Chapter 1

Expectations for Carbon Pricing in Japan

in the Global Climate Policy Context

Satoshi Kojima and Kenji Asakawa

Abstract 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.

Keywords Paris agreement · Decarbonization · Transition · Carbon pricing ·

Effective carbon rates

1 Introduction

The Paris Agreement adopted in December 2015 sets out the trend toward decar-
bonization, which calls for net zero GHG emissions by the latter half of this century.
Along with this trend not a few countries have set ambitious emission reduction
targets to address it, and among them Japan officially set an 80% reduction target for

S. Kojima (B) · K. Asakawa

Institute for Global Environmental Strategies (IGES), Hayama, Japan
e-mail: kojima@iges.or.jp

© The Author(s) 2021 1

T. H. Arimura and S. Matsumoto (eds.), Carbon Pricing in Japan,
Economics, Law, and Institutions in Asia Pacific,
https://doi.org/10.1007/978-981-15-6964-7_1
2 S. Kojima and K. Asakawa

greenhouse gas (GHG) emissions by 2050 in the Plan for Global Warming Coun-
termeasures adopted by the Cabinet in May 2016. The IPCC 1.5°C Special Report
(IPCC 2018) published in November 2018 further corroborates this trend, and now
international society seriously discusses decarbonization measures to reduce CO2
emissions to net zero around 2050. In order to realize such a decarbonized society, a
fundamental transformation of the entire economic and social system is needed and
not only carbon intensive sectors such as the power generation sector and the iron
and steel sector but also all sectors and all stakeholders including households must
be decarbonized.
How to realize such a fundamental transformation is apparently an extremely
difficult question, but there are number of existing studies tackling this daunting task
to answer this question and there seems to be a general agreement that carbon pricing
is necessary to realize a fundamental systemic change toward a decarbonized society.
The Deep Decarbonization Pathways Project (DDPP), an international research
project that aimed to chart a pathway to reach the 2050 reduction target using back-
casting methods to be consistent with the Paris Agreement, placed carbon pricing as
a key element in all policy packages (DDPP 2015). It is explained that the realization
of decarbonization assumes that a large number of discrete (decentralized) actors will
make the right choices, and carbon pricing is essential to harmonize such discrete
decisions (DDPP 2015). Rockström et al. (2017), in their “Roadmap for Rapid Decar-
bonization“ to achieve net zero CO2 emissions by 2050, stated that carbon pricing
of at least USD 50/t-CO2 in 2020 for all CO2 emissions needs to be introduced, and
that it needs to be raised to a level above USD 400/t-CO2 by 2050.
There are strong calls for carbon pricing from several influential stakeholders at
the global level. At COP21 in December 2015, the Carbon Pricing Leadership Coali-
tion (CPLC) was officially launched. As of 2019 CPLC brings together more than
33 national and sub-national governments, 162 private sector organizations, and
80 strategic partners representing NGOs, business organizations, and universities,
aiming at promoting carbon pricing towards the long-term objective of introducing
carbon pricing all over the world (World Bank 2019a). Actually it was not by chance
that the launch of CPLC and the adoption of the Paris Agreement happened simul-
taneously at COP21. There was a strong synergy between these two events. The call
for ambitious climate actions, through carbon pricing, by both heads of governments
and CEOs of leading companies gave momentum to raise the level of ambition of
the Paris Agreement, and ambitious climate goals stipulated in the Paris Agreement
built momentum to introduce carbon pricing as a key instrument to attain the climate
goals. From the business sector, the World Business Council for Sustainable Devel-
opment (WBCSD) stated in their 2019 report that “carbon pricing mechanisms are
critical to support the urgent efforts required to drive the transition towards a low
carbon future and achieving the 1.5 °C goal” (WBCSD 2019, p. 6). As WBCSD
(2019) declared, the time for debating the need for carbon pricing was over and it
is time to strongly call for the need of carbon pricing as long-term polices towards
decarbonized society.
Carbon pricing is expected to contribute to decarbonization through several func-
tions. Two key functions are price signalling and revenue generation functions. The
1 Expectations for Carbon Pricing in Japan in the Global … 3

price signalling function means that carbon pricing improves economic efficiency
by reflecting the cost of carbon emissions, i.e. the damage costs of climate change.
Ideally carbon prices should be set at the true cost of carbon emissions, but in reality
any level of carbon pricing will raise the relative prices of carbon intensive commodi-
ties and can contribute to mitigation. This function is common across all forms
of explicit carbon pricing, including both carbon tax and cap-and-trade (emission
trading system), and it makes low-carbon products relatively cheaper than carbon-
intensive alternatives, which results in steering consumers to make low-carbon
choices, as well as making low-carbon business profitable and creating business
opportunities. The revenue generation function means that revenues from the carbon
pricing schemes can be utilised to finance climate actions. This function is limited
to carbon taxes or cap-and-trade mechanisms with auction of emission allowances.
This function may enable low-carbon and decarbonization investment, including
infrastructure development, without which systemic changes towards decarbonized
society cannot be materialised. In addition, a carbon tax with a clearly announced
future price schedule may serve to inform the general public the strong commitment
of governments to achieve climate goals and enable them to accommodate expected
levels of carbon prices in their decision making, which is termed as an announce-
ment effect. Through these functions, carbon pricing is expected to provide enabling
conditions of a systemic transformation towards decarbonized society.
On the other hand, existing research on carbon pricing has advanced around
either theoretical studies supporting that carbon pricing is the most cost-effective
emission reduction measure (e.g., Pearce 1991; Schneider and Goulder 1997; Moro-
tomi 2000; Nordhaus 2010) or research on the double dividend hypothesis (e.g.,
Fullerton and Metcalf 1997; De Mooij 2000; Arimura et al. 2018), which argues
that emissions reductions and positive economic impacts can be achieved simulta-
neously by appropriating revenues from carbon pricing to reduce market-distorting
taxes such as income tax and corporate tax. Tvinnereim and Mehling (2018) review
empirical studies on carbon pricing, including examples of ex-post evaluations by
econometric analysis, and point out that although the emission reduction effect of
carbon pricing was empirically supported, the reduction effects were only in the
range of a few percent to 10% even in countries that have introduced expensive
carbon pricing, including Sweden, and does not support that carbon pricing is effec-
tive for the large emission reductions needed for decarbonization. Patt and Lilliestam
(2018) claim that most of the existing theoretical studies on carbon pricing are based
on the short-term and static demand-supply curves of neoclassical economics, but in
order to handle system transitions such as decarbonization, a theoretical framework
of transition theory from a long-term and dynamic perspective is needed, such as a
decrease in supply price due to an increase in supply due to learning effects and a
product value that is determined by regimes such as infrastructure, social networks
and institutions.
This chapter demonstrates increasing expectations for carbon pricing in Japan
in the context of global climate policy corresponding to the Paris Agreement, in
particular the 1.5 °C goal, with keeping mind of the abovementioned research gap.
The following Sect. 2 explains the global trend of carbon pricing with introducing
4 S. Kojima and K. Asakawa

