Environmental Policy

List Of The Committee Members Of Research Panel_Chapter 2

CHAPTER 2 :MAIN POINTS AND OPTIONS FOR ECONOMIC INSTRUMENTS AS COUNTERMEASURES AGAINST WARMING

2-1 WHY TAX UTILIZATION IS REQUIRED

2-1-1 Limitation of other measures

(Limitation of regulatory instruments)

We do not have the regulation directly aimed at prevention of global warming right now in Japan. As for the regulation related to global warming, we have Fuel Consumption Standard for automobiles based on The Law Concerning the Rational Use of Energy. Regulatory instruments are highly efficient for those which can be secured uniformly at the time of shipment of a number of products, such as performance of the product, and have the advantage that emission can be controlled precisely. Therefore, if the people in Japan have more recognition about the importance of prevention of global warming and have a grounding in accepting the regulatory instruments for it, we need to review the possibility of introduction of the regulations aimed at countermeasures against global warming in the near future.
However, there are following problems in the regulatory instruments as a countermeasure against global warming so that it is difficult and unrealistic to manage everything by regulations.

[1]
Global warming is the problem caused by carbon dioxide emission and others accompanied by the consumption of fossil fuel by various and wide range of economic bodies. At the same time the diffuseness of emission source becomes one of its problem. Therefore it is limited to directly control each one of them comprehensively. In addition, it is difficult to establish proper emission reduction aims toward individual company, industry and person and to monitor its implementing situation by the method of setting and making them obey a controlling standard. The administrative cost can be increased so that excessive reduction cost can be invited.
[2]
With regulatory instruments, incentive will lack against reduction of carbon dioxide emission over the regulating value.
(Limitation of autonomous drive)

Autonomous drives of entrepreneurs and companies to preserve environment are playing important roles in solving global warming. It might be not too much to say that, without the autonomous drives of entrepreneurs, the global warming would never be solved.
On the other hand, autonomous drives have the following characteristics, therefore, it is difficult to say that global warming can be solved only by autonomous drives.

[1]
Countermeasures against global warming cannot be necessarily taken to the socially desirable standard only by autonomous drives. We have experienced severe industrial pollution in Japan before. They were caused because there were no regulation in those days, or if there were, the causing companies took necessary instruments within the range they could since it was generous. It is difficult to take strict instruments only by autonomous wills of individual companies under competition with others. The fund is also limited which the individual companies can contribute autonomously. Therefore, autonomous drives tend to lack as a whole society.
[2]
Autonomous drives causes the problem of "free ride". The good environment is advantageous for everyone. However, when somebody pays the cost for it, or does environmental preservation activity, even if the people have the merit to enjoy the good environment for himself, the third person who does not pay at all can also gain its profit. In other words, since the third person who does not pay at all can sneak a ."free ride" on the autonomous activities of others, the incentive to try to pay by themselves will tend to be lost. The autonomous drives can cause such a problem of "free ride" so that the company which took countermeasures against global warming can be economically disadvantageous.
According to "Survey of Environment Friendly Corporate Activities" conducted by Environmental Agency (December, 1996), 84.2% of the listed companies try to take care of the environment, not just to obey the regulations. As there are environmental instruments which lead to the profit of company long-termly, such as production technology of low load type, more and more drives will be conducted from now on if it is depended on autonomy. However, in the same survey, only 7.4 % of companies answered that they pay for the cost to preserve environment regardless of their business results.

It is a matter of course, however that the importance of autonomous drives cannot be reduced even though there are such characteristics. To solve the global warming problems, countermeasures against it should be proceeded by proper utilization of various methods, including regulatory instruments, based on the autonomous drives of entrepreneurs and the people.

(Problems of aiding measures)

To promote the efficient use of energy, various aiding measures have been taken, such as subsidy, low interest loan or tax system measures. These measures have become effective in controlling carbon dioxide emission. In aiding measure itself, however, there are various problems, such as the possibility that it can be against the polluter pays principle (PPP) of OECD and social unjustness to provide the polluter with benefit from public fund and the increase of carbon dioxide emission caused by the increase of the number of market entry as well as vested interests, inefficiency of subsidy distribution system, or the possibility of causing of so-called ''governmental failure" relating to the choice of the technology to be aided. Therefore, in implementing aiding measures, it is required to prevent such side effects which are often accompanied when the aiding measures are taken independently.

