THE LATEST TRENDS IN THE GREENING OF THE TAX SYSTEMS IN

JAPAN AND COMPARISON WITH EU COUNTRIES

16th Global Conference on Environmental Taxation

September 2015

NAITO Aya and MOTOKI Yuko

Mizuho Information & Research Institute, Inc.

1

Table of contents

General information of environmental taxes in Japan 2

Environmental taxes in OECD countries 3 List of environmental taxes - Japan and other countries - 4

Outline of tax revenue in Japan (1) -Share of env. tax revenue- 5

Outline of tax revenue in Japan (2) -Overall trend of revenue- 6

Energy taxes in Japan 7

List of energy taxes in Japan 8

Tax rates of energy products and electricity in Japan 9

Outline of Carbon Tax in Japan (1) -Tax rate- 10

Outline of Carbon Tax in Japan (2) -Tax revenue- 11

CO2 reduction effects of Carbon Tax in Japan 12

Vehicle taxes in Japan 13

Flow of imposition of vehicle taxes in Japan 14

List of vehicle taxes in Japan 15

Greening vehicle taxes in Japan - Passenger cars, trucks and buses with 2.5t or less - 16

Comparison with European countries 17

Comparison of ENERGY taxes in Japan and European countries 18

Comparison of VEHICLE taxes in Japan and European countries 19

Comparison of incentive to promote greener vehicles by taxes 20

Recommendation for future changes 21

Future recommendation for Japan’s environmental tax system 22

General information of environmental taxes

in Japan

2

-2

-1

0

1

2

3

4

5

% o

f G

DP Other Motor vehicles Energy

* 2011 figure

Revenues from environmental taxes in per cent of GDP, 2012

(Note) Energy products : Motor fuels (for transportation) , Heating and industrial process fuels , Electricity; Motor vehicles : One-time taxes on registration; annual registration taxes , Special heavy vehicle taxes ;

Other: Pollution (emissions of SOx and NOx, pesticides and fertilizers, etc. ), Waste (landfilling and incineration, plastic bags, batteries, tires, etc.) , use of water and other resources

(Source) OECD-EEA database of instruments for environmental policy

Environmental taxes in OECD countries

Japan’s revenue from environmental taxes accounts for only 1.6% in GDP. In most EU countries especially Denmark and Slovenia, their revenue from environmental taxes are

much higher than Japan.

In this paper, focus will be put on ‘Energy’ and ‘Motor vehicles’ taxes because total revenue from ‘Other’ taxes is less than 1% of GDP in Japan.

Japan:

1.6% of GDP

Denmark and Slovenia: around 4%

(appx. 2.5 times higher than Japan)

List of environmental taxes - Japan and other countries -

(Source) OECD-EEA database of instruments for environmental policy

4

Objective Field Name of Tax Measures Name of Measures in Japan Country which introduced the measures (e.g.)

Low Carbon

Global Warming

Carbon tax (energy tax) Tax for Climate Change Mitigation Denmark, Finland, France, Germany, Ireland, Mexico, Norway, Portugal, Sweden, Switzerland, UK

Vehicle Tax Greening Vehicle Taxation Denmark, Finland, France, Germany, Portugal, Switzerland, UK

Taxes Freon Not introduced Australia, Denmark, Norway, US

Recycle

Waste and Recycle

Waste Tax Waste Tax (Local) Canada (both national and state), Denmark, Finland, France, Italy, Norway, Sweden, UK, US (state)

Packaging Tax Not introduced Australia, Canada (states), Finland, Ireland, Israel, Italy, Norway, US

Natural Resources Mining Tax Not introduced Canada (states), Chile, China, Israel, UK, US (state)

Water Resources

Tap water Tax △ Water protection fund (Local) Denmark, Germany (both national and states), Israel, South Korea

Underground water tax △ Groundwater protection fund(Local) Belgium(state), Czech Republic, Germany (state)

Biodiversity

Forest Forest Tax Forest environmental Tax (Local) Austria(state)

Logging Tax Not introduced Canada(state), US (state)