advanced cases of carbon pricing across the world. Section 3 explains historical
progress of carbon pricing discussion in Japan and outlines the current nation-wide
carbon pricing scheme, i.e. Global Warming Countermeasure Tax. There are also
sub-national carbon pricing schemes in Japan, that is, ETSs in Tokyo and Saitama,
of which explanation are provided in Chaps. 6 and 7 respectively, and this chapter
focuses on carbon tax including the currently implemented Global Warming Counter-
measure Tax. Section 4 argues that the current carbon pricing schemes in Japan are too
modest and there is a room to upgrade them to exploit full potential of carbon pricing,
with arguing expected price ranges in compatible with decarbonization transition,
and Sect. 5 concludes this chapter.

2 Global Trend of Carbon Pricing

2.1 Carbon Pricing Initiatives in the World

Since the first carbon tax was introduced by Finland in 1990, only a limited number
of European countries implemented carbon tax and the emissions covered by these
schemes were very small until the early 2000s. In 2005 EU-ETS was started and the
emissions covered by carbon pricing significantly increased, around 4% of global
emissions (World Bank 2019b). In 2007 the number of carbon pricing initiatives
reached 10, and 4 years later the number of initiatives exceeded 20. Since then the
number of initiatives have steadily increased, and as of April 2019, 46 countries and
28 cities/states/regions, which represent 56% of global greenhouse gas (GHG) emis-
sions, have introduced carbon pricing initiatives, according to World Bank (2019b).
The levels of carbon prices vary significantly across countries/schemes as shown in
Fig. 1.
Currently three Nordic countries (Sweden, Norway and Finland), Switzerland,
Liechtenstein and France set high carbon prices above USD 50/t-CO2 , with Sweden
implementing the highest carbon price of USD 127/t-CO2 . 18 initiatives employ
moderate carbon prices between USD 10/t-CO2 and USD 50/t-CO2 , and the
remaining initiatives employ low carbon prices less than USD 10/t-CO2 . Japan’s
carbon tax (Global Warming Countermeasure Tax) is JPY 289/t-CO2 (around USD
2.6/t-CO2 ), which is among the lowest carbon prices.

2.2 Lessons Learned from Advanced Carbon Pricing

Initiatives

In order to make the debate over carbon pricing in Japan more productive and
proactive towards decarbonization transition, advanced cases of carbon pricing in
1 Expectations for Carbon Pricing in Japan in the Global … 5

$0 $20 $40 $60 $80 $100 $120 $140

Sweden carbon tax $127
Switzerland carbon tax $96
Liechtenstein carbon tax $96
Finland carbon tax $70
Norway carbon tax $59
France carbon tax $50
Iceland carbon tax $31
Denmark carbon tax $26
BriƟsh Columbia carbon tax $26
EU ETS $25
UK carbon price floor $24
Ireland carbon tax $22
Korea ETS $22
Alberta carbon tax $22
Slovenia carbon tax $19
New Zealand ETS $17
Spain carbon tax $17
California ETS $16
Quebec ETS $16
Newfoundland and Labrador carbon tax $15
Prince Edward Island carbon tax $15
Canada federal fuel charge $15
Portugal carbon tax $14
Beijing pilot ETS $11
ArgenƟna carbon tax $6
Tokyo emission trading system (ETS) $6
Saitama ETS $6
Switzerland ETS $5
Chile carbon tax $5
Colombia carbon tax $5
Latvia carbon tax $5
Singapore carbon tax $4
Shanghai pilot ETS $4
Hubei pilot ETS $4
Mexico carbon tax $3
Japan carbon tax $3
Guangdong pilot ETS $4
Estonia carbon tax $2
Tianjin pilot ETS $2
Fujian pilot ETS $2
Ukraine carbon tax $1
Poland carbon tax $1
Shenzhen pilot ETS $1
Chongqing pilot ETS $1

Fig. 1 Prices in existing carbon pricing initiatives. Source World Bank (2019b), adopted by the
authors
6 S. Kojima and K. Asakawa

