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In this chapter, we use the ambitious policy mix scenario of Chapter 5 as our starting point. The scenario achieves the ambitious 2°C target in 2050 in the four East Asian countries and the main price-based instrument is the carbon tax, which generates revenue for national governments. Our analysis in this chapter consists of scenarios that are designed to enforce budget neutrality. We explore different ways in which the revenues from carbon taxes might be used to reduce other tax rates, that is, through Environmental Tax Reform (ETR). The options for other taxes to reduce are income taxes, VAT, and employers’ social security contributions. Additionally, we also look at a scenario in which revenues are recycled back as lump-sum payments to households as a basic income. The analysis is carried out using the E3ME model, with the same set-up that was used in Chapter 5. It shows that a carbon tax as part of ETR could lead to a smaller loss of GDP than the carbon tax alone or could lead to an overall increase in GDP.

Greenhouse gas emissions (GHG) focus on producers and consumers and can be analyzed by using input-output tables, but GHG emissions from international shipping and aviation are generally estimated by using fuel consumption and fuel-based emission factors. This chapter analyzes the structure of GHG emissions from international shipping caused by final product demands from China, Japan, and Korea in terms of distance travelled, and relationship between producers and consumers. The need to transport intermediate goods internationally arises from the fragmentation of production; CO2 is emitted as a by-product of this process according to the amount of goods, the port distance, and the emission factor. Crude petroleum and natural gas are produced in Indonesia and exported to other East Asian countries, including China, as raw materials. Total CO2 emissions from international shipping that arise from China's final demand are 4.48 mt CO2. To identify individual countries responsible for these emissions it is necessary to estimate the direct and indirect emissions from shipping.

As we have seen in previous chapters, environmental tax reform (ETR) is an effective tool for curbing energy demand and the emissions of greenhouse gases (GHG) (see Chapter 8 ), and could play a key role in the phasing out of nuclear power (see Chapter 5 ) with negligible or slightly positive macroeconomic outcomes. However, the inevitable rise in energy prices may lead to serious concerns about industrial competitiveness (see Chapter 13 ).