(Advantages of economic instruments in reducing CO2 emission)

On the other hand, there are following advantages of economic instruments in reducing CO2 emission.

[1]
By the introduction of economic instruments, such as carbon tax, economical and rational activities of each bodies to save energy cost are promoted so that purchase of save- energy equipment in each section will be proceeded. Like this, by autonomous selection of most economical drives of each body successively from those of the lowest cost through market mechanism to reduce carbon dioxide emission, the optimum reduction of carbon dioxide emission with the lowest cost can be conducted as a whole society.
[2]
Economic instruments, such as carbon tax, has continuous incentive effects because reduction of carbon dioxide emission can connect to economical benefit. It also gives plus effects on the technology development which contributes to reduction of carbon dioxide emission long-termly. As a secondary effect, environmental taxes of carbon tax has the characteristic to bring income.
[3]
According the details by sections of CO2 emission in Japan (1994), industrial section occupies about 40%, consumer section, about 25%, transportation. about 20%, and others (energy transition, industrial process, waste etc.), about 15%, respectively. The combined rate of transportation and consumer reaches to about 45% of the whole, with exceeding industrial section. As for transition of these years, CO2 emission has increased in consumer and transportation sections.
In these consumer and transportation sections, the effect by economic instruments, such as environmental taxes, are considered to be big especially because the measures should cover various fields, such as reduction of CO2 emission from automobiles through diffusion and promotion of low polluting cars, strengthening of the connection among traffic network and improvement of urban structure, rationalization of energy use through strengthening of heat insulating structure of buildings and diffusion of save-energy equipment and transition of life style of the people.

2-1-2 Emission trading system

(1) Introduction of the tradable or marketable discharge permits system

The tradable or marketable discharge permits system is the system that the government assign the emission amount of pollutant specified beforehand to individual bodies and approve the sale of the permit of emission.
There are various kinds of tradable or marketable discharge permits. For example, in US, the system to deal in the tradable or marketable discharge permits of nitrogen oxide and carbon monoxide to reduce the emission of these air pollutants, the system to deal in the tradable or marketable discharge permits of sulfur dioxide to reduce the its emission from power plants and the system to deal in the manufacturing permit and consuming permit of chlorofluorocarbon (CFC) and halon aimed at reduction of manufacturing and consumption of the destructive materials of ozone are implemented. (Reference: "Implementing example of tradable or marketable discharge permits "(US) )

(2) Implementing problems

To control carbon dioxide emission, there are advantages in the tradable or marketable discharge permits system.

[1]
In countermeasures against global warming, it is required to control the total emission of carbon dioxide. The tradable or marketable discharge permits system can control the total emission as a target for certain.
[2]
In case ofcontro11ing carbon dioxide emission, the economic bodies which will be affected by the instruments are of wide range. But the tradable or marketable discharge permits system will give each body enough discretion in implementing the instruments and enable them to take flexible instruments.
[3]
The tradable or marketable discharge permits system enables to take instruments closely, compared with regulating method or carbon tax, so that if special consideration is required for the specified economic body, considerations by emitting origin can be possible in deciding initial assignment.
[4]
As countermeasures against global warming by environmental NGO or at individual level, contributions by the purchase of "carbon dioxide tradable or marketable discharge permits" which is not premised on consumption of fossil fuel can be considered.

On the other hand, the following problems are indicated.

[1]
If it is aimed at the emission control of carbon dioxide, the decision of distribution of initial assignment becomes an extremely big problem. Therefore it can become difficult to obtain agreement towards distribution, because close consideration can be facilitated technologically.
[2]
As the emitting origin of carbon dioxide are of various kinds, such as automobiles, as well as business bodies like power plants and ironworks. Therefore, compared with carbon tax, it can be considered that expenses for preparing monitoring and observing systems and those for market creation will specially cost a great deal.

Considering the above, tax and surcharge systems seem more realistic than the tradable or marketable discharge permits system as a domestic countermeasure against global warming. Internationally, the system of dealing of emission frames among countries have higher possibility because the dealing bodies are limited, and because international aims are imposed on the upper limit of emission of each country, in the first place, and its implementating situation have to be checked, so that monitorings are comparatively easy, even if there is increase and decrease of the upper limit of emission.

