Pricing carbon emissions for Japan based on energy production

Fossil fuels such as coal, oil and gas generate carbon emissions that contribute to global warming and climate change. Taxes on carbon emissions can mitigate their effects on the environment by changing demand and supply. For taxes to be effective, accurate carbon emissions prices are required. The paper uses an innovative KLEM production function approach to calculate carbon emissions prices for Japan, where carbon emissions are the output, and capital (K), labour (L), energy (E) (or electricity), and materials (M), are the inputs. The variables capital, labour and materials are essentially fixed on a daily, weekly or monthly basis, whereas energy can be changed more frequently, such as daily, weekly or monthly, so that changes in carbon emissions essentially depend on changes in energy. If prices are set according to average cost pricing, the prices of carbon emissions and energy may be approximated by an energy production model with a constant factor of proportionality, so that carbon emissions prices will depend on energy prices. Using this innovative approach, the paper estimates carbon emissions prices for Japan using seasonally adjusted and unadjusted monthly data on the volumes of carbon emissions and energy, and energy prices, from December 2008 to April 2018.