The Impact of Green Fiscal Reforms and the Demographic Squeeze: Lessons from Japan

Jared Carbone (), Maxwell Fleming () and Akio Yamazaki
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Jared Carbone: Department of Economics and Business, Colorado School of Mines
Maxwell Fleming: Department of Economics and Business, Colorado School of Mines

No 2025-03, Working Papers from Colorado School of Mines, Division of Economics and Business

Abstract: How does carbon pricing perform in an economy with a declining population growth? We develop an overlapping generations model calibrated to Japan. Using this model, we examine how demographic change interacts with green fiscal reforms, in which revenues from carbon pricing are used to improve the efficiency of the tax system. Our results show that demographic change erodes the tax base, so the fiscal response has a larger impact on welfare than the carbon policy itself. Relative to a constant population growth benchmark, ignoring demographic change can overestimate the welfare costs of carbon pricing by 11 percent when pension benefits are reduced and carbon revenues are used to cut capital taxes. Microsimulation analysis indicates that low-income households face higher short-run welfare losses under policies that are most efficient in the long-run, highlighting a trade-off between efficiency and progressivity in the design of carbon pricing in aging economies.

Keywords: green fiscal reforms; carbon pricing; demographic change (search for similar items in EconPapers)
JEL-codes: H22 H23 Q52 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2025-12
New Economics Papers: this item is included in nep-age, nep-dge and nep-sea
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