Europe, which were often introduced after intense debate with opponents, provide
good reference cases.
In Germany, compared to Japan, ecological tax reform itself has become a political
point of contention and has been elevated to a national debate through the election
campaign. The lesson to be learned from this is that the larger the national debate
became, the more each stakeholder’s “real opinions” (the real points of contention)
came up for discussion, rather than superficially contesting theoretical and academic
points of contention (Kreiser et al. 2015). As a result, it was decided to focus on indi-
vidual benefits, such as the international competitiveness, performance, and employ-
ment issues of the stakeholders affected by the carbon tax, particularly the manufac-
turing industry, rather than the macro and general discussion such as impacts on GDP
growth rates. In this way, we believe that the political contentiousness has stimulated
a wide range of stakeholders to discuss their “true feelings” and, because the issues
were thoroughly addressed, it was possible to design the system for a carbon tax and
other measures accordingly, and relatively quickly consensus was formed.
France was more concerned about the international competitiveness of its own
industry, and discussion of border tax adjustment in cooperation with other countries
was rendered in parallel with the introduction of a carbon tax and other measures
(Asakawa et al. 2016). In EU, many countries have already traded emissions credits
through EU-ETS and many countries have also introduced carbon taxes. Therefore,
at least a fairer competitive market in terms of carbon pricing has been developed
than in the other regions. Nevertheless, the fact that border tax adjustments were
being considered suggests that international competitiveness is an issue that should
be handled with caution.
In the United Kingdom, from the beginning of policy process the priority is given
to stakeholder consultation in order to reflect the opinions of citizens and industry in
the design of the system, including consideration for the energy poor (Force 1998). In
response to industry concerns, the government exempted energy-intensive industries
from taxation, but instead forced them to sign a climate change agreement with the
government with voluntary reduction targets. This active adoption of a policy mix of
agreements and carbon taxes is also instructive in designing carbon pricing in Japan.
In Sweden, the success factor of early introduction of carbon tax was the fact that
tax on fossil fuels was sought as an alternative revenue source to income taxes that
had been a high tax burden (Asakawa et al. 2016). This suggests that in addition to the
importance of revenue neutrality, the choice of alternative taxes also contributes to
public support. In addition, the abundance of biomass, which became an alternative
heat source for local heat supply with the introduction of the carbon tax, could be
another important factor in increasing public support.

2.3 The Current Status of Effective Carbon Rates

There is an argument that energy taxes also function as carbon pricing instru-
ments. For example, taxation on fossil fuels provides incentives to reduce fossil
1 Expectations for Carbon Pricing in Japan in the Global … 7

fuels consumption and consequently has the same effect as a carbon tax, if we just
focus on one type of fossil fuel. The important difference between carbon tax and
energy tax is that the former tax rates per carbon content are identical across different
types of fossil fuels while those of the latter differ between different fossil fuels, and
in the worst case the latter could give incentive to increase carbon emissions through
lowering relative price of high carbon content fossil fuel such as coal comparing
with that of low carbon content fossil fuel such as natural gas. Bearing this caveat in
mind, energy tax can be regarded as an extension of carbon pricing. Following this
line of argument, OECD defines effective carbon rates (ECR) as the sum of explicit
carbon prices (carbon taxes and ETS) and fossil fuel taxes per carbon emission, and
estimates the effective carbon rates of OECD countries and its key partner countries
as shown in Table 1 (OECD 2016).
Switzerland records the highest national average effective carbon rate at EUR
104.4/t-CO2 , followed by Luxemburg (EUR 95.3/t-CO2 ) and Norway (EUR 93.0/t-
CO2 ). Interestingly the national average effective carbon rate of Sweden (EUR 69.3/t-
CO2 ) is significantly lower than its carbon tax rate (USD 127/t-CO2 ), which means
that substantial portion of carbon emissions are exempted from carbon tax.
The effective carbon rates vary greatly across sectors. In many countries including
Japan, road transport energy is heavily taxed and is associated with much higher
effective carbon rates than those of remaining energy usages, as shown in Table 1.
For example, in Japan, the average effective carbon rate of road transport energy is
high at EUR 188.3/t-CO2 while that of other energies is much low at EUR 7.7/t-CO2 ,
which result in the country’s average effective carbon rate at EUR 34.8/t-CO2 .

3 The Current Status of Carbon Pricing in Japan

3.1 The Current Carbon Pricing Initiatives in Japan

Currently there are three carbon pricing initiatives in Japan, Tokyo ETS started in
2010, Saitama ETS started in 2011 and linked to Tokyo ETS, and the Global Warming
Countermeasure Tax, a national carbon tax, started in 2012. As two local ETSs are
addressed in the following Chap. 6 (Tokyo ETS) and Chap. 7 (Saitama ETS), this
section focuses on the Global Warming Countermeasure Tax.
Japan introduced the Global Warming Countermeasure Tax in April 2012 after
long discussion at the Central Environment Council. In particular, the Special
Committee on Global Warming Countermeasures and Taxation, which was estab-
lished under the Joint Committee of Comprehensive Policy and Global Environment,
the Central Environment Council, from 2001 to 2003, carried out intensive discus-
sions on carbon taxes with the aim of creating a basis for public debate on carbon
taxes as a part of evaluation and review of the Charter of Countermeasures against
Global Warming in 2004. Based on these discussions the Ministry of the Environ-
ment (MOE) submitted a series of tax proposals based on the examination of the
8 S. Kojima and K. Asakawa

Table 1 Effective Carbon Rates (ECR) of OECD Countries and Key Partner Countries
Overall All energy excluding road Road transport energy
average ECR transport energy
(EUR/t-CO2 ) Share of Average ECR Share of Average ECR
emissions (EUR/t-CO2 ) emissions (EUR/t-CO2 )
(%) (%)
Australia 21.2 82 2.4 18 106.6
Austria 56.2 75 20.2 25 164.4
Belgium 40.6 79 7.4 21 165.7
Canada 10.7 73 3.4 27 30.6
Chile 12.5 84 0.0 16 78.2
Czech 33.2 84 6.7 16 172.3
Denmark 80.3 77 47.4 23 190.4
Estonia 29.1 87 9.5 13 160.4
Finland 48.7 87 23.7 13 216.1
France 65.8 67 9.7 33 179.9
Germany 58.7 82 23.4 18 219.5
Greece 60.4 82 20.7 18 241.4
Hungary 35.4 77 5.0 23 137.4
Iceland 80.1 58 18.1 42 165.6
Ireland 71.9 73 20.6 27 210.6
Israel 79.6 75 26.3 25 239.4
Italy 60.4 82 20.4 18 242.7
Japan 34.8 85 7.7 15 188.3
Rep. Korea 28.4 87 9.8 13 153.3
Luxemburg 95.3 31 5.8 69 135.5
Mexico 2.7 69 0.2 31 8.1
Netherlands 88.7 80 54.6 20 224.8
New Zealand 30.5 67 1.2 33 90.2
Norway 93.0 76 46.7 24 239.3
Poland 28.6 85 10.6 15 130.6
Portugal 48.4 72 6.6 28 156.1
Slovakia 40.0 83 16.3 17 155.7
Slovenia 67.8 62 16.6 38 151.5
Spain 43.4 74 11.1 26 135.1
Sweden 69.3 78 30.7 22 206.5
Switzerland 104.4 64 21.5 36 251.7
Turkey 39.2 85 7.6 15 218.6
UK 75.5 77 14.3 23 280.6
(continued)
1 Expectations for Carbon Pricing in Japan in the Global … 9

