Dynamics of Japan’s Industrial Production and CO2 Emissions: Causality, Long-Run Trend and Implication

While CO2 emissions from the residential and commercial sectors of Japan have increased significantly since 1990 the country‟s industrial emissions make up the largest share of those emissions. The historical CO2 emission performance data also indicate that the iron and steel, chemical, paper and pulp and cement were the top four largest industrial emitters, and these top four emitting industries contributed nearly two-third of the industrial sector‟s total CO2 emission amount during 1990-2015. Evidently, any appropriate efforts or strategies guided by an empirical investigation like this are expected to help Japan‟s industrial emitters move toward a more tolerable and less polluted carbon footprint, which is well-matched with the country‟s commitment to Kyoto Protocol. This study is thus an effort to empirically investigate the causality and long-run trend/relationship between Japan‟s industrial production and CO2 emissions and to propose some corporate environmental strategies using the econometric techniques of Vector Error Correction (VEC) and Granger causality. It found that there exists no Granger causality between Japan‟s industrial production and CO2 emissions in any direction. But the VEC estimation reveals that an increase in Japan‟s industrial production by 1% is associated with a 0.08% increase in the country‟s CO2 emissions. It also reveals that any disequilibrium between Japan‟s industrial production and CO2 emissions could take about 0.7 quarters for half of the error to be corrected for. The adjustment rate for Japan‟s industrial production is found to be positive but quite slow at the rate of 0.08% per year. Since Japan‟s CO2 emissions vis-à-vis its industrial production is found to have reached above the long-run equilibrium level, its industrial sector is expected to encounter with stricter government regulations requiring reduction of CO2 emissions to the targeted/equilibrium level in the future.