Wildlife

Hunting Tax Hunting Tax(Local) Finland, Netherland

Fishing tax (e.g. license) Tax on hobby fishing (Local) Finland, US (state)

Pet Tax Not introduced Germany, Finland, China

Other Eco tax (e.g. mountain climbing tax) Entrance Tax (Local) Ecuador

Safety

Pollution (Air, Soil, Noise, General)

Air pollution Tax Not introduced Denmark, Italia, Netherland, Czech Republic

Tax on Wastewater discharge Not introduced Denmark, Germany, Sweden, Luxembourg, Estonia

Soil load charge Not introduced US (state), Hungary

Noise abatement Levy Not introduced Hungary

Aviation noise Tax △ Aviation noise charge (Local) Australia, France, Italy

Tax on polluting activities Not introduced France, Australia, Korea

Chemical substances Tax on hazardous chemicals Not introduced Canada (state), Denmark, US (both national and states)

Nuclear Nuclear fuel tax Nuclear fuel Tax (Local) Germany, Sweden, Slovak Republic

Radioactive waste tax Nuclear waste Tax (Local) Finland, Sweden, US (state)

Others

Tax on air transport Not introduced Australia, Austria, Germany, Ireland, UK

Tax on road user Tax on natural park entrance (Local) Germany, New Zealand, Switzerland

Tax on Incandescent light bulb Not introduced South Africa

Categorised into consumption tax

Outline of tax revenue in Japan (1) -Share of env. tax revenue-

Breakdown of tax revenue (FY2015)

(Source) Ministry of Finance, Ministry of Internal Affairs and Communications

5

Total tax revenue (national + local) in Japan in 2015 is expected to be approximately 96 trillion JPY. Energy tax revenue is approximately 4.7 trillion JPY and 5% of total tax revenue in Japan.

Vehicle tax revenue is approximately 2.5 trillion JPY and 3% of total tax revenue in Japan.

Energy taxes and vehicle taxes are categorized into consumption tax.

[National] •Gasoline tax •Oil and Gas Tax •Aviation Fuel Tax •Petroleum and Coal Tax •Electric Power Development Promotion Tax

[Local] •Diesel Oil Delivery Tax

[National] • Motor Vehicle Weight Tax

[Local] • Automobile Tax • Light Vehicle Tax • Automobile acquisition tax

National + Local

96 trillion JPY

(FY2015) Initial budget

Outline of tax revenue in Japan (2) -Overall trend of revenue-

Trends in major national tax revenue

Consumption tax (in green line) hikes a little step by step in accordance with the increase of VAT rate and is expected to continue this trend.

Relatively environmentally distortionary taxes such as individual income tax (in blue line) and corporate tax (in red line) are in a trend of reducing.

(Source) Ministry of Finance

6

Downwards trend

Upwards trend

*Data in 2015 is an estimated value

Energy taxes in Japan

7

Tax Name (Nation/State/Municipality)

Subject to Tax Tax Rate Tax Revenue

(FY 2014) Revenue Use

Gasoline Tax （Nation）

Volatile Oil JPY 48.6/l JPN 2,466

billion National general account

Local Gasoline Excise （Nation）

JPY 5.2/l JPN 263.8 billion

National general account (Fully granted as general fund of states, specified cities, and municipalities)

Oil and Gas Tax （Nation）

Oil and Gas for the Car JPY 17.5/kg JPY 20 billion

National general account (1/2 is granted as general fund of states, specified cities and municipalities)

Diesel Oil Delivery Tax (State)

Diesel Oil JPY 32.1/l JPY 938.3 billion National general account

Aviation Fuel Tax （Nation）

Aviation Fuel JPY 18.0/l * Special tax rate up to March 2017

JPY 66 billion

Aviation Maintenance (2/9 is granted as cost for aviation measures in cities and states)

Petroleum and Coal Tax

(Nation)

Crude Oil, Petroleum

Products, Gaseous

Hydrocarbons, and Coal

JPY 2,040/kl [Crude Oil, Petroleum Products] JPY 1,080/t [LPG and LNG] JPY 700/t [Coal]

JPY 628 billion

Stable Fuel Supply Measures Measures to ensure a stable and inexpensive supplies of oil, coal, and flammable natural gas

Measures to Sophistication of Energy Demand Structure Measures to build the structure of stable and suitable energy in accordance with the economic and social environment

Special Provision for

Tax for Climate Change

Mitigation

(Carbon tax)

Additional rate on Petroleum

and Coal Tax according to

the amount of CO2 emissions

* since October 2012.

