Green tax reform: converting implicit carbon taxes to a pure carbon tax

Global warming has become one of the most important issues in international society. Though environmental taxes and economic instruments are becoming popular among policy makers in Japan, there is little acceptance of the idea of introducing a new carbon tax to abate CO2 emissions. The Japanese tax system has implicit carbon taxes that consist of two custom duties and five excise taxes, the combined revenue of which amounts to five trillion yen per year. This article examines how much a green tax reform that converts the implicit taxes to a pure carbon tax in a revenue-neutral condition abates CO2 emissions. The results of this research are as follows. In a case in which the price elasticity of every fossil fuel is equal, the green tax reform could effectively abate CO2 emissions. Moreover, the higher the same price elasticity, the more effectively would the green tax reform abate CO2 emissions. When the price elasticities of fossil fuels are different from each other and when the price elasticity of gasoline is high, the green tax reform could not abate CO2 emissions. When the price elasticity of gasoline is relatively high, as we estimated, however, the tax reform may abate CO2 emissions, though its efficiency of abatement decreases. As a consequence, the green tax reform that converts the implicit taxes into a pure carbon tax in a revenue-neutral condition could mitigate the movement against the introduction of a carbon tax and effectively abate CO2 emissions.