2-2 CONCRETE DESIGN OF TAX TO PREVENT GLOBAL WARMING

2-2-l Taxation body

As for the taxation body of environmental tax, the optimum body is generally to be decided to take necessary measures against the environmental problem, according to the local spread of external diseconomies.
As global warming is the global size environmental problem that causes and effects relate with each other at the cross-border level, not remaining in only one nation, its countermeasures should be taken in cooperation with countries globally. Therefore, it is a matter of course that it is most desirable to introduce carbon tax common to every country.
Here, the argument is proceeded on the assumption that Japan introduces the tax system to prevent global warming on our own initiative.

[1]
As global warming is the global Size environmental problem that causes and effects relate with each other across multiple local government bodies and the border of countries, each country is ultimately required to take necessary measures in cooperation with each other globally.
It is possible enough for local government bodies to take necessary measures to reduce generated carbon dioxide with their own discretion and proceed their policies with the intention of widely taking countermeasures against generating source in advance of the Government. However, as for the measures which affects the rules of the market themselves, such as taxes, it is required to construct the system from the national point of view, even if Japan introduces taxes to prevent global warming independently. For example, it is not very necessary to reflect the local diversity, such as the different tax rate by areas, on the System (market rule).
[2]
In case of taxation at the time of manufacturing or importing, or taxing large scale consumers like electricity companies, the places of tax payment may be converged at certain areas so that financial arrangement among local governments might be required, because manufacturing or importing facilities or generating facilities are maldistributed regionally.

From the above points of view and others, it seems to be appropriate that the Government should be the taxation body.

However, if the subject of taxation is carbon plus energy, the self-governing bodies can be taxation bodies for a part of it, because the preservation of local environment is included in the purpose of taxation on energy rather than emission control of carbon dioxide.

2-2-2 Subject of taxation /purpose of taxation

choices [1] Carbon (CO2 emission control), [2] Carbon + Energy (CO2 emission control + Energy use control)

  • [1] Carbon (CO2 emission control)
    In case of introduction of environmental taxes for emission control of CO2 as a countermeasure against global warming, it is the principle that taxation should be in proportion to amount of carbon dioxide emitted into atmosphere.
    In this case, however, there can be choices among taxation by grasping the emission of carbon dioxide itself, taxation on consumption (combustion) of fossil fuel as energy, or taxation on products and services produced with emission of carbon dioxide.
    These choices depend on the preciseness and low cost of the taxation.
    Unlike harmful substances mainly emitted from comparatively small fixed source, such as sulfur dioxide, carbon dioxide is emitted not only from business establishment but also from moving sources, such as automobiles, and its amount is extremely heavy. Therefore, grasping the amount of emission itself is not appropriate, because it will cost a great deal.
    On the other hand, as consumption of fossil fuel can be grasped by the amount of purchase, cost for grasping is small, and since there is no practical technology to separate and fix carbon dioxide from emission or exhaust gas at the present, the amount of emission of carbon dioxide can be certainly estimated from the consumption of fossil fuel. As for fossil fuel, the taxation system, such as gasoline taxes, already exists. By utilizing such taxation systems, cost will be more decreased.
    In this point, taxation on products and services cause the necessity to research the whole production process for accurately grasping the amount of carbon dioxide per one unit of products and services, which is the weak point because it will cost too much.
    Therefore, it is appropriate that tax should be imposed on consumption of fossil fuel as energy, in proportion to the carbon contents of the fuel.
  • [2] Carbon + energy (CO2 emission control + energy use control)
    When taxation is elaborated, with airy at CO2 emission control for a countermeasure against global warming, it becomes the carbon tax plan described in [1].
    On the other hand, energy use which occupies 91.7% of CO2 emission in Japan (FY 1994) causes various environmental problems other than global warming. Air pollution or noise accompanied by the use of automobiles, destruction of natural environment accompanied by the construction of power plants, or radioactive wastes accompanied by the construction of nuclear power plants are examples of such problems. Therefore, controlling the use of energy means the direct and indirect contribution to the reduction of the load on various environment.
    Considering environmental tax plan aimed at controlling of use of energy as well as CO2 emission control from the above points, taxation on the whole energy, along with taxation in proportion to carbon contents, can be regarded. In this case, energy is to be imposed on consumption of energy by fossil fuel and non-fossil fuel in proportion to the amount of energy. By making the subject of taxation carbon and energy, the effects to reduce the undesirable influences on the market by taxes can be expected. As described in the following.
    With the introduction of carbon tax, difference of price will arise between energy by fossil fuel and energy by non-fossil fuel, such as nuclear power or hydraulic power. And even among fossil fuels, difference of price will arise between coal and petroleum whose carbon contents per unit energy amount is big and natural gas whose carbon content is small. Therefore, carbon tax have the effects to promote substitution to use of energy by non-fossil fuel or use of natural gas among fossil fuels.
    It is difficult, in this case, to estimate the social cost by promotion of use of nuclear power or hydraulic power (e.g. the cost required for countermeasures against environmental effects by the radioactive wastes of nuclear power plant, or the cost accompanied by the destruction of scenes of natural beauty by the construction of hydraulic power plant).
    Therefore, if it is considered that this amount of cost is extremely high, it may be appropriate in reality that tax should be imposed on the whole energy along with the taxation in proportion to carbon contents to promote the use of non-fossil fuel etc.
    Subject of taxation and taxation steps in energy taxation should be reviewed, with referring to power source development promoting taxes.