JPY 760/kl [Crude Oil, Petroleum Products] JPY 780/t [LPG and LNG] JPY 670/t [Coal]

－

Electric Power

Development Promotion

Tax (Nation)

Electricity Sold JPY 375/1000kwh JPY 323 billion

Measures to Supply Location Subsidiary to be granted pursuant to the provisions of the Act on the Development of Areas Adjacent to Electric Power Generation Facilities, financial measures for the safety in the surrounding area of power plants to contribute to installation of facilities and its smooth operation.

Measures to Power Usage Financial measures to promote the use of facilities for power generation, to secure safety and to facilitate the supply of electricity.

JPY 4.7 trillion in total

List of energy taxes in Japan

8

There are 7 energy taxes in Japan and their revenue is JPY4.7 trillion in total, which accounts for 5% of whole tax revenue.

‘Tax for Climate Change Mitigation’ SO-CALLED CARBON TAX is introduced as a part of Petroleum and Coal Tax in October 2012. Although this tax is a part of other tax, it is imposed every tCO2 emitted so it can be said carbon tax is introduced in Japan.

List of Energy Taxes in Japan

779 779 779 779 779 779 301 400 432

Aviatio

n Fu

el Tax

Ga

solin

e Ta

x

Die

sel O

il De

livery Tax

Oil an

d G

as Tax

908

24,241

13,486

11,620

6,825

1,068 1,068590 689

1,629

0

5,000

10,000

15,000

20,000

25,000

Petrol Diesel Aviation Fuel Gas Oil Heavy Oil Kerosene Coal Natural Gas Electricity

23,173 12,4187,305 5,757

3,247

Ta

x R

ate

of

En

erg

y T

ax

ati

on

(JP

Y/t

CO

2)

Tax Rates of Energy Taxes on Each Fuel

Petroleum and Coal Tax

Tax for Climate Change Mitigation (Carbon Tax) (JPY 289 (approx. €2) for all energy)

Electric Power Development

Promotion Tax

Tax Reduction until March 2017

Tax rates of energy products and electricity in Japan

Tax Rate of Carbon Tax in Japan

Approximately € 2/tCO2 (€ 1 = JPY140)

9

With regards to each fuel, the highest tax amount is imposed on petrol. However, most of the amount is Gasoline tax and the share of Carbon tax is negligible. For other fuels, too, the amount of Carbon tax in the whole burden is small.

LPG

Outline of Carbon Tax in Japan (1) -Tax rate-

Coverage of Taxation Reference Tax Rate From Oct. 1, 2012 From Apr. 1, 2014 From Apr. 1, 2016

Crude Oil and Oil Product [per kℓ]

JPY 2,040 * + JPY 250

JPY 2,290 *

+ JPY 250

JPY 2,540 *

+ JPY 260

JPY 2,800 *

Gaseous Hydrocarbon [per ton]

JPY 1,080 * + JPY 260

JPY 1,340 *

+ JPY 260

JPY 1,600 *

+ JPY 260

JPY 1,860 *

Coal [per ton] JPY 700 * + JPY 220

JPY 920 *

+ JPY 220

JPY 1,140 *

+ JPY 230

JPY 1,370 *

Carbon tax in Japan is an additional tax on the current Petroleum and Coal Tax. Carbon tax rate is increased in three steps in 3.5 years since its introduction of October 2012. Tax rate is corresponding to the amount of CO2 emissions for all fossil fuels (JPY 289/tCO2)