Table 1 (continued)
Overall All energy excluding road Road transport energy
average ECR transport energy
(EUR/t-CO2 ) Share of Average ECR Share of Average ECR
emissions (EUR/t-CO2 ) emissions (EUR/t-CO2 )
(%) (%)
USA 5.7 72 0.8 28 18.4
Argentina 33.0 77 3.7 23 130.9
Brazil 3.8 72 1.8 28 9.1
China 4.0 94 1.6 6 42.0
India 2.9 93 1.0 7 29.1
Indonesia 2.4 83 0.0 17 13.9
Russia 0.0 92 0.0 8 0.1
South Africa 13.7 91 3.0 9 122.1
Source OECD (2016), adopted by the authors

characteristics of carbon taxes, institutional issues as taxes, the use of tax revenues,
and preliminary estimation of the effects of carbon taxes. Table 2 shows changes in
proposals made by MOE and the Central Environment Council until the introduction
of the Global Warming Countermeasure Tax.
It is observed that basic features of the implemented Global Warming Counter-
measure Tax as well as most proposals, except for those in 2003, 2004 and 2009,
are low tax rate with spending tax revenue for global warming countermeasures.
Kawakatsu et al. (2017) reported that the study group on possible tax system reform
established by the Environmental Agency (the current MOE) already suggested in
1998 that a possible Japanese carbon tax should have a low tax rate and that the
revenues should be solely used for GHG reduction, according to Environmental
Agency (1997). In many countries carbon intensive sectors such as the fossil fuel
industry, the iron and steel industry and the paper industry strongly oppose carbon
pricing that significantly increases production costs if other conditions remain the
same, and Japanese business community strongly opposed introducing the carbon
tax, which was one of the factors explaining why the realized tax rate (JPY 289/t-
CO2 ) was much lower than the originally proposed rates (JPY 655/t-CO2 in the
proposals during 2004–2008, and JPY 1,064/t-CO2 in the 2009 proposal).
Another interesting feature of carbon tax debate in Japan and the implemented
Global Warming Countermeasure Tax is lack of double dividend perspective, which
has been intensively discussed associated with carbon pricing and has provided
orientation of green tax reform in many countries. The double dividend hypoth-
esis claims that the reduction of externality by a carbon tax (the first dividend) and
the effect of reducing market distortions caused by taxation (the second dividend)
can be achieved simultaneously by using carbon tax revenues to reduce other taxes
(Goulder 1995; Schob 2003). The original double-dividend hypothesis is that the tax
revenue from the optimal solution for the first dividend, which is the Pigouvian tax,
10 S. Kojima and K. Asakawa

Table 2 Contents of tax proposals towards the Global Warming Countermeasure Tax
Proposal Description Tax rate (JPY Expected Tax revenue Use of tax
date per t-CO2 ) mitigation (JPY billion revenue
effects per year)
August Preliminary 927 for all Kyoto 950 Subsidy for
2003 estimation by fossil fuels protocol global warming
the special target of 6% countermeasures
committee on 12,273 for all reduction 12,574 No use (only
taxation for fossil fuels from 1990 (estimated price incentive)
global warming by the
countermeasure authors)
November FY2005 tax 655 for all 4% reduction 490 General revenue:
2004 reform proposal fossil fuels from 1990 JPY 340 billion
by MOE for global
warming
countermeasures
and JPY150
billion for
reduction of
social insurance
cost
November FY2006 tax 655 for all 3.5% 370 General revenue:
2005 reform proposal fossil fuels, reduction JPY 370 billion
by MOE with from 1990 for global
temporal warming
exemption countermeasures,
for gasoline, with partial
diesel, jet concession to
fuels local
municipalities
November FY2007 tax 655 for all No 360 General revenue:
2006 reform proposal fossil fuels, description JPY 360 billion
by MOE with for global
temporal warming
exemption countermeasures,
for gasoline, with partial
diesel, jet concession to
fuels local
municipalities
November FY2008 tax 655 for all No 360 General revenue:
2007 reform proposal fossil fuels, description JPY 360 billion
by MOE with for global
temporal warming
exemption countermeasures,
for gasoline, with partial
diesel, jet concession to
fuels municipalities
(continued)
1 Expectations for Carbon Pricing in Japan in the Global … 11

