Chart of the Week



Green Transformation Policy: R&D Expenditure and Carbon Pricing

6/1 2024

Author: Kazuhiro Okuma

To promote climate change mitigation, countries are moving to introduce unconventional strong policies. In Japan, the "GX Basic Policy" was decided in 2023, and the government will provide investment support of 20 trillion yen over 10 years by issuing "GX Economic Transition Bonds" and introducing an emissions trading system (from 2026) and a carbon levy (from 2028) to use the revenue to repay the bonds as well as to provide incentives for mitigation. Based on this policy, the issuance of bonds started in February 2024, and the design of an emissions trading system is currently under discussion. EU was ahead of Japan. As part of the Green Deal and Covid-19 recovery, a package of policies has started to establish a fund called Next Generation EU to increase investment in climate change mitigation and other fields, as well as to strengthen the ETS and introduce the Carbon Border Adjustment Mechanism, the revenues from which will be used to repay the fund. A common feature of these policies is the idea of combining increased fiscal spending on environmental measures with the introduction of carbon pricing.

In this context, it makes sense to combine environmental spending, of which a significant portion should be R&D spending, and carbon pricing in policy analysis. Based on OECD statistics, government budget allocations for environment-related R&D and the intensity of carbon pricing in each country can be illustrated in Figure 1.



The horizontal axis of the figure shows the ratio of environment-related government R&D spending to total R&D spending, and the vertical axis shows the value of the Effective Carbon Rate (EUR 60 per ton of CO2), which is an indicator of the intensity of carbon pricing. Countries in the upper right-hand corner have strong policies in both R&D spending and carbon pricing, while countries in the lower left-hand corner have weak policies in both areas. Countries in the lower right have strong R&D spending but low carbon pricing, and the opposite is true for countries in the upper left. Although the figure is simple, it allows us to observe the diversity in the intensity and character of each country's climate policy.

The figure shows that European countries generally have stronger environmental policies, especially carbon pricing. Japan shows stronger R&D spending than carbon pricing. The United States is weaker on both fronts.

Japan introduced the “global warming tax”, a carbon pricing in 2012, but the tax rate is low. An emissions trading system has also been proposed for some time but has not been introduced due to persistent opposition. The GX policy package aims to further strengthen R&D spending, which will be followed by the introduction of carbon pricing. While strengthening R&D is of course important, it will be particularly important from the perspective of effective environmental policy that carbon pricing, which will be designed one step later, is implemented with sufficient intensity.