2-2-3 Taxation steps

Choices:
At the time of [1] manufacturing and importing, [2] circulation and [3] consumption.

Basically, the effects of taxation is the same if it is imposed properly, regardless of the points of taxation. When tax is realistically imposed, however, there are some points which should be considered from the points of easiness of introduction and efficiency.
From the point of reduction of taxation cost, taxation on the upper course of the now, such as the time of manufacturing or importing, is desirable because of lesser number of people obligated to pay their taxes.
From the point of securing of price shifting, market structure of petroleum and energy and price formation custom should be considered. In the existing petroleum taxation, there are various taxation steps, such as importing (custom tariffs on crude petroleum), clearance from manufacturers, or reception from bonded area (gasoline tax) depending on the types of taxes.
Additionally, from the point of heightening consciousness of environmental preservation, some measures which will make consumers conscious of carbon tax should be reviewed.

2-2-4 Aim of taxation

choices [1] Incentive [2] Subsidy effects [3] Announcement effects

  • [1] Reduction of carbon dioxide emission by incentive effects
    Carbon tax is often introduced aimed at incentive effects of reduction of carbon dioxide emission. Carbon tax originally means to apply the principle of so-called Pigou effect, which is to realize the most efficient resource distribution in social welfare by adding external cost on price, to the emission control of carbon dioxide.
    When carbon tax is imposed on carbon dioxide emission source (e.g. gasoline, light fuel oil or coal etc.), the tax is shifted on the price and, by income effect and substitution effect accompanied by it, the use of carbon dioxide emission source is reduced, so that the whole emission of carbon dioxide will be reduced. In addition, long-termly it can have plus effects on the development of technology which contributes to prevention of global warming.
    Even if companies pay all the amount of carbon tax and they are not fully added to costs, carbon tax has the same effect long-termly, because the companies which cannot bear the tax will withdraw from the market and the survived companies will promote to introduce and develop save-energy technology. In this case, though economical burden of consumers can be avoided, it becomes eventually the responsibility of the people (consumers) through the decrease of dividend by the decrease of profit of companies.
    On the other hand, there is a criticism that incentive effects of the carbon tax on energy consumption is so small that it does not show its sufficient effects unless the rate is extremely high. This is because goods of low substitutability, such as fossil fuel, has a small price elasticity of consumption, and therefore, even if the price increases, consumption does not decrease so much short-termly. However, long-termly, the increase of energy price by carbon tax will proceed adoption and development of save-energy technology and development of new energy, and long-term price elasticity will be bigger than short-term price elasticity. According to the example of the US, it was reported, while the short-term price elasticity of petroleum demand for fuel was 0.2 in 1970's when the price of crude oil increased, its long-term price elasticity was 1.2 (Joseph E. Stigliz, 1993).
  • [2] Collecting revenue for subsidy for introduction of save-energy equipment and technology
    More and more development of save-energy and new energy is required on both sides of demand and supply of energy. However, the investment recovery period is tend to be long in many of save-energy measures, and it is limited to proceed save-energy investment in the present situation.
    Then while increasing investment in save-energy equipment entrepreneurs can afford because of the increase of energy cost, by providing subsidy for introduction of technology which contributes to prevention of global warming, the burden in the initial investment is decreased. And tax and subsidy will make more effective incentive of introduction of technology of good energy efficiency, and by raising the energy efficiency as a whole with selecting technology based on the economical rationality of each section, carbon dioxide emission will be reduced.
    This kind of subsidy should be conducted within the range of social sense of justice and fairness as well as fair international competitive principle, such as PPP. Additionally, subsidy measures should be taken properly within the range of funds allowable for aid and with preventing the occurrence of so-called "failure of government" and with responding to the progress of technology in selection of technology to be aided.
    If the revenue from carbon tax is used as the fund of subsidy to promote the introduction of technology and equipment which contribute to reduction of carbon dioxide emission, it has an advantage that tax rate could be comparatively low, compared with carbon tax aimed at incentive effects by economical responsibility.
    Generally as the environment is improved after introduction of environmental taxes, tax revenue from environmental taxes will be decreased. However, since the price elasticity of fossil fuel is comparatively small in the short term, it is possible to realize the utilization carbon tax revenue as funds for subsidy.
    If the effect by subsidy is expected, it is necessary to properly combine incentive effects and subsidy effects, so that carbon tax can be most effective.
  • [3] Announcement Effects
    Carbon tax has also an effect to make the people conscious of the existence of global warming and the necessity of reduction of carbon dioxide emission through the act of each people to pay taxes, other than the said incentive effects and the utilization of subsidy. It is called "Announcement Effect."
    If people have paid carbon tax in daily life, it can be recognized that the more tax is imposed on goods, the more it has effects on global warming, so that the existence of global warming and the necessity of reduction of carbon dioxide emission will be infiltrated into every people. Therefore, announcement effects by tax will give impacts equal to every diffusive and enlightenment measure.
    As an introduction method of carbon tax utilizing this effect, there is step-by-step carbon tax, by which low-rated carbon tax is imposed initially that will be raised step-by-step afterward. And it is possible for the people to prepare for the measures against introduction of high rate taxes during the initial period of low rate. If it is prepared beforehand, the effect of tax will be big, and if the schedule of the increase of the carbon tax rate is decided, the development of low-carbon technology toward it will be promoted.
    Quantitative analysis for announcement effects has not conducted yet, and the size of the effect is not clear quantitatively. However, satisfactory information is essential in the present market economy and its effect can be much bigger than expected.
(Reference)

