The Hidden Price of Carbon in Japan: A Total Carbon Pricing Assessment of Direct and Indirect Carbon Price Signals

National-level carbon pricing policies in Japan include the carbon tax (formally known as the Global Warming Countermeasures Tax) introduced in 2012, and two regional Emissions Trading Schemes (ETSs) operated by the Tokyo Metropolitan Government and Saitama Prefecture. However, there are other pricing mechanisms that can be regarded as forms of indirect carbon pricing such as fuel consumption taxes, fuel excise taxes, and fossil fuel subsidies. These indirect measures often offset the effects of explicit carbon pricing. Fuel subsidies, for example, weaken the effectiveness of the carbon tax by artificially suppressing energy prices. Consequently, these schemes tend to maintain fossil fuel demand rather than encouraging renewable energy transition or energy conservation. To grasp a nation’s effective carbon price level, it is necessary to calculate the Total Carbon Price (TCP), which encompasses not only direct carbon pricing mechanisms, such as the carbon tax and ETS, that raise the price of fossil fuels, but also indirect mechanisms, such as fuel subsidies and excise taxes that affect fossil fuel prices. This chapter applies the methodology developed by the (World Bank, Paolo Agnolucci, Carolyn Fischer, Dirk Heine, Mariza Montes De Oca Leon, Joseph Pryor, Kathleen Patroni, and Stephane Hallegatte, Measuring Total Carbon Pricing. Policy Research Working Papers, June 2023) to estimate Japan’s Total Carbon Pricing, covering its carbon pricing mechanisms from 2018 to 2023.