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Green Fiscal Reforms and the Demographic Squeeze: Lessons from Japan

Author

Listed:
  • Jared C. Carbone

    (Department of Economics and Business, Colorado School of Mines)

  • Maxwell Fleming

    (Department of Economics and Business, Colorado School of Mines)

  • Akio Yamazaki

    (National Graduate Institute for Policy Studies (GRIPS))

Abstract

How does carbon pricing perform in an economy with a declining population growth? We develop an overlapping generations model calibrated to Japan. Using this model, we examine how demographic change interacts with green fiscal reforms, in which revenues from carbon pricing are used to improve the efficiency of the tax system. Our results show that demographic change erodes the tax base, so the fiscal response has a larger impact on welfare than the carbon policy itself. Relative to a constant population growth benchmark, ignoring demographic change can overestimate the welfare costs of carbon pricing by 11 percent when pension benefits are reduced and carbon revenues are used to cut capital taxes. Microsimulation analysis indicates that low-income households face higher short-run welfare losses under policies that are most efficient in the long-run, highlighting a trade-off between efficiency and progressivity in the design of carbon pricing in aging economies.

Suggested Citation

  • Jared C. Carbone & Maxwell Fleming & Akio Yamazaki, 2025. "Green Fiscal Reforms and the Demographic Squeeze: Lessons from Japan," Working Papers 2025-03, Colorado School of Mines, Division of Economics and Business.
    • Handle: RePEc:mns:wpaper:wp202503
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    References listed on IDEAS

    as
    1. Roberton C. Williams III & Hal Gordon & Dallas Burtraw & Jared C. Carbone & Richard D. Morgenstern, 2014. "The Initial Incidence of a Carbon Tax Across U.S. States," National Tax Journal, National Tax Association;National Tax Journal, vol. 67(4), pages 807-830, December.
    2. Sebastian Rausch & Hidemichi Yonezawa, 2018. "The Intergenerational Incidence Of Green Tax Reform," Climate Change Economics (CCE), World Scientific Publishing Co. Pte. Ltd., vol. 9(01), pages 1-25, February.
    3. Frédéric Gonand, 2016. "The Carbon Tax, Ageing and Pension Deficits," Post-Print hal-01251698, HAL.
    4. Bovenberg, A Lans & Goulder, Lawrence H, 1996. "Optimal Environmental Taxation in the Presence of Other Taxes: General-Equilibrium Analyses," American Economic Review, American Economic Association, vol. 86(4), pages 985-1000, September.
    5. Stephie Fried & Kevin Novan & William Peterman, 2018. "The Distributional Effects of a Carbon Tax on Current and Future Generations," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 30, pages 30-46, October.
    6. Laurence Kotlikoff & Felix Kubler & Andrey Polbin & Jeffrey Sachs & Simon Scheidegger, 2021. "Making Carbon Taxation A Generational Win Win," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 62(1), pages 3-46, February.
    7. Bovenberg, A.L. & Goulder, L.H., 1996. "Optimal environmental taxation in the presence of other taxes : General equilibrium analyses," Other publications TiSEM 5d4b7517-c5c8-4ef6-ab76-3, Tilburg University, School of Economics and Management.
    8. Roberton C. Williams III & Hal Gordon & Dallas Burtraw & Jared C. Carbone & Richard D. Morgenstern, 2015. "The Initial Incidence of a Carbon Tax Across Income Groups," National Tax Journal, National Tax Association;National Tax Journal, vol. 68(1), pages 195-214, March.
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    JEL classification:

    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects

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