1.1

Carbon tax advantages

Obviously, the carbon tax has two significant advantages. The first advantage is the environmental benefit: imposing a carbon tax increases the cost of using traditional fossil fuels, encouraging enterprises to reduce their carbon tax expenses by switching to new energy sources or enhancing energy efficiency. This leads to overall emission reductions in society⁴. The second advantage is the social welfare benefit: to alleviate the tax burden on businesses, the government may lower other tax rates or increase transfer payments to residents and enterprises. Additionally, the revenue from the carbon tax can be used by the government to boost investments in carbon emission reduction or climate change initiatives, thereby enhancing social welfare⁵.

The carbon tax mechanism can also address the shortcomings of the carbon market in terms of institutional design. Firstly, due to entry criteria, the carbon market often excludes some small and medium-sized enterprises, preventing it from effectively encouraging these businesses to pursue energy saving and emission reduction⁶. In contrast, the carbon tax applies to all market participants, thereby promoting carbon emission reductions universally and fairly. Additionally, the carbon price in the carbon market fluctuates with market conditions, creating uncertainty in the expected returns for enterprises investing in low-carbon technologies. Furthermore, the cost of carbon trading is significantly higher than that of a carbon tax, and establishing a Monitoring, Reporting, and Verification (MRV) system imposes additional burdens on some enterprises. The carbon tax can utilize the existing tax system, thereby saving transaction costs for enterprises and reducing operational burdens.

1.2

Limitations of carbon tax policy

There are good reasons why governments do not want to use a carbon tax as a policy tool, one of which has to do with the welfare implications of a carbon tax. For example, a carbon tax on fossil fuels hurts the poor relatively more than it hurts the rich. Even though governments may impose higher carbon taxes on the rich, the poor will still suffer welfare losses when commodity prices rise because they spend more on basic consumer goods⁷. When ancillary compensatory measures are not in place, the losses of those harmed by the carbon tax may not be recovered for reasons that are difficult to identify. Therefore, even if governments decide to impose a carbon tax, they have concerns about collecting enough to reduce emissions to the desired level⁸. In addition, the impact of a carbon tax on large commercial activities is another reason for the government’s hesitation on the subject of a carbon tax.

Several other reasons make it undesirable to raise the market price of fossil fuels to reflect social costs directly. A carbon tax on fossil fuels aims to restructure the industry by increasing costs in related sectors⁹. However, restructuring takes time because capital, labor, and other resources cannot be perfectly and instantly transferred to new industry structures. During the transition period, resources may remain idle for extended periods, and the larger the price changes, the higher the potential restructuring costs.¹⁰.

Some of the resources used by other sectors of the economy will flow into renewable energy and related support sectors and increase investment and employment in these areas. However, it is clear that these flows will not automatically and immediately fill the gap in fossil fuel investment¹¹. In such a scenario, a mismatch between supply and demand would occur in the short term. Combined with the large uncertainties embedded in the relevant economic variables, economic disruptions could clearly be magnified4¹².

Another problem is that the carbon tax only targets CO₂ emissions from fossil fuels and does not include carbon compounds such as methane, which has a large greenhouse potential¹³. Carbon emissions from agriculture/livestock, waste management, or improper land use are even more difficult to assess and monitor, and these carbon emissions are difficult to tax directly. We need alternative non-tax policies to carbon taxes to limit carbon emissions from these other sources along with other GHG emissions¹⁴.

1.3

Targeted government initiatives

Therefore, governments will use a variety of targeted policies and regulations to spread their impact on energy restructuring along different dimensions of the market, society, and time. Indeed, implicit taxes and other fiscal incentives are common government decentralization measures¹⁵. For example, governments could ban the import of all luxury vehicles that use fossil fuels or impose a higher emissions tax on them. Other measures include requiring buildings to install more energy- efficient devices, providing subsidies for green public transportation, and raising metropolitan parking fee minimums¹⁶. To meet the objective of cutting greenhouse gas emissions, we require policies beyond just carbon taxes¹⁷. Given that markets are not flawless or comprehensive, and consumers might lack complete information, additional policies can help lower the economic adjustment costs.

