporate taxes and 5) a cut in consumption taxes. The first scenario is a pure carbon tax, and the other four scenarios are types of environmental tax reform. Our CGE simulation shows that environmental tax reform tends to generate more desirable impacts than the pure carbon tax by improving welfare or increasing GDP while reducing emissions (double dividend). In particular, we show that a cut in corporate taxes leads to the most desirable policy in terms of GDP and national income.