Table 2 (continued)
Proposal Description Tax rate (JPY Expected Tax revenue Use of tax
date per t-CO2 ) mitigation (JPY billion revenue
effects per year)
November FY2009 tax 655 for all No 360 General revenue:
2008 reform proposal fossil fuels, description revenue neutral
by MOE with by reducing other
temporal environmental tax
exemption revenue
for gasoline,
diesel, jet
fuels
November FY2010 tax For importers No 2,000 General revenue:
2009 reform request and description (a priority is given to
by MOE extractors of part of the expenditures for
fossil fuels Challenge 25 global warming
• 1,174 for that will countermeasures
coal achieve 25% and tax cut
• 1,064 for reduction included in the
non-coal from 1990 by challenge 25
For gasoline 2020)
producers
• 7,467 for
gasoline
November FY2011 tax 300 for all 1% reduction 240 Use for mitigation
2010 reform proposal fossil fuels from 1990 in measures of
by MOE 2020 energy-derived
CO2
November FY2012 tax 289 for all No 262 (normal Use for mitigation
2011 reform proposal fossil fuels, description years) measures of
by MOE starting from energy-derived
(implemented 1/3 of 289, CO2
from FY2012) raised to 2/3
of 289 in
April 2014
and raised to
289 in April
2016
Source MOE, ‘Greening taxation’, accessed 15 January 2020 at https://www.env.go.jp/policy/tax/
kento.html, adopted by the authors

can be used to reduce other taxes that have the effect of distorting the market, in order
to attain additional benefit of further improvement in resource allocation efficiency
by correcting market distortions (the second dividend). For this form of the double
dividend hypothesis, partial equilibrium model analyses by Nichols (1984), Terkla
(1984), and Lee and Misiolek (1986) in the 1980s provided results supporting the
hypothesis (Schob 2003). There are various variations in the double dividend hypoth-
esis in terms of the definition of the second dividend such as an increase in employ-
ment rather than general GDP growth (e.g., Bovenberg and van der Ploeg 1998) or
12 S. Kojima and K. Asakawa

in the effect of correcting inequality in the income distribution (e.g., Klenert et al.
2016). In either case the possibility of double dividend from carbon tax can contribute
to improve social and political acceptability of carbon tax. In Japan, however, the
possibility of double dividend through revenue recycling to reduce other taxes or
social insurance cost was reflected only in the MOE’s tax proposals in 2004 and
2009, and the implemented Global Warming Countermeasure Tax does not have
this possibility. Replacing existing taxes, such as corporate tax and income tax, with
carbon tax in order to pursue double dividend would have financial implications to
related ministries, not only MOE and the Ministry of Finance but also the Ministry of
Economy, Trade and Industry, the Ministry of Health, Labor and Welfare, and so on.
Consequently, incorporation of double dividend feature into carbon tax very likely
requires inter-ministerial coordination, which might have hindered active discussion
on double dividend issues in Japan.

3.2 The Current Sectoral Effective Carbon Rates in Japan

Broadly, there are three types of energy taxes in Japan, that is, upstream fossil fuel
tax (the Petroleum and Coal Tax), downstream fossil fuel taxes (the Gasoline Tax, the
Light Fuel Oil Tax, and the Aviation Fuel Tax), and electricity tax (the Electric Power
Development Promotion Tax). The tax rates of downstream fossil fuel taxes are in
general high, e.g. that of the Gasoline Tax is around USD 200/t-CO2 and that of the
Light Fuel Oil Tax is around USD 100/t-CO2 , but only selected types of fossil fuels
are covered (Kawakatsu et al. 2017). Upstream fossil fuel tax, i.e. the Petroleum and
Coal Tax, is levied on the import or extraction of all types of fossil fuels including
natural gas, and the Global Warming Countermeasure Tax is implemented as an
additional tax on the Petroleum and Coal Tax (Arimura and Iwata 2015). It should
be noted that tax rates of the Petroleum and Coal Tax vary across different types of
fossil fuels, i.e., around USD 7/t-CO2 for crude oil, USD 4/t-CO2 for natural gas,
and USD 2.7/t-CO2 for coal, which would give price advantage to coal against other
cleaner fossil fuels.
Some opponents to carbon pricing often claim that Japan has already implemented
quite high carbon pricing through the abovementioned energy taxes. The effective
carbon rates estimated by OECD (2016) shed light on this claim. As shown in Table 1,
Japan’s effective carbon rate of road transportation energy is EUR 188.8/t-CO2 ,
which is higher than the average of listed countries in Table 1 (EUR 146.6/t-CO2 ) but
not extremely high among OECD countries. In terms of national average effective
carbon rates, Japan is EUR 34.8/t-CO2 , which is lower than the average of listed
countries in Table 1 (EUR 43.9/t-CO2 ).
In order to identify potential of carbon pricing in Japan further, we estimated
Japan’s sectoral average effective carbon rates of 6 sectors, that is, the road trans-
portation, the offroad transportation, the industry, the agriculture and fishing, the
residential and commercial, and the electricity sectors, as shown in Table 3.
1 Expectations for Carbon Pricing in Japan in the Global … 13

Table 3 Sectoral effective carbon rates of Japan

Sector Average ECR Emission (1000 t-CO2 ) Emission share (%)
(EUR/t-CO2 )
Road transport 188.3 196,028 14.7
Offroad transport 56.7 20,719 1.6
Industry 3.3 451,225 33.8
Agriculture and 0.8 10,237 0.8
fishing
Residential and 5.5 150,165 11.2
commercial
Electricity 10.4 508,103 38.0
Source OECD (2016), adopted by the authors

It is striking that the average effective carbon rate of the industrial sector, which
emit 33.8% of total carbon emissions, is EUR 3.3/t-CO2 , which is only marginally
above the rate of Global Warming Countermeasure Tax. In terms of effective carbon
rate it is clear that only transportation sectors (road transportation and offroad trans-
portation) bear disproportionally heavy burden, which may result in sub-optimal
mitigation outcome as a whole country.

