Short-term Economic Effect of EU-CBAM on Japanese Industries

This paper utilizes the 2015 Japanese Domestic Input-Output table and empirically analyzes the short-term impact of the EU-CBAM on the Japanese industry. We compare four scenarios reflecting the Japanese response to the implementation of EU-CBAM. The results show that the impact of the implementation of a “new” carbon price within Japan is smaller when the targeted industries are restricted to items regulated under CBAM, namely cement, iron and steel and fertilizers. Furthermore, if effective carbon rate is used to calculate the industry specific carbon price needed to match the EU-ETS permit price, then the impact of the regulated industries is mitigated. This suggests that tax reforms, switching energy taxes to carbon taxes, are needed to mitigate the short-term impact of carbon pricing policies. This will enable Japanese exporting industries to comply with EU-CBAM regulations by reporting their explicit carbon prices.