2.1

Study on the environmental effects of carbon tax

The environmental effects caused by the carbon tax are an important aspect in assessing the effects of carbon tax implementation. The environmental effects of carbon tax are mainly reflected in two aspects: on the one hand, the direct result of implementing carbon tax is the reduction of carbon emissions, which can mitigate climate change, which is a long-term global environmental benefit. On the other hand, the implementation of carbon tax policy can limit the consumption level of fossil fuels, and the emission level of many air pollutants generated from fossil energy consumption, including carbon dioxide, will be reduced, which in turn can reduce the local environmental pollution problem and improve the local environmental quality to get short-term environmental benefits¹⁸. The majority of scholars currently focus on the former environmental effect. They argue that a carbon tax can effectively reduce carbon emissions by raising the cost of fossil energy use and increasing the expenditure of energy consumers, thus inducing a shift in their energy consumption patterns towards cleaner and lower carbon¹⁹. In terms of policy implementation effects, some European countries have achieved better emission reduction results. For example, an evaluation of the implementation of a carbon tax in Denmark in 1997 showed that the imposition of an environmental tax led to a 10% reduction in energy consumption by firms, and a series of environmental policies, including a carbon tax, led to a 13% reduction in carbon emissions in Sweden between 1987 and 1994²⁰. On the contrary, some studies have concluded that the environmental effects of carbon taxes are not significant. Bruvoll and Larsen²¹ showed empirically that carbon taxes reduced carbon emissions in Norway by only 2.3% in 1990-1999. Similarly, Baranzini et al.²² show that the energy tax in Denmark only reduced the country’s carbon emissions by 4.7% from 1998 to 2000. In addition, Liu and Li²³ and Zhou et al.²⁴ did not find significant environmental effects of carbon taxes in their simulations of carbon taxes in the Chinese region.

The main reasons why the environmental effect of carbon tax is not significant in each country include: First, some countries implement lower carbon tax rates, and at the same time implement higher tax incentives and tax rebates to protect the competitiveness of high energy-consuming industries, which causes the effect of carbon tax policy to be greatly reduced. Countries such as Norway and Denmark have 50% or 100% tax incentives for high-carbon industries, resulting in lower policy efficiency of the environmental effect of carbon tax. Second, when the total amount of carbon emissions rises due to the entry of new sources of pollution, the effective carbon tax rate should also be adjusted to increase. When the carbon tax rate is in the stable period after it is set, the actual tax rate will deviate from the effective tax rate and it is difficult to bring out the best effect. Third, in an inflationary situation, the effective rate of carbon tax becomes smaller over time, and also deviates from the effective tax rate and gradually reduces the promotion of emission reduction behavior²².

2.2

The economic effects of carbon tax

A carbon tax is a tax on the CO² emitted during the use of fossil energy, which will directly lead to an increase in the price of fossil energy, increase the production cost of enterprises, and have an impact on the overall economic system. The study of the economic effects of carbon tax mainly includes two aspects: industrial competitiveness and macroeconomic growth. As a tax regulation instrument, carbon tax policy can achieve the goal of energy saving and emission reduction, and at the same time, it can have a direct impact on the national economic system through the price mechanism, and these impacts can be expressed through some macroeconomic indicators, including Gross domestic product (GDP), consumption, investment and energy prices. The traditional economics view is that environmental regulation comes at the cost of economic losses²⁵.

In terms of the negative impact of carbon tax on the economic system, some scholars suggest that appropriate environmental regulation can induce firms to engage in more innovative activities, and these innovations will increase the productivity of firms which will offset the additional cost of environmental management and enhance the profitability of firms in the market. This hypothesis provides a fresh perspective on the relationship between environmental protection and economic development, and the claims of this hypothesis contrast with previous studies. Lee et al.²⁶ studied the impact of carbon tax and carbon trading on Taiwan’s economy and found that introducing a carbon trading policy along with a carbon tax would boost GDP growth. In general, the differences in empirical studies on the macroeconomic impact of carbon taxes are mainly due to the methodology, scenarios, model assumptions, and mechanisms for the return of tax revenues²⁷ in the short run, the negative macroeconomic impact of a carbon tax is unquestionable, while the technological innovation effect generated by the impact of a carbon tax is often a long-term effect that cannot be captured in the short run. From the perspective of most countries that have implemented carbon taxes, in the short term, carbon taxes can inhibit economic factors such as investment, consumption, and economic growth by affecting energy prices. However, from the perspective of long-term benefits, the negative effects can be mitigated as long as the level of tax is located in a reasonable range and implemented with appropriate policy measures. Therefore, carbon tax is regarded as a feasible environmental policy by most researchers.

