Computable General Equilibrium Analysis of Environmental Taxes at the Regional Level

Abstract

In this study, we developed a computable general equilibrium model to analyze environmental tax systems at the regional level. In addition, we estimated the impacts of a carbon tax in Aichi Prefecture, Japan. By simultaneously analyzing the tax source and how to use tax revenue, we considered the appropriate environmental tax system for the region. We also made the necessary settings for an empirical study at the regional level. For example, building the model as a two-region interregional model (Aichi and the rest of Japan) and explicitly stating a difference in financial conditions of the local government and the central government in each region. Moreover, we considered changes in environmental loads other than carbon-dioxide emissions to see if there are any trade-offs.
The numerical results clarified that: (i) in terms of economic benefits based on household consumption, the best carbon tax system is to tax all industries in accordance with CO₂ emissions, then return the tax revenue to the households; (ii) in terms of a contribution of CO₂ reduction for the whole country, the best tax system is to impose an environmental tax on the petroleum and coal products sector, then use the tax revenue for the CO₂ reduction projects of the local government; and, (iii) in terms of a secure local revenue and overall reduction in environmental loads, the best tax system is to tax all industries in accordance with CO₂ emissions, then include the carbon tax in the general budgets.

JEL Classification: H23, R13, Q58