Mechanism of Reducing Carbon Dioxide Emission by Introducing Carbon Tax

2-2-5 Taxation level

Theoretically, proper tax rate should be set at the level where the marginal cost to reduce emission of carbon dioxide equals to the limit of social damages so that social costs regarding measures against global warming are contained completely in economic activities. However, it is necessary to have huge amount of information to make a decision on this level. Moreover, such information is often just an estimation based on certain Premises.
Therefore, it is general to set the tax rate in order to accomplish the required goal of carbon dioxide emission which are set separately after taking other effect of the policy into consideration.
In this case, responses from economic entities against carbon tax are possibly different from prediction so that review of tax rate should be considered, taking into account trends of overall economy. It is also possible to raise the tax rate in stages taking it into consideration that controlling emission of carbon dioxide is a long term subject.
Simulation of AIM model (see note below) shows that if carbon tax is introduced from 1996, at the tax rate of ¥3,000/tC, emission amount of carbon dioxide in 2000 will increase 1.6% compared to 1990. At the tax rate of ¥30,000/tC, it will increase 0.1%. If part of the tax revenue is applied to promotion of energy saving technology at the tax rate of ¥3,000, it will decrease 0.1% in the same period of time.
It is necessary to merge other policy means in order to be effective even with a low tax rate.

Note: AIM model (Japanese model of regional warming analysis in Asia Pacific)
It is part of an integrated model (AIM) which National Environmental Institute and Nagoya University are developing cooperatively.
In order to evaluate various policy options to respond to global warming, it can totally simulate a global chain of processes from greenhouse gases, fluctuation of climate, to effect on the natural environment and human society and especially focus on the Asia pacific region. For the Asia Pacific region, they have developed a model for each country and Japanese model is just one of them. Filing about 100 technologies, it is possible to estimate energy requirement and amount of carbon dioxide emission by accumulating detailed calculations corresponding to energy prices, etc.

