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Monday, Jan. 14, 2008


Public's will to bear the cost

Most Japanese industry executives contend that the proposed environment tax should not be introduced on the grounds that it would slow the growth of gross domestic product. In my opinion, this argument is totally mistaken.

Introduction of the tax would merely cause the transfer of income from consumers and companies to government coffers. As long as the government makes no mistakes in spending the money, the macro-economic effects of the tax should be neutral.

If the government cuts income and corporate taxes in amounts equivalent to revenues from the environment tax, consumer spending will increase — thanks to the availability of more disposable income — as will corporate investment on equipment and research and development.

On the other hand, introduction of the tax will trigger across-the-board price hikes for products and services, and if there are no adjustments to income, consumer spending and capital investment are bound to decrease.

Definite predictions of the absolute values of the above-mentioned increases and decreases cannot be made. However, the differences are likely to be minimal. Furthermore, by effectively applying environment-tax revenues (tax of ¥3,000 per ton of carbon will produce revenues of ¥1 trillion), a substantial amount of greenhouse gases can be cut. Such revenues could be used to:

* Offset a decrease in automobile-tax revenues following tax cuts for energy-efficient cars.

* Establish a system of obliging power utilities to buy solar cell-generated power at twice their regular energy price to encourage the installation of rooftop solar cells. The government would pay the cost of this scheme.

* Introduce a light-rail transit system in more cities, using state-of-the-art low-floor streetcars.

* Use light-emitting diodes in traffic signals nationwide, replacing regular electric lights.

Fiscal expenditures by the government are indispensable for promoting cuts in greenhouse-gas emissions. The environment tax, in addition to raising the cost of fossil fuels to curb consumption, will help build the fiscal resources for cutting greenhouse-gas emissions.

Some argue that the tax would have only a limited effect on fossil-fuel consumption (and CO2 emissions). True, higher gasoline prices are unlikely to prompt a large number of people to drive less in the immediate future. In that sense, the short-term elasticity of gasoline demand is likely to be small.

Yet, the environment tax is likely to prompt most motorists to switch to a more fuel-efficient car when buying a new car. Therefore, although the elasticity of gasoline consumption may be small in the short term, it is likely to grow in the medium term with the replacement demand for cars. In the long term, rises in gasoline prices will prompt the development of more fuel-efficient cars and lead to a significant decrease in gasoline consumption.

Consumer reaction to higher electricity rates will be basically the same. Generally speaking, a sudden rise in rates is unlikely to cause a change in long-established habits. It will not cause people to immediately replace incandescent lights with fluorescent lights. Nor will it induce them to change temperature settings for air conditioners. They are likely, however, to replace burned-out incandescent bulbs with fluorescent ones, and to choose an energy-efficient air conditioner to replace an old energy-guzzling unit.

The spreading popularity, through government campaigns, of "Cool Biz" fashion — lighter apparel for the office in summer — shows that it is not hard to change people's habits. In the past several years, there's been much talk about corporate social responsibility (CSR), and consumers tend to respect companies that are eager to protect the environment.

If a number of companies sell similar consumer products with little difference in price and quality, I would hope that consumers would choose the one from companies demonstrating a strong sense of CSR, especially concerning environmental protection. I feel that more people are already taking such action. We are seeing the advent of a society in which corporate enthusiasm for environmental protection and a willingness to pay the cost for that purpose do not conflict with efforts to maximize profits.

Another term that is becoming popular is SRI, or socially responsible investment. It applies, for example, to investment trusts whose funds include the stocks of socially responsible companies and banks that promote lending to such companies. Social responsibility has various meanings, but in recent years it has come to mean mostly environmental protection.

In August 1999, Nikko AM (Asset Management) Co. started selling the investment trust Nikko EcoFund, which included stocks of environmentally conscious companies. Other brokerages have followed suit. The balance of such investment trusts in Japan as of June 2007 totaled ¥274 billion.

On an international scale, of course, this amount is abysmally low. The global balance of such funds amounts to ¥300 trillion, including ¥210 trillion for the United States and ¥20 trillion for Britain. It is hoped that Japanese banks and brokerages will step up efforts to promote SRI.

Takamitsu Sawa is a professor at Ritsumeikan University's Graduate School of Policy Science and a specially appointed professor at Kyoto University's Institute of Economic Research.

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