The case for a carbon tax

19.10.15 Publication:

There are many uncertainties in economic and political life. But here at least are two things I thought were certainties in Japan. One is that the government needs to find ways to increase tax revenues in order gradually to close the fiscal deficit and get the public debt back under control. The other is that Japan needs to reduce its emissions of greenhouse gases, mainly carbon dioxide, in order to meet the international agreed targets for controlling CO2 and global warming.

So why, in that case, does Japan’s new long-term energy plan include a big and continuing role for the dirtiest form of fossil fuel, coal? And why is the Ministry of Finance not using the carbon tax it introduced in 2012 so as to raise revenues and discourage CO2 emissions at the same time?

Probably, the official answer is that this is exactly what it is doing. The “Tax for Climate Change Mitigation” was introduced with a schedule for gradual increases in the tax, with the burden shared out according to how much carbon dioxide is associated with the different fossil fuels of oil, natural gas and coal.

The aim of the tax was stated as being to discourage greenhouse-gas emissions and help Japan to meet its commitment to cut such emissions by 80% by 2050. But is this really happening? The question is worth asking because of the report issued by the Ministry of Economy Trade and Industry in June 2015, announcing the recommendations of its consultative committee on long-term energy supply and demand.

According to the report, in 2013 liquefied natural gas (LNG) accounted for 43.2% of Japan’s power generation, with coal providing 30.3% and oil providing 14.9%. The committee’s recommendation for 2030 is that LNG’s share should drop substantially, to 27%, while coal’s share will fall just from 30.3% to 26%.

The return of nuclear power to provide 20-22% of Japan’s power by 2030, according to the committee’s plan, would of course substantially reduce greenhouse gas emissions. But the surprise for me is that coal is expected to remain such an important part of Japan’s power generation.

If the 2012 carbon tax were being implemented fully, according to the intentions stated when it was introduced, surely this would not happen. The share of coal would fall faster than the share of LNG, since coal is dirtier in terms of carbon dioxide emissions than gas.

So why is this not expected to happen? There are three possible explanations. One is that climate change, and the reduction of greenhouse gas emissions, is not in fact a policy priority for the Japanese government. The second is that the electricity production companies remain politically influential. For the big advantage of coal is that it is cheap, with prices having slumped in recent years. Naturally the electricity firms benefit from having as cheap a fuel as possible. The third possibility is that between 2030 and 2050, coal will in fact be penalized by the carbon tax and steadily phased out.

This third possibility cannot be entirely excluded, but it is so far into the future that we can set it aside for the purposes of the current argument. The real current explanations must be that climate change is not a priority, and that industry lobbying has proved effective.

This is a big pity, since the fall in all energy prices over the past year, thanks to US shale oil and gas production and to rising oil output in Libya, Iraq and Iran, has created a big opportunity to use the carbon tax in an effective way.

While energy prices are falling, power producers and big power consumers have less cause to complain about a carbon tax. For that reason, the Ministry of Finance really should now push hard for the “Tax for Climate Change Mitigation” to be raised and enforced properly, with steady rises in the tax, especially on coal, over the next decade.

This would bring in very useful tax revenue. But over a period of years, the main effect should be to alter choices about which forms of energy to use, incentivizing investment in making low-carbon sources cheaper. It takes time for energy investment to make a difference, since it is so capital- and technology-intensive. But eventually, the difference will be made.

In the end, this will all depend on whether Japan really cares about greenhouse-gas emissions and global warming. But if the country whose greatest cultural city gave its name to the Kyoto Protocol doesn’t care about climate change, then there is little hope for the planet. It is time for the carbon tax to be used, properly.