2-2-6 Use of tax revenues

Options [1] general revenue source [2] subsidy to environmental measures

  • [1] General revenue source
    If environmental taxes such as carbon tax, etc. are imposed genuinely for the purpose of incentive, tax revenues are secondary and their use is not specified.
    It can be used as revenue source of the general policy including environmental policies as well as revenue source to reduce other taxes. It is also necessary to take notice of extremely large burden on industries with mass energy consumption industry in the center when carbon tax is genuinely imposed for the purpose of incentive.
  • [2] Subsidy to environmental measures
    When taking fostering policies are considered in promotion of introduction of energy saving equipment, technology, etc., it is possible to apply revenues of the carbon tax to spending of such purpose with priority. It is the case which includes securing source of subsidy in the purpose of taxation.

However, it is necessary to consider that the less tax revenues will be, the further environmental measures will advance. It is also necessary to avoid financial stiffening to be caused by fixation of its usage.
Either way, regarding usage of tax revenues, it is necessary to investigate the right way of handling them, taking economic circumstances, financial situation, etc. into consideration

Considering annual emission of carbon dioxide (in tons, converted to carbon) in Japan is about 340 million tons, the estimated amount of tax revenues is as follows:

  • In case of ¥3,000 per 1 ton of carbon, about ¥1 trillion
  • In case of ¥10,000 per 1 ton of carbon, about ¥3.3 trillion
  • In case of ¥30,000 per 1 ton of carbon, about ¥10 trillion

Also, when tax revenues are used for environmental measures, environmental effect can be expected by acceleration of environmental measures through a subsidy adding to preservation effect of the environment (controlling effect on carbon dioxide emission) by incentive effect. Also, there is a possibility that positive effect on employment will be created depending on use of tax revenues. The effect on preservation of the environment and employment is explained as follows:

  • Effect on preservation of the environment
    When tax revenues are used as a subsidy to introduce and promote reduction technology of carbon dioxide, emission amount of carbon dioxide is decreased on the whole, as stated before. Because amount born by corporations in initial investment of the aforesaid technology is reduced and introduction of decreasing technology is advanced. Also, if introduction of the aforesaid technology is expanded, there will be a possibility of further diffusion due to reduction of the price caused by mass production effect, etc.
    Subsidizing technological development might prompt revolutionary technological development such as revolutionary new energy, energy saving, etc.
    A subsidy for carbon dioxide reduction measure to a developing country plays an important role to control increase of carbon dioxide emission accompanying economic development from now on.
    We have been cooperating with them by transferring energy saving technology, etc. so far, but by making use of a subsidy, it will be possible to train an energy manager at a factory and to prompt diffusion of energy saving technology which has been already transferred.
Employment effect

If carbon tax is implemented, through price mechanism, energy substitution will occur. Furthermore, in technology, a substitution to the energy saving technology will occur. As a result, the industry which supply energy saving technology will expand employment by expanding its business size due to demand increase. Also, if the revenue of carbon tax is used as a subsidy to introduce carbon dioxide reduction technology, it will accelerate technological substitution and increase further employment effect.
As such, utilizing economic instruments such as carbon tax, environmental tax, subsidy, etc. properly may cause "double dividends" such as; effect on preserving the environment and effect on creating employment.

2-2-7 Economic influences

It is pointed out that environmental measures have influences on economy such as economic growth, international competitive power, trade, employment, and reverse movement. But as stated in the first report,

[1]
all of these can be applied, not only to economic instruments such as environmental tax, but also to control and voluntary activities, and
[2]
from our experience until today, there is no evidence that these environmental control and standard have had an effect on competitive power. The meeting of OECD environmental ministers in February, 1996 made a summary that from the experience so far, there had been no meaningful effect on competitiveness, trade nor industrial shift by environmental policies.
However, when we discuss towards enforcement of environmental tax in order to reduce short term influence and psychological resistance accompanied by introduction a neutralizing measure should be included in the discussion.
We should pay attention to the possibility to lose effectiveness of environmental tax when a neutralizing measure, etc. is set up.
2-2-7-1 Income distribution effect (reverse movement)

We are concerned about the "reverse movement" problem. For a lower income person, the tax ratio against income becomes relatively higher because carbon tax or carbon and energy tax is imposed on consumption of energy which is necessaries for business activities and everyday lives.
But it is not appropriate to take up and discuss income distribution effect by only one tax item as in the first report.
There are several simulation results on the income distribution effect of energy tax such as carbon tax and others. According to them, it is sate to consider that it is recognizable that there is reverse movement, but it is not that large.