2.3

The welfare effects of carbon tax

The welfare effect of carbon tax is an important research direction in the study of the policy effect of carbon tax. The welfare effect of carbon tax includes not only the distribution of carbon tax cost among different producers, but also the distribution of carbon tax burden among different residents. The cost of carbon tax is unevenly distributed among different actors, with some economic agents bearing more losses and others possibly profiting from the supporting measures of carbon tax, which intensifies the current situation of social inequity. Most studies on the welfare impact of carbon taxes have focused on the discussion of the impact and distributional rationality of the levy on the welfare levels of different population groups.

The main perspectives of existing studies on the welfare effects of carbon taxes include different income groups, different regions, between urban and rural areas, and between generations, with the main focus on the welfare effects between different income groups. Some researchers argue that carbon taxes are regressive, more unfavorable to low- and middle- income groups, and will increase the inequity of social income distribution²⁸. The main reasons for this are: first, lower- income households spend a larger share on fuel relative to higher-income households. A carbon tax raises the price of energy, resulting in a loss that will be higher for the poor than for the rich. On the other hand, the rich, although spending less on fuel than the poor, consume more in total and would benefit more from a lower carbon tax rate or subsidies for domestic energy consumption such as heating²⁹. Second, firms will invest more capital to improve the technology to reduce emissions, resulting in a higher demand for capital than for labor, which will lead to lower wages, a loss for the low-income group. Third, lower income groups prefer basic necessities, while higher income groups have a greater preference for high environmental quality, so higher income groups receive more benefits from improved environmental quality⁵. Finally, the carbon tax induces a transition of the economic system toward low carbon, and the transition will eliminate some of the outdated production capacity and cause some people to lose their jobs, which are mostly in the low-income group. However, more researchers are optimistic about the welfare effects of carbon tax, and believe that although carbon tax may have regressive effects, such regressive effects can be weakened and mitigated, or even completely offset, through reasonable tax incentives or rebate system, etc. Creedy and Sleeman³⁰ studied the impact of a carbon tax on social welfare in New Zealand and showed that the burden of living caused by the carbon tax is small and can eventually be compensated by subsidies. Oladosu and Rose³¹ studied the welfare effects of a carbon tax in the Susquehanna River Basin region of the United States and found that the regressive effects can be offset by improved economic structure, increased payment transfers, and reduced profits to offset them. In terms of the impact of carbon tax on residents’ social welfare, the conclusions obtained for different research samples are inconsistent. The key factor affecting the direction of the welfare effect of carbon tax is the mechanism of using the carbon tax revenue, and the regressive effect of carbon tax will likely be offset if the carbon tax revenue refund system is reasonably arranged.

4.1

Carbon tax process in Japan

As a signatory to the 2015 Paris Agreement, the Japanese government has been actively striving to reduce carbon emissions. In 2012, Japan implemented a carbon tax of $2.65 per ton of CO₂ with the goal of bringing emissions down to 1990 levels by 2020⁴⁵. Despite these efforts, Japan’s rate of carbon reduction falls short of what is necessary to limit global temperature rise to 1.5°C.

Recent observations noted by Fujinami indicate a 20% increase in typhoons approaching Japan over the past four decades⁴⁶. This underscores the urgency for Japan to prioritize climate issues more prominently and reconsider and enhance its carbon tax policy to achieve greater emission reductions efficiently.

In 2001, Japan’s Central Environmental Council established the “Expert Committee on Taxation System to Address Climate Change.” By 2003, the committee’s report highlighted the necessity for improvements in the taxation system before implementing climate change taxes⁴⁷. In 2005, the Japanese government contemplated an environmental tax of 2,400 yen per ton of CO₂, but it did not encompass coal, gasoline, light oil, and jet fuel used in manufacturing⁴⁸.