4 Expectations for Carbon Pricing in Japan

4.1 Discussion on Required Price Level

As we discussed in the previous section, the current carbon pricing schemes in Japan
are modest and there is a room to upgrade them to exploit full potential of carbon
pricing in the context of decarbonization transition. The first key issue is adequate
level of carbon pricing. In order to get ideas from the existing literature, it seems
important to distinguish two approaches in estimating the carbon price corresponding
to the given reduction target. One is the marginal abatement cost approach, which
assumes that the carbon price to achieve the given reduction target is equal to the
marginal abatement cost corresponding to that target, and the other is explicit carbon
pricing approach in which the reduction target is achieved as a result of stakeholders
response to explicit carbon pricing. In hypothetical first best world two approaches
result in the same carbon price, but this does not hold in the real world as explained
below.
The marginal abatement cost is the cost to reduce one unit in addition to the
current amount of abatement. Since the cost to reduce one unit differs depending on
abatement technologies and the amount of abatement, and since it is used from less
expensive abatement technologies to achieve the required abatement, the marginal
abatement cost increases as the required amount of emission reduction increases
14 S. Kojima and K. Asakawa

(Fig. 2). When the marginal abatement cost corresponding to the given reduction
target is collected as a carbon price, the reduction target is achieved as a result of the
emitter’s rational action of cost minimization. In this case, the marginal abatement
cost corresponding to the given reduction target is equal to the carbon price to achieve
the target (Fig. 2). IPCC (2018) reports the marginal abatement costs in the scenarios
corresponding to the 1.5°C and 2°C targets as the prices of carbon emissions.
On the other hand, Kesicki and Ekins (2012) point out that an approach in which
reduction targets are achieved through the introduction of a carbon price equal to
the marginal abatement cost corresponding to the reduction target does not reflect
the various interactions associated with the dynamic processes, and it is necessary
to consider marginal abatement costs separately from explicit carbon prices such
as carbon taxes and ETS. Bataille et al. (2016) point out that prior to COP 15,
majority of research focused on the marginal abatement cost curve for discussing
economically efficient emission reductions since the main challenge there was partial
emission reductions, but when addressing the challenge of full decarbonization, such
as the DDPP, the marginal abatement cost approach is not useful because it may
lead to lock-into carbon-intensive infrastructure and technologies or solutions that
are inconsistent with social and economic priorities. For utilizing carbon pricing
to realize a decarbonized society, it is important to go beyond the framework of the
statistic equilibrium analysis of the marginal abatement cost approach and to conduct
a dynamic analysis of the processes that significantly change the marginal abatement
cost curve itself and the possibility of lowering total emissions and target reductions
through a reduction of emitting activities as a result of influencing decision-making
of all actors such as producers, consumers, and investors.
For example, the introduction of carbon pricing gives renewable energy a price
advantage over fossil fuels, while the introduction of renewable energy in large
quantities as a result of this price advantage makes renewable energy technologies

Fig. 2 Marginal abatement cost curve and carbon price. Source The authors
1 Expectations for Carbon Pricing in Japan in the Global … 15

Fig. 3 Possibility of lowering carbon price through various dynamic effects. Source The authors

cheaper due to economies of scale, and this virtuous cycle will lead to substantial
emission reduction. Taking these dynamic effects into account, the explicit carbon
price required to achieve the reduction target is expected to be substantially lower
than the corresponding marginal abatement cost for achieving the reduction target in
the statics framework, as illustrated in Fig. 3.
Furthermore, the downward shift in the marginal reduction cost curve and the
reduction in total emissions can also be caused by systemic changes such as the
transition to a digital economy or a circular economy, which are not necessarily
caused by the introduction of carbon pricing. Obviously the above argument still
applies in this case. Regardless of the impact of carbon pricing, the dynamic analysis
of system conversions that significantly change the marginal abatement cost curve
itself and the possibility of lowering total emissions and the reduction target through
a reduction in emitting activities is important to support actual implementation of
carbon pricing.
In addition to the above arguments, the fact that individual bounded rationality
plays a major role in real-world decision-making can also be a factor in the discrep-
ancy between the marginal abatement cost estimates and the carbon price. It is known
that there are negative marginal abatement costs, i.e., technologies that benefit from
the implementation of reduction measures, when a marginal abatement cost curve is
drawn by ordering the reduction cost per unit and the amount that can be reduced
for each reduction measure technology from the one with the lowest reduction cost
per unit. The fact that not all of these technologies with negative marginal abate-
ment costs have been introduced shows that in the real world, the assumption that all
measures with marginal abatement costs lower than the carbon price will be imple-
mented is not necessarily valid. Therefore, a distinction needs to be made between
estimating the marginal abatement cost corresponding to a given reduction target
16 S. Kojima and K. Asakawa