(Example)
Poterba (1991), using US date from the 1985-86 Consumer Expenditure Survey, estimates that a carbon tax would have a regressive incidence, regardless of whether income or expenditure is used to measure relative standards. However, the carbon tax appeared much more regressive if income is used then if expenditure is used.
On the income basis, the carbon tax appears sharply regressive. The percentage burden of the additional tax falls sharply with increasing income; for the poorest decile the additional tax burden would be equivalent to 10.1 per cent of income, for the second decile 5 per cent, and for the top decile, 1.5 per cent. On the other hand, using expenditure deciles and expenditures the denominator in calculating the percentage burden shows a much less regressive profile: the bottom decile pays additional tax equivalent of 3.7 per cent of sending whilst the top decile pays an additional 2.3 per cent of spending. Poterba expresses a clear preference for the latter basis of calculation, which he argues is more consistent with a life-cycle concept of income than the use of current incomes. On the basis of his preferred definition, the regressivity of the carbon tax appears quite modest.

2-2-7-2 Influence on prices

With introduction of carbon tax, prices will rise for the time of introduction only. But it is to pay tax as part of prices and t11is burden must naturally be paid in order to preserve the environment.

Also, there is a possibility of "me-too price raises". In order to avoid such price raises, we should adequately make public relations to consumers and businesses. It is also necessary to investigate and watch vigorously price movement and through national and local governments.

2-2-7-3 Influence on International trade and its competitive power and leakage

It is pointed out that introduction of carbon tax or carbon and energy tax needs high tax- rate so that there will be influences such as slowed down economic growth, etc. There are also discussions that international competitive power will be lowered and industry will be hollowed as a result. Also, relating to this, it is pointed out that introduction of carbon tax leads to leakage, increase of CO2 emission, in other countries and areas. It occurs through increase of production in non introduction countries of such taxes and growth of consumption in other countries by international price decrease of fossil fuel.
There have been analyses using various economic models regarding slowdown of economic growth by high tax-rate. Most of such model analyses were calculated on the premise of stabilizing carbon dioxide emission at the level of 1990 in the year 2000 or after. These trial calculations estimated that slowdown of economy would be around 0.01 to 0.05 point annually with some exceptions at actual economic growth ratio of about 3.5% as standard, depending on the way to introduce carbon tax and assumption of taxation level.
Influence on international competitiveness and trade in reality is, as stated in the first report, affected by many composite factors, not only various regulations and tax system but also by political stability, labor, wage level, access to materials and the market, situation of social capital, etc. Therefore, it has no meaning to take out influence of just carbon tax for discussion.
However, if other countries have not introduced similar carbon tax or carbon and energy tax yet, it is necessary to temporarily establish, towards enforcement of these taxes, a neutralizing measure, etc. as a transitional measure, which is found in North European countries, to minimize short term influences accompanied by introduction and psychological resistance.
Further, we should pay attention to the possibility to lose effectiveness of environmental tax when a neutralizing measure, etc. is set up.

Measures related to influence on international trade and competitiveness are as follows:

  • (1) Border Tax Adjustment
    Border tax adjustment (BTA) which applies domestic tax to imported goods and exempt domestic tax for export goods is done to eliminate influence of domestic tax on competitive power.
    Border tax adjustment has been said to have following problems:
    [1]
    How can border tax adjustment maintain emission control effect of CO2 by carbon tax?
    [2]
    Can border tax adjustment be approved as the rule of international trade?
    [3]
    Is it technically possible to impose border tax on products which is a tax to consumption of fossil fuel?
    Therefore, it is necessary to study it including necessity of border tax adjustment, paying attention to detailed contents of environmental tax, simultaneous development situation of similar policies in the world, etc. and coordination with handling of current energy taxes.
  • (2) Compensation measures
    In order to maintain incentive effect of carbon tax or carbon and energy tax, it is considered to compensate later via other tax system after applying carbon tax without exception. But this seems to be hard to realize.
  • (3) Carbon Tax Reduction and Exemption
    Taking examples of other foreign countries into consideration, followings can be the object of discussions as object of carbon tax reduction and exemption.
    [1]
    the ones not corresponding to the purpose of taxation
    [2]
    the ones with small possibility of tax collection
    [3]
    Consideration to international competitive power of industry when other countries do not strengthen the measure equally as Japan compared to the current Situation.
    [4]
    Contributing to emission control of CO2, etc.