Tax Rate

Tax Increase

* = Rates of Petroleum and Coal Tax; in case of gasoline equivalent to JPY 0.76/ℓ

Petroleum and Coal Tax

Carbon Tax JPY 289/tCO2 (all fossil fuels)

Crude oil/ Petroleum products

Gaseous hydrocarbon (LPG/LNG)

Coal

JPY 301/tCO2 JPY 400/tCO2

JPY 779/tCO2

Additional tax rate

Main rules tax rate

Imposed since Oct 2012

10

Outline of Carbon Tax in Japan (2) -Tax revenue-

Carbon tax revenue is estimated to be JPY 39.1 billion for the first year FY 2012 and JPY 262.3 billion for each normal year after FY 2016.

All the revenue is put into the special account and used to promote renewable energy share and disseminate energy saving measures by industry.

Revenue of Carbon Tax

JPY 40 billion JPY 90 billion JPY 170 billion JPY 170 billion

JPY 260 billion

(Enforcement) April, 2013 April, 2014 April, 2015 April, 2016 April,

2017 1st October, 2012

Tax Rate: 1/3

Tax Rate: 2/3

Tax Rate: 3/3

All the revenue goes into the special account By using all of the tax revenue, it has been supposed that various measures of energy-originated CO2 emission control, such as energy-saving measures, promotion of renewable energy, and clean and efficient use of fossil fuels, are steadily implemented. Various actions are to be conducted such as:

Domestic business location for innovative low-carbon technology-intensive industries, namely, lithium-ion butteries Installation of energy-saving equipment by small and medium-sized enterprises Introduction of renewable energy so-called “Green New Deal Funds” in accordance with local characteristics.

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Revenue Recycle System

CO2 reduction effects of Carbon Tax in Japan

Estimation of CO2 Reduction Effect by Carbon Tax *

Compared to 1990, in 2020 ▲0.5% to ▲2.2% (6 million to 24 million tons of CO2 reduction) is estimated as for energy-originated CO2 reduction due to price effect*1 and budget effect*2.

Price effect is quite lower than budget effect due to the low rate of carbon tax in Japan.

* As contents concluded by FY 2012 Tax Reform are premised - Tax Rate ： JPY 289/tCO2 (will be raised progressively for three and a half years) - Revenue： JPY 39.1 billion for the first year/JPY 262.3 billion for the normal years

(Note)Energy originated CO2 emission in 2020 without Carbon Tax (as BAU) is assumed as 11.15 billion tons of CO2. (Note) Price effect is calculated by using the price elasticity of energy use estimated from the latest statistics. (Note) Budget effect is estimated by using AIM/Enduse (Asia-Pacific Integrated Model) in case (1) to introduce the existing technologies with precedence in order of cost-effectiveness: in case (2) to assign half of

the revenue to a prospective measure in the long term and to equally distribute remaining half to the existing technologies depending on the potentials for the introduction. (Note) In addition, so-called announcement effect is also expected but not included in this estimation. (Note) The total of number of the lists does not necessary accord with the total number from relation of the significant digit.

*1: Price Effect: CO2 reduction through taxation (price elasticity)

*2: Budget Effect: CO2 reduction by inflecting tax revenue for measures for energy-originated CO2 emission control

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Budget Effect

Vehicle taxes in Japan

13

User

Taxes on ownership

Taxes on acquisition

Vehicle taxes

Flow of imposition of vehicle taxes in Japan There are in total of 4 vehicle taxes in Japan, one is a tax on acquisition and the other three are

taxes on ownership. Automobile Acquisition Tax is imposed on automobile dealer.

Motor Vehicle Weight Tax, Automobile Tax and Light Vehicle Tax are imposed on user’s ownership.

