The Double Dividend of an Environmental Tax Reform in Japan : a CGE Analysis based on the 1995 Input-Output Table

This paper discusses the feasibility of the so-called “double dividend” of the environmental tax reform (ETR) in Japan using a computable general equilibrium analysis. The ETR not only introduces tax against the climate change but also recycles revenue in lowering some existing distortionary taxes. The CGE model with 16 production sectors and 27 commodities (including 14 energy products) based on the 1997 Input-Output Table avails in analyzing the necessary carbon and energy tax to meet Japan’s goal of CO2 reduction (here: 6% less than in 1990), and the economic cost or gain of the ETR. As a result, about 30,000yen/tC of carbon-energy tax on fossil fuels such as coal will be necessary by 2010. This will cause a moderate economic impact. Consequently, an even more economic gain (more GDP-growth and employment) can be achieved if revenue is allotted to reduce labor cost. One of the reasons for this result is the assumption of the non-cleared labor market. The effects of special treatment on heavy industries are also analyzed. There will be more employment and growth when the halved carbon-energy tax rates are applied to the four heavy industrial sectors, but the tax rate for other sectors and consumers must be higher. It can also be shown that by dividing the consumption sector into five income classes, the change of prices by this energy taxation can in itself be regressive, but the overall effect of the ETR will be rather proportional