and how much is reduced through each stakeholder’s responses when that marginal
abatement cost is introduced as an explicit carbon price.
As the above discussion suggests, estimated carbon prices in consistent with
decarbonization transition significantly vary between two approaches. In general,
the marginal abatement cost approach resulted in much higher carbon prices than the
explicit carbon pricing approach.
IPCC (2018) estimates global marginal abatement costs for emission pathways
meeting the 2°C target to be USD 15-220/t-CO2 eq (2010 prices) in 2030 and USD
45-1,050/t-CO2 eq (2010 prices) in 2050, while marginal abatement costs for emis-
sion pathways meeting the 1.5°C target to be USD 135-6,050/t-CO2 eq (2010 prices)
in 2030 and USD 245-14,300/t-CO2 eq (2010 prices) in 2050. Oshiro et al. (2017)
estimated marginal abatement costs using the AIM/Enduse [Japan] model, a sequen-
tial dynamic bottom-up energy model, for seven different scenarios for Japan’s
decarbonization paths corresponding to the 2°C and 1.5°C targets, with and without
utilizing carbon sequestration through nuclear power and bioenergy CCS (BECCS),
and with and without making early abatement efforts in 2030 that exceed the NDC
reduction target. It is also argued that without the use of BECCS, the 1.5°C target
cannot be achieved and the marginal reduction cost in 2050 under the 2°C target
achievement scenario rises to USD 860/t-CO2 . Sugiyama et al. (2019) analyzed
the decarbonization paths of achieving the 2030 NDC and 80% reduction in 2050
using 7 different models with different characteristics, including sequential and full
dynamics, global model and Japan single country model, general equilibrium model
and partial equilibrium model, and estimated the marginal abatement cost in 2030
as USD 44-346/t-CO2 (median USD 150/t-CO2 ) and the marginal abatement cost in
2050 as USD 273-7,730/t-CO2 (median USD 2,818/t-CO2 ).
On the other hand, the studies in explicit carbon pricing approach estimate rela-
tively moderate carbon price to achieve decarbonization transition. DDPP (2015)
identifies carbon pricing as an important element in all policy packages, but Canada
and France are the only countries to place explicit carbon pricing in their policy
packages in the DDPP country reports (Bataille et al. 2015; Criqui et al. 2015). As
part of its policy to reduce GHG emissions by 90% from 2005 levels by 2050, Canada
assumes to introduce carbon pricing at CAD 50/t-CO2 in 2020 and raise it by CAD
10/t-CO2 each year thereafter until it reaches CAD 350/t-CO2 in 2050 through a
combination of an ETS for heavy industry and a flexible carbon pricing system with
an upstream ETS or carbon tax option for other stakeholders. Revenues from carbon
pricing are assumed to be used to reduce income taxes for individuals and corpora-
tions (Bataille et al. 2015). In France, as part of the policy to reduce GHG emissions
by 75% of 1990 levels by 2050, a carbon tax of EUR 90/t-CO2 in 2030 and EUR
280/t-CO2 in 2050 is introduced for all sectors under the scenario of 50% share of
nuclear power and 40% share of renewable energy in the power supply mix in 2050,
and a carbon tax of EUR 120/t-CO2 in 2030 and EUR 360/t-CO2 in 2050 is intro-
duced for all sectors under the scenario of 25% share of nuclear power and 70% share
of renewable energy in the power supply mix in 2050, and the carbon tax revenue is
returned equally to households (Criqui et al. 2015). Rockström et al. (2017) argue
that in an effort to achieve a “roadmap for rapid decarbonization” to achieve net
1 Expectations for Carbon Pricing in Japan in the Global … 17

zero CO2 emissions globally by 2050, they would eliminate all fossil fuel subsidies
by 2020, which currently amount to USD 500–600 billion per year, and introduce
an explicit carbon price of at least USD 50/t-CO2 for all CO2 emissions in 2020
through international ETS scheme and a carbon tax on air and sea transport, gradu-
ally increasing to a level above USD 400/t-CO2 by 2050. This roadmap assumes that
all CO2 emissions, estimated to be around 5 Gt by 2050, will be captured by BECCS
to achieve net zero CO2 emissions. To realize a decarbonized society in Japan, Kojima
et al. (2018) propose a policy package consisting of carbon tax and a tax recycling
scheme in which a portion of the carbon tax revenues is allocated to energy effi-
ciency investments in order to achieve the 2030 NDC target and the long-term goal
of the Global Warming Action Plan, an 80% reduction by 2050. Based on E3ME
macro-measurement model analysis, Kojima et al. (2018) propose a carbon tax of
JPY 11,400/t-CO2 (around USD 100/t-CO2 ) in 2030 and JPY 57,300/t-CO2 (around
USD 500/t-CO2 ) in 2050 in a phased manner from 2021 to 2050, with allocating
2–4% of the carbon tax revenue to energy efficiency investments and returning the
remainder of the tax revenue to households in a lump-sum manner. More recently,
Kobayashi et al. (2019) incorporate an assumption of a full transition to a digital
economy and estimate the carbon tax rate to achieve 80% reduction in CO2 emis-
sions in 2050 (compared to 2013), which corresponds to the 2°C target, and zero CO2
emissions in 2050, which corresponds to the 1.5°C target, using the static computable
general equilibrium (CGE) model. Their assumption of a full transition to a digital
economy include widespread use of artificial intelligence (AI), the Internet of Things
(IoT), and big data. In introducing the carbon tax, the existing energy tax portion
of the tax is reduced so as not to be double taxed with the existing energy tax. It is
also assumed that all carbon tax revenues will be returned to households. This study
assumes that CO2 emissions in 2050 will be reduced by 61% in comparison with
2013 even without carbon pricing, because the transition to the digital economy will
result in a reduction in manufacturing and a shift to an industrial structure dominated
by the service industry along with a decline in the population and an aging of the
population. Furthermore, this study assumes a structural change accompanying the
transition to the digital economy, such as the use of plastic as a substitute for steel in
automobile manufacturing due to the improved safety of automobile traffic caused
by the spread of automated driving, or an 80% reduction in the number of automo-
biles due to the development of the sharing economy, and the elimination of auto-
mobile purchases by ordinary households. Based on these assumptions, Kobayashi
et al. (2019) conclude that a carbon tax of JPY 9,700/t-CO2 (around USD 90/t-CO2 )
would be necessary to achieve 80% reduction, which means additional 19% reduc-
tion on the baseline reduction of 61%, with an additional assumption that carbon
pricing triggers the introduction of CCS and additional renewable energy. Without
assuming carbon pricing-induced CCS and additional renewable energy deployment,
the carbon tax rate required to achieve an 80% reduction in 2050 will jump to more
than JPY 30,000/t-CO2 (around USD 270/t-CO2 ). In order to further reduce emis-
sions and achieve zero emissions in 2050, Kobayashi et al. (2019) estimate that a
carbon tax of JPY 21,400/t-CO2 (around USD 200/t-CO2 ) will be required, assuming
the introduction of CCS and additional renewable energy through carbon pricing.
18 S. Kojima and K. Asakawa