Automobile Acquisition Tax [State]

Consumption Tax Consumption Tax

14

Imposition Stage of Taxes for Vehicle Use

Motor Vehicle Weight Tax [Nation]

Automobile Tax [State]

Light Vehicle Tax [Municipality]

Consumption Tax

Ownership Motoring

Oil and Gas Tax (LPG)

Diesel Oil Delivery Tax (Diesel)

Gasoline Tax, Local Gasoline Tax (Gasoline)

Energy taxes

Consumption taxes

Automobile Dealer

Automobile Manufacturer

Tax Name

(Nation/State/Mu

nicipality)

Subject to Tax Tax Rate Tax Revenue

(FY 2014) Allocation of Tax

Motor Vehicle

Weight Tax

(Nation)

Automobile Inspected automobile to receive

the certification of vehicle

inspection and be inspected and

notified light vehicle to receive

the designation of vehicle

number

(Ex)Passenger & Private Car

Tax rate for the time being

JPY 4,100/0.5ton/year

Main rules tax rate

JPY 2,500/0.5ton/year

JPY 630.7 billion

National general account (407/1000

of the tax revenue is granted as general

fund of cities)

Part of the tax revenue is issued as

compensation expense of Pollution-

originated Health Damage.

Automobile Tax

(State)

Automobile Car and Truck acquired as of

April 1

(Ex)Passenger and Private Cars

Total emissions of 1.5-2 litres

JPY 39,500/year

JPY 1,540 billion National general account

Light Vehicle Tax

(Municipality)

Light Vehicle Light vehicle and bicycle with

prime mover as of April 1

(Ex)Light Vehicle & Private Car

JPY 10,800/year (2015.4.1-)

JPY 7,200/year (-2015.3.31)

JPY 199.9 billion National general account

Automobile

Acquisition Tax

(State)

Automobile to be acquired

Private Car 3% of acquisition price;

Car for Business and Light Vehicle

2% of acquisition price

JPY 109.6 billon National general account (95/100*7/10 of the revenue is issued to

cities (other is added to specified cities))

JPY 2.5 trillion in total

List of vehicle taxes in Japan

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Tax revenue vehicle taxes are about JPY 2.5trillion in total and account for 3% of total tax revenue in Japan.

None of them is imposed based on CO2 emissions performance or fuel efficiency of vehicles but acquisition price, vehicle weight, cylinder capacity etc.

List of Vehicle Taxes in Japan

Vehicle type Fuel efficiency Tax reduction

2020 standard 2015 standard Eco-car Subsidies for Automobile Acquisition Tax

Eco-car Subsidies for Motor Vehicle Weight Tax

Green exemption for Automobile Tax

Green exemption for Light Vehicle Tax

Fuel-cell, Electric, Plug-in hybrid, Natural gas, Clean Diesel

- - Exempted [1st・2nd] Exempted

▲75% ▲75%

Gasoline (incl. gasoline hybrid)

+20% reduction +20% reduction ▲50%

+10% reduction +20% reduction ▲80% [1st] ▲75% (*) ▲25%

2020 achieved +20% reduction ▲60% [1st] ▲50% (*)

+10% reduction ▲50%

2020 not achieved

+20% reduction ▲40% [1st] ▲25% (*) -

+10% reduction

+5% reduction ▲20% -

Tax Reduction

Tax Increase

Greening vehicle taxes in Japan - Passenger cars, trucks and buses with 2.5t or less -

Vehicle taxes in Japan are not based on CO2 emissions performance or fuel efficiency. However, there are some tax reduction scheme both on vehicle acquisition tax and ownership

taxes. Energy performance standards for this tax reduction is become stricter year by year to facilitate consumers to purchase relatively expensive eco-friendly cars.

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* Compared with JPY2,500/0.5t (main rules tax rate).

Green Exemption for Automobile Tax & Light Vehicle Tax Tax Increase

[Gasoline, LPG] 13 years or older + 15% (10% for trucks and buses)

[Diesel] 11 years or older + 15% (10% for trucks and buses)

[Light Vehicle] 13 years or older + 12,900 JPY (≓20% increase compared with the normal tax rate 10,800 JPY)

Comparison with European countries

17

Exchange rates used in this paper are;

1EUR=140.4JPY, 1DKK=18.9JPY, 1GBP=177.4JPY

(source) average rate of foreign exchange by Mizuho Bank Ltd., third and fourth quarter of 2014

Comparison of ENERGY taxes in Japan and European countries

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Tax rates on gasoline and diesel are higher than that of coal and natural gas in every country. Tax rates of coal and natural gas differ significantly country by country. For all fuels, Japan’s tax burden is lower than the other four countries.