To reassess the feasibility of a carbon tax, Japan’s Ministry of the Environment established a subcommittee on global warming tax considerations in 2010, tasked with developing a climate and energy roadmap for the country. A 2011 Ministry of the Environment report underscored the limitations of high carbon tax rates in influencing prices, prompting subsequent discussions to focus on minimizing price impacts while using carbon tax revenues to bolster low-carbon initiatives and promote green technology development⁴⁹. As a result, a significantly reduced climate change mitigation tax ($2.65/ton CO₂e)

Unlike countries such as Sweden, Finland, and the Netherlands, where a separate and dedicated carbon tax is applied nationwide, the Japanese government has added a carbon emission factor to the existing energy tax to reduce carbon emissions, and the amount is much lower than the standard in European countries. We believe that this is still a big difference from a comprehensive carbon tax in the strict sense. In the future, if we can get the public’s approval, the implementation of a comprehensive carbon tax will be more conducive to reaching the goal of carbon neutrality.

4.2

Carbon tax process in China

After experiencing three decades of rapid economic growth, China has come to recognize the severe environmental consequences stemming from its substantial energy consumption, including increased emissions of carbon dioxide and air pollutants. Carbon dioxide emissions are particularly linked to global warming². This has prompted a global consensus on the need to reduce carbon emissions, improve environmental conditions, and foster the development of a low-carbon green economy⁵⁰.

As a signatory to the Paris Agreement, China has committed to reaching its peak carbon emissions around 2030 and increasing the proportion of non-fossil energy in primary energy consumption to 20% by the same year. Achieving these emission reduction targets through tools such as carbon taxes has thus become a crucial area of research in China’s emission reduction efforts⁵¹.

China, as the world’s largest carbon emitter, faces increasingly prominent environmental challenges. In 2010, the Xinjiang Autonomous Region became the first pilot area for resource tax reform⁵². Subsequently, in 2011, China revised and enhanced its Provisional Regulations on Resource Tax and initiated nationwide reforms on oil and gas taxation⁵³. The State Council and the Ministry of Finance then introduced reforms to the coal resource tax, implementing a nationwide ad valorem tax approach for coal resources in 2014⁵⁴.

According to a 2016 report from China’s Ministry of Finance, China currently does not have a standalone carbon tax but is prepared to introduce it as part of its existing environmental and resource tax framework.

4.3

Carbon tax process in South Korea

As the fourth largest energy consumer in Asia, South Korea plans to reduce its greenhouse gas emissions by 30% from projected levels by 2020. This is one of the most ambitious emission reduction targets among Asian countries which promotes environmentally friendly investment and development (Kim S.R, 2011).

Before the start of the climate negotiations in Copenhagen in 2009, South Korea released their statement on their plans to reduce emissions. Korea has unilaterally set voluntary targets and hopes to lead other developing countries to join in the effort and to induce further commitments from developed countries. The Korean government’s proposed National Strategy for Green Growth is a comprehensive long-term plan which includes three main objectives: first, to effectively address climate change and energy security, second, to create new economic growth in multiple sectors, and third, to improve the quality of life of its people and its contribution to the international community (Kamal-Chaoui L et al., 2011). The Comprehensive Green Growth Act was enacted in 2009 (January 2010). The Korean government is also evaluating the feasibility of imposing a carbon tax, and property, automobile, and energy taxes are all being considered to limit greenhouse gas emissions and promote a green economy (Mathews, 2012). In particular, the introduction of a carbon tax is becoming part of the environmental tax reform process in Korea. A team of scholars and policy makers in has confirmed the effectiveness of carbon taxes under the green growth strategy⁵⁵.

The Korean government’s green policy also promotes a new negotiated agreement system and a national cap-and-trade system to be legislated in 2015, and provides policy support for 10 key environmental technologies, including carbon capture and storage and new batteries⁵⁶. Although some companies have expressed concerns about the direction of the policy, most Korean companies have been supportive of the government’s green growth plan. More than 600 Korean companies will voluntarily participate in the Korea Carbon Emissions Trading System starting in 2010²⁶. With the support of the Korean government, the Global Green Growth Institute was established in Seoul to promote national policy experiences on climate change and to facilitate the development of a green growth strategy in Korea.