The debate on the carbon tax is heating up again after a lapse of two and a half years. Before the 1997 Kyoto conference on climate change, I proposed that Japan introduce this environmental tax, following Norway, Sweden, Finland, Denmark and the Netherlands. However, the Ministry of International Trade and Industry, the Federation of Economic Organizations (Keidanren) and industries such as steel and petroleum opposed the tax for the following reasons.
First, raising the prices of fossil fuels through the introduction of a carbon tax would not help much to reduce emissions of carbon dioxide because, generally, energy has low price elasticity, or responsiveness to price changes. Second, the rate of economic growth will drop if the carbon tax is introduced. And third, if Japan alone levies it ahead of other major industrialized countries, the export competitiveness of Japanese industries that consume large quantities of energy, such as steel, will decline.
But what if the carbon tax is instituted? The price elasticity of gasoline, for example, might remain low because it will be difficult to find a substitute fuel, and because most drivers will not immediately drive less even if the price is raised. The same thing can be said about heating oil, gas and electricity.