2-2-8 Relation with existing tax system

Relation with existing systems has not been taken into consideration in discussing carbon tax or carbon and energy tax so far, but these taxes have the same tax object as existing oil taxes.
Also in oil taxes and automobile related taxes, there are some that affect to control carbon dioxide emission in our country apart from their original purposes. For example, volatile oil tax and petroleum and gas tax are to be imposed on gasoline, LPG, etc. and to be added onto the price. As a result, it is considered that they have an effect to control consumption of gasoline, etc. Also, car weight tax and car tax occupy part of car owning cost and are considered to have indirect effect on purchasing activities of consumers. However, the tax setup against each fossil fuel of these existing taxes has the tax ratio which has nothing to do with generation of carbon dioxide directly. For example, it does not have incentive effect which brings change of energy supply source.
It is necessary to consider relation with existing energy related taxes and car related taxes when carbon tax or carbon and energy tax are newly introduced. For example, there is a plan that tax ratio corresponding to carbon content is added collectively on current tax ratio of volatile oil tax, local road tax, petroleum and gas tax and light oil claim tax. In case of carbon and energy tax, the tax ratio is also added, corresponding to energy quantity, to power source development promotion tax.
Furthermore, most of current petroleum taxes and car related tax is imposed as purpose tax and are specified revenue source for road revenue source, etc. The way of these specified revenue sources should be, etc. are currently discussed at many occasions. The viewpoint of the environmental preservation should be taken into full consideration considering these taxes have effects to control emission of carbon dioxide.

2-3 DETAILED OPTIONS OF TAX TO PREVENT GLOBAL WARMING WHICH CAN BE INTRODUCED IN OUR COUNTRY

Based on above studies, we made out detailed optional proposals of tax to prevent global Warming.
Makeup of the optional plan proposals are as follows:
First, we thought of two objects of taxation: [1] carbon and [2] carbon + energy. Also, as the target of taxation, we came up with two proposals: one is to aim at combination of incentive effect and subsidy effect and the other is to aim at incentive effect only. Basic four options consist of combinations of these two options.
Plan 1 is the combination of carbon and low taxation ratio. Plan 2 is of carbon and high taxation ratio. Plan 3 is of carbon, energy and low taxation ratio and Plan 4 is of carbon, energy and high taxation ratio.
Two taxation levels are set: low ratio of ¥3,000/tC (Plan 1) and high ratio of ¥30,000/tC (Plan 2). Plan 3 and 4 have the same purpose, but the ratio is half as carbon tax ratio for it is carbon plus energy taxation. Also, Plan 4 adopted phased taxation ratio increase for it has a high taxation ratio.
Regarding lightening measures, all proposals have tax exempts in common as follows:

[1]
Not corresponding to taxation purpose (use of petroleum as material)
[2]
Small possibility of tax collection (objects of easy tax evasion such as fuel of international airline, international marine transport and deep-sea fishery)

further, Plan 2 and 4 impose high ratio taxation. Taking the first introduction in our country into consideration, in order to ease economic influences, we set up tax reducing measures to make high energy consumption industry exception, to make exemption to corporations which agree to reduce emission, tax exemption to overall industrial division, etc. in Plan 2. In Plan 4, we introduced a proposal to adjust the border tax instead of individual reductive measures.
Regarding usage of tax revenues, in Plan 1 and 3 which expect both incentive effect and subsidy effect, we naturally made the proposal to use them as subsidy. In Plan 2 and 4, we made the proposal to carry them over to general revenue source.

Summing up the characteristics of each proposals based on the makeup, Plan 1 is "low tax ratio, subsidy combined type carbon tax". Plan 2 is "Northern European type carbon tax", Plan 3 is "low tax ratio, subsidy combined type carbon and energy tax". Plan 4 is "International concerned, phased tax ratio carbon and energy tax".

Needless to say, it is our urgent necessity to further reduce emission of CO2 to prevent global warming. But many subjects are related to emission of CO2 and marginal cost of reducing emission of carbon dioxide varies subject to subject.
In this circumstance, it is necessary for each and every industry and class to seriously think about and discuss the big subject of to whom and how we should properly impose tax so that we can form understanding of Japanese citizens in common. The purpose is to ask citizens for right and fair economic burden in order to achieve the goal of reducing CO2 emission of Japan.
Here we submit optional proposals of environmental taxes to give detailed image to carbon tax, etc. as measure to global warming. We expect that they will be used as so called material basis and help lead to serious, active discussions based on common ground among many related people in various fields.

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