Double Dividend of the Carbon Tax in Japan: Can We Increase Public Support for Carbon Pricing?

Carbon pricing is difficult to introduce in many countries because it is not easy to obtain public supportPublic support for carbon pricing due to the burden associated with it. One way to overcome this difficulty is to rely on the double dividendDouble dividend of a carbon taxCarbon tax. If a government uses revenue from a carbon tax to reduce existing distorting taxes, such as corporate taxes or labor taxes, a carbon tax can improve economic efficiency while reducing greenhouse gas (GHG) emissions. This chapter examines the net burden of a carbon tax with revenue recyclingRevenue recycling (RR) for two types of stakeholders: firms and households. Using dynamicDynamic computable general equilibriumComputable general equilibrium (CGE) modeling, we examine the carbon prices needed to achieve the emission targets set for 2030 and 2050. Then, we simulate two types of RR: corporate tax reduction and a reduction in social securitySocial Security payments. We compare the benefit of the tax reduction to the increase in the burden from the carbon tax in scenarios for 2030/2050. In the scenario of corporate tax reduction, by selecting firms from the land transportation sector and power sector, we examine how profit changes due to the carbon taxCarbon tax. We find that the tax burden for a firm in the land transportation sector can be eased greatly with the corporate tax reduction. In the scenario of the social securitySocial Security payment reduction, we find that some households are better off under carbon pricing despite expenditure increases due to the carbon taxCarbon tax. Thus, we show that RRRevenue recycling can increase support for the carbon taxCarbon tax.