<From "Kiko Network News" Vol.32,September 2003>

MOE (Ministry of Environment) proposes a carbon tax,
initiating full-scale discussions:
Early introduction of an effective carbon tax is expected

As one of the measures to combat climate change, carbon taxes (or “tax measures for combating global warming” by MOE) are now attracting more and more attention. The carbon tax is designed to reduce carbon dioxide (CO2) emissions by imposing tax on fossil fuels such as petroleum, and raising the prices of fuels accordingly. The Central Environmental Council (the Expert Committee and the underlying Working Group) of the MOE has recently compiled a draft plan for the carbon tax. It is the first proposal for the design of a carbon tax system to be released by the government, and at long last, full-fledged discussions toward the introduction of the tax are expected to begin. This article will review the MOE (Central Environmental Council) proposal and discuss the future development.

MOE proposal: low tax rate earmarked for climate protection

The Working Group's report entitled “Working toward a proposal of tax measures for combating global warming” was presented on July 25 at the meeting held by the Expert Committee on Tax Measures for Combating Global Warming within the Joint Subcommittee on General Policy Planning and Global Environment. Then, on August 27, the above Expert Committee released a report entitled “Plan for a tax system to combat global warming: a proposal for citizen discussion and debate”. The contents of the two reports are basically the same, although the former provides more details. The report says that the proposed tax system was prepared in advance of the 2004 review of the Guideline of Measures to Prevent Global Warming, the so-called “climate change policy package.” The followings are the main points of the MOE proposal.

(1)Tax rate

The report says that the tax rate cannot be decided until the Guideline is reviewed in 2004, and the tax rate is not clearly stated in the report. However, estimation by a simulation model suggests that, in order to achieve a 2% reduction from 1990 levels (the reduction rate of energy-related CO2 emissions stated in the Guideline), the tax rate should be as high as 45,000 yen/tC when only cost incentives of the taxation are concerned, and 3,400 yen/tC when the tax revenues are subsequently used as subsidies. Also, estimation of the economic impact of the tax predicts that the GDP in 2010 will decrease by only 0.06-0.16% compare to the expected GDP when the tax is not introduced. Therefore, it is estimated that the carbon tax will have little negative impact on economy.

(2) Tax revenue

The report mainly suggests that the revenues from the carbon tax should be used for combating climate change (although it also suggests alternative plans including use for other measures or for covering other tax cuts). It is laudable that the report mentions “transparency of tax use that meets the approval of the public.”

(3) Taxation stages

In regard to the taxation stages, the report recommends the most-upstream or upstream taxation (e.g. at the time of import of petroleum), when considering the reality of the administrative work that comes with taxation. (Downstream taxation at the time of petroleum sales is also referred to as an alternative plan.)

(4) Tax reduction to industry

With regard to the reduction of the tax burden on industry, the report says that "some sort of system is necessary." (Concrete plans have yet to be discussed.) However, the report's assertion that some conditions should be imposed to ensure reductions in CO2 emissions before introducing tax reductions is commendable.

(5) Coordination with existing energy taxes,

The report indicates that "some sort of adjustment is necessary" to the existing energy taxes. (Nothing concrete has been discussed.) However, the introduction of the carbon tax should not be accompanied by any “adjustments" to existing energy taxes that would lead to an increase of CO2 emissions. In summary, the proposal indicates that the MOE is oriented toward a taxation system featuring a low tax rate and earmarked for climate-related use.

The progress is welcome, but not satisfactory.

Although the MOE (the Central Environmental Council) proposal has been announced, it does not necessarily mean that it will become the overall government's proposal and be implemented. The newly released proposal needs to be discussed step by step (See Table 1) until it is finally implemented.Let us consider how the different sectors can be expected to proceed in the future.

○ Government ministries and agencies,

Although government ministries and agencies have not yet announced their views on the carbon tax (Only the Forestry Agency has expressed its support for the introduction and revealed its intention to allocate tax revenues for forest management.), discussions among them will continue in the future.

○The Government's Tax System Research Commission

Assuming that the expected time schedule (See Table 1) is followed, the existing Subcommittee on Basic Problems will take up this issue for discussion, and in 2004, a new subcommittee will be established to consider a concrete system design.

○ Political parties,

The ruling Liberal Democratic Party (LDP), and in particular its Taxation System Research Committee, is expected to be greatly involved in the final decision of a carbon tax. Therefore, assuming the schedule in Table 1, the meeting of the LDP committee to be held in Autumn 2004 will have significant meaning. Among the various parties, only the Democratic Party has so far announced a concrete plan for a carbon tax.We hope that the other parties will also make clear their own proposals for the carbon tax as soon as possible, and that the discussions will proceed at the initiative of politicians, not only of bureaucrats.

○ Industry,

As the MOE proposal has gradually been revealed, some industries (e.g. oil, steel) have started to raise their voices against a carbon tax. According to the Survey of Environment-Friendly Corporate Conduct performed by the MOE (questionnaire survey), opinions on a carbon tax are divided approximately one third each among those in support, those in opposition, and those undecided.

○ Labor unions, consumer organizations, citizen's groups, etc.,

Many groups have shown positive attitudes toward the introduction of a carbon tax. However, it is still necessary to promote their further understanding.

Toward the introduction of the ideal carbon tax

It is becoming better understood that a carbon tax (tax measures for combating global warming) is an important measure to efficiently reduce CO2 emissions. Except for some industries, the carbon tax has been generally supported, and therefore it is highly probable that the tax will be introduced in some form in the future. However, there are some concerns. For example, if the tax rate is too low to have effect on the CO2 emissions reduction, it will become nothing more than another consumer tax under the name of a carbon tax. Moreover, according to the Government Guideline of Measures to Prevent Global Warming, nuclear power generation as well as road construction to prevent traffic jams are also defined as measures to curb climate change, so there is a possibility that the revenues from the carbon tax will be used also for these purposes. The Ministry of Environmnet's proposal is just the starting point for a full-fledged discussion. We hope that, through sufficient debate, "the ideal carbon tax" will be introduced as quickly as possible.

Since Sept 2003 The MOE’s (the Central Environmental Council) proposal is open for public comments. Local public hearings will be held.
Fall 2003 Government's Tax System Research Commission will conduct hearings with the Central Environmental Council.
Since early 2004 "Environment Tax Subcommittee" will be established within the Government's Tax Research Commission (*).
During fiscal 2004 Review of the Guideline of Measures to Prevent Global Warming. (Additional measures to be introduced in the fiscal year of 2005 will be discussed).
Summer-Fall 2004 Government proposal for a carbon tax will be compiled (*).
End of 2004 The government draft budget including a carbon tax will be finalized (*).
End of fiscal 2004 The government draft budget including a carbon tax will be passed through the Diet (*).
Within fiscal 2005 A carbon tax will finally be implemented (*).

(* Assuming introduction during fiscal 2005, the author of this article has made a prediction based on various sources.)