Abstract
Following the Kyoto Protocol, the Japanese government plans to reduce greenhouse gas emissions by 6% on the basis of the 1990 emission level over the next decade. To reduce greenhouse gas emissions, the Japanese government considers adopting an environmental tax. This paper analyzes the economic effect of a recent proposal by the Japanese government for a CO2 tax with policies that use the tax revenues to lower the pre-existing taxes. We examine the double dividend hypothesis using a computational general equilibrium model. In particular, our model incorporates \3, 000/tC CO2 tax and we conduct 6 simulations that use the environmental tax revenues to lower the following pre-existing taxes, (1) labor income tax, (2) employee's social security contribution, (3) consumption tax, (4) corporate tax, (5) payroll tax (employer's social security contribution), and (6) a combination of employee's social security contribution and payroll tax.
The simulation had the following results: Compared to the benchmark equilibrium, the CO2 emissions decrease in all simulation scenarios. This means that the first dividend is realized in all cases. The welfare effects of the environmental tax reforms are measured by the sum of the equivalent variations. The welfare gain (the second dividend) is realized in case (1), (2), (3) and (6), but in the two scenarios (4) and (5), where the tax revenues are used to reduce the firm's tax burden, the revenue recycling policies reduce welfare. From the viewpoint of the double dividend, the case (3) is the most desirable policy because it reduces the CO2 emissions and achieves the highest welfare gain.
The policy implication from this paper is that the Japanese government must not blindly use the revenues from the environmental tax for environmental purposes, but needs to consider the double dividend from the environmental tax reform.
