The role of carbon taxation in energy transition and meeting the sustainability goals based on a general equilibrium model

This study explores the role of implementing carbon taxation policies as a solution for efficient energy transition and achieving a long-term zero-carbon society. This chapter focuses on Japan’s macroeconomy and how it is affected by carbon tax through the Structural Vector Autoregressions (S-VAR) technique for the quarterly data from the years 2005 to 2020. A theoretical general equilibrium model supports the empirical analysis. Major findings suggest that an increase in energy price caused by carbon tax will prompt an increase in interest rate, exchange rate, and consumer price index. Simultaneously, a negative relationship is observed between energy price increase and real Gross Domestic Product (GDP) in Japan. Major practical energy policies of this study consist of carbon taxation policy reformation, reinvestment of carbon tax revenue, and a cap-and-trade scheme with consideration of Japan’s current situation of the power sectors.