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Why a carbon tax would help Japan achieve its green ambitions

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Japan should find its own path to carbon neutrality while being aware of its own strengths, such as combining carbon-neutral fuels with high-efficiency combustion engines.

That’s according to Toyota Motor Corp. President Akio Toyoda, speaking as chairman of the Japan Automobile Manufacturers Association during a news conference on April 22.

He argued that banning gasoline-powered vehicles would lead to loss of jobs for people manufacturing such cars and also could cause Japan to lose the strengths it has nurtured, including fuel injection technology.

On the following day, Honda Motor Co. President Toshihiro Mibe announced that the carmaker would aim to stop selling new gasoline-powered vehicles worldwide by 2040 and replace them completely with electric and fuel-cell vehicles.

Which one of them is right? We don’t yet know.

The trend can be seen not only in the automotive industry. The steel industry is looking into hydrogen direct reduction steelmaking, through which steel is made from iron ore using hydrogen instead of cokes to reduce iron oxides.

Whether this method is the way to go depends on whether clean and low-cost hydrogen can be obtained in mass quantities.

To move forward with decarbonization amid uncertainties, it is important to have a carbon pricing scheme which is technology-neutral and encourages companies to come up with new ideas.

An updated version of Toyota Motor Corp.’s Mirai fuel cell vehicle is unveiled to the media at Port Messe Nagoya in November 2019. | KYODO

Carbon pricing is a scheme to make greenhouse gas emitters bear the financial costs by setting prices according to the amount of carbon dioxide emitted.

There are two major forms of carbon pricing — emissions trading and carbon tax.

Emissions trading, also known as a cap-and-trade system, can bring about the same level of revenues as a carbon tax, if the initial distribution of emissions allowances is decided completely through auctions.

There are some major differences between the two:

  • Price fluctuations: In a cap-and-trade system, the prices of emissions permits change according to economic situations and that can have a negative impact on companies’ investment, research and development. There are ways to reduce fluctuations by allowing companies to “bank” allowances to use in future periods or “borrow” from future years’ emissions. Price caps or floors can be set on the allowances. While a carbon tax does not offer the same degree of certainty in emissions reductions as cap and trade, there is a so-called “ratchet mechanism” that will adjust the tax upward in the following year if the emissions reductions were lower than the national target.
  • Complementary policies: Robert N. Stavins, a Harvard University professor who heads the Harvard Project on Climate Agreements, writes that if a complementary regulatory policy is introduced along with a cap-and-trade scheme, there could be three negative impacts.
  • If the complementary policy is binding, there will be no additional reduction in emissions by the targeted source but rather a relocation, or leakage, of emissions to other sectors under the overall cap.
  • The cost-effectiveness of emissions reductions will not be equalized between sources targeted by the policy and those which are not, making the scheme inefficient.
  • Allowance prices will be suppressed, raising concerns about the ability of the system to reduce emissions or encourage technological change.
    When a carbon tax is paired with complementary policies, the emissions-leakage effect and allowance price suppression will not occur, Stavins says.
    • Transaction costs:........

      © The Japan Times

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