4.2 Careful Consideration for Revenue Recycling

The revenue generation function of carbon pricing is associated with both potential
and challenges and it must be carefully considered.
In terms of potential, there are various options of spending of the revenue of carbon
pricing. In case of the Global Warming Countermeasure Tax its revenue is solely
spent for global warming countermeasures. However as explained in Sect. 3, wisely
designed revenue recycling may be able to achieve double dividend in some forms
(Chap. 13). Considering the problems Japan is facing now, such as low birthrate and
aging population, declining local population, in addition to various challenges asso-
ciated with decarbonization transition including infrastructure investment, revenue
recycling for solving these problems may generate double dividend or even multiple
dividend. When the level of carbon price will be as high as discussed in 4.1, the
expected revenue could be very large and appropriate revenue recycling could have
huge positive impacts.
On the other hand, there is a potential conflict between the mitigation function and
the revenue generating functions of carbon pricing (Morotomi 2000). This concern
is particularly important when carbon pricing is introduced in order to achieve major
emissions reduction. For example, if Japan could achieve an 80% emissions reduction
by 2050 with carbon tax as one of key policy instruments for this purpose, the tax base
of the carbon tax would fall by 80%. Some may argue that no tax can escape revenue
fluctuations, but the point here is not just revenue fluctuations but also implications for
policy design. If, for example, a carbon tax is intended to generate stable revenue,
either a sufficiently low tax rate should be chosen or a gradually increasing tax
schedule would be needed to compensate for the reduction in the tax base. In the
former case, the mitigation effect is sacrificed. The latter case, starting with an initial
low rate may be reasonable as in any case, but a very high rate of carbon tax would be
politically infeasible and keeping a certain revenue level would become very difficult.

5 Conclusion

This chapter reviewed the current carbon pricing in Japan, in terms of not only explicit
carbon pricing but also effective carbon rates, along with the current status of carbon
pricing worldwide, in the context of global climate policy after the Paris Agreement
and the IPCC 1.5°C Special Report (IPCC 2018).
There seems a general agreement among the literature addressing decarbonization
pathways corresponding to post Paris Agreement climate policy that carbon pricing
with high price level plays indispensable roles to realize systemic transition towards
decarbonized society. The rationale is that high level of carbon pricing can provide
effective and consistent signals to all stakeholders which is essential to harmonize
their decentralized decision making towards decarbonization.
1 Expectations for Carbon Pricing in Japan in the Global … 19

In this context, there is a large potential of improvement in Japan’s carbon pricing

schemes. Japan has implemented nationwide carbon tax, i.e. the Global Warming
Countermeasure Tax, since April 2012. The tax rate of this carbon tax is JPY 289/t-
CO2 (around USD 2.6/t-CO2 ), which is one of the lowest among carbon pricing
initiatives in the world. There are also two municipality level ETS schemes in Tokyo
(since 2010) and in Saitama (since 2011), which will be addressed in Chaps. 6 and
7, respectively. There is an argument that Japan has already implemented high level
carbon pricing in terms of various forms of energy taxes. However, the nationwide
average effective carbon rate of Japan is EUR 34.8/t-CO2 according to OECD (2016),
which is lower than the average effective carbon rates of OECD countries and its
key partner countries (EUR 43.9/t-CO2 ). Our estimates of Japan’s sectoral average
effective carbon rates based on OECD (2016) highlight that only the transportation
sectors are associated with high effective carbon rates. In Japan the sectoral average
effective carbon rates of two large emitters, i.e. the industrial sector and the elec-
tricity sector, are EUR 3.3/t-CO2 and EUR 10.4/t-CO2 , respectively. For improving
mitigation efficiency of carbon pricing, one candidate option is energy tax reform
based on carbon content of energy carriers, which is discussed in Chap. 11.
In order to exploit full potential of carbon pricing in materializing decarbonization
transition, much higher carbon price than the current Global Warming Countermea-
sure Tax is needed. In order to get ideas about adequate level of carbon pricing
from the existing literature, we distinguished two approaches in estimating carbon
price corresponding to the given reduction target, that is, the marginal abatement
cost approach that assumes carbon price to achieve the given reduction target is
equal to the marginal abatement cost corresponding to the target, and the explicit
carbon pricing approach in which the reduction target is achieved as a result of
stakeholders response to explicit carbon pricing. In general the former is associated
with much higher carbon prices than the latter due to lack of dynamic interactions
between carbon pricing and marginal abatement cost curves, such as downward shift
of marginal abatement cost curves due to innovation induced by carbon pricing. The
literature based on the explicit carbon pricing approach tend to estimate carbon prices
corresponding to decarbonization paths at around USD 100-500/t-CO2 (c.f. DDPP
2015; Rockström et al. 2017; Kojima et al. 2018; Kobayashi et al. 2019).
Another important issue of carbon pricing is the revenue recycling design. As
in many European cases green tax reform in which revenue of carbon tax is spent
to reduce other forms of taxes or social insurance costs may result in double divi-
dend (Chap. 13), or even multiple dividend. While careful consideration of revenue
recycling design is necessary because of potential conflict between the mitigation
function and the revenue generating functions of carbon pricing, carbon pricing with
adequate price level with wisely designed revenue recycling is expected to play
important roles to materialize decarbonization transition.
20 S. Kojima and K. Asakawa

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Dr. Satoshi Kojima is a principal coordinator at the Institute for Global Environmental Strate-
gies (IGES). He has conducted various quantitative policy impact assessments using computable
general equilibrium models and he has led research projects on sustainable development policy
including sustainable resource management and sustainable ecosystem use. He studied environ-
mental economics at the University of York in UK and received a Ph.D. in 2005.

Dr. Kenji Asakawa completed a Master of Urban Environment Engineering in Architectural

Engineering at the Waseda University Faculty of Science and Engineering. While working at a
consulting company on environmental preservation projects based on ODA and being involved in
environmental impact assessment both in Japan and overseas, he obtained a class-1 certification
as an Architect and as a Professional Engineer. Subsequently, after working in the development
of global warming mitigation, including CDM projects, and climate policy, he obtained his Juris
Doctor from Omiya Law School and passed the National Bar Examination.

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