Comparison of energy tax burden on fuels by per tonne of CO2 emissions

Japan’s energy tax rates are significantly lower than these EU countries

About twice higher

than Japan

About 3 times

higher than Japan

About 30 times

higher than Japan

About 30 times

higher than Japan

(source) Calculated by Mizuho Information & Research Institute based on each government’ reports etc.

Comparison of VEHICLE taxes in Japan and European countries

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Comparison of tax burden of vehicle taxes per automobile

Vehicle acquisition tax is introduced in Japan, Finland and Denmark but the rate in Japan is significantly lower than the other two countries. Denmark is exceptionally high.

Vehicle ownership tax is less than that of Denmark but higher than the other three countries.

Vehicle

acquisition tax

is much higher

in Denmark

Vehicle ownership tax

in Japan is relatively

similar among these

countries ※Given definition of a car in this calculation is as follows; vehicle price: 1.8 mill JPY (without VAT), engine size: 1,800cc, weight: 1.5t, energy

efficiency: 15.4km/L (JC08 mode), CO2 emission factor: 2.32kgCO2/L, annual travel distance: 10,000km, and life durability: 12 years. Tax burden is

calculated with this given definition and each country’s tax rate (as of April 2015). Tax on Vehicle Insurance in Denmark is not included here.

Consumption tax (tax on motoring) is

lowest in Japan.

Comparison of incentive to promote greener vehicles by taxes

20

We compared tax burden on vehicle purchase and 12 years of use (which contains energy, vehicle and consumption taxes’ burden together) in different levels of energy efficiency of vehicles to compare changes of tax burden in these five countries.

The changes of tax burden in different energy efficiency of vehicles are smallest in Japan.

Changes in tax burden per automobile at different fuel efficiencies

When the fuel efficiency is improved by 30% than baseline, tax burden in Denmark will decrease by about 1,048,000 million JPY in its lifetime.

As for Japan, the decrease of tax burden is only 198,000JPY.

Japan’s vehicle taxation does not work as an incentive for purchasing eco-friendly cars,

compared to these EU countries

When the fuel efficiency of A vehicle is worse by 30% than baseline, tax burden in Denmark will increase by about 1,143,000JPY in its lifetime.

As for Japan, the increase on tax burden is only 305,000JPY.

※Given definition of a car in this calculation is as follows; vehicle price: 1.8 mill JPY (without VAT), engine size: 1,800cc, weight: 1.5t, energy efficiency: 15.4km/L (JC08 mode), CO2 emission

factor: 2.32kgCO2/L, annual travel distance: 10,000km, and life durability: 12 years. Tax burden is calculated with this given definition and each country’s tax rate (as of April 2015). Tax on

Vehicle Insurance in Denmark is not included here.

Recommendation for future changes

21

In Japan, amount of tax imposed on each fuel is lower than UK, Germany,

Finland and Denmark, especially on coal.

Purchasing more energy-efficient car in Japan is not motivated enough

by tax system when it is compared to the system in the UK, Germany,

Finland and Denmark.

Future recommendation for Japan’s environmental tax system

Findings in our study

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Higher energy and carbon tax rates should be introduced to change

people’s behavior towards low carbon business and lifestyles.

More effective tax system can incentivize consumers to purchase more

eco-friendly vehicles in reference to the case in Europe.

Japan should learn from experiences from other countries.

Those should lead to green growth and future prospect of Japan.

Recommendation

For more information Mizuho Information & Research Institute, Inc. Environment and Energy Division 1 NAITO Aya: aya.naito@mizuho-ir.co.jp MOTOKI Yuko: yuko.motoki@mizuho-ir.co.jp

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