A DSGE Analysis of Japan’s Energy Policy and Sustainable Economic Development

This study examines the impact of Japan’s energy policy on sustainable economic growth from 2005 to 2025. The analysis involved adding carbon externalities to a DSGE model to evaluate the effects of a carbon tax, a renewable energy subsidy, and energy-efficiency improvements. All policies are uniformly assessed within a unified, dynamic, micro-founded macroeconomic model that links energy use and emissions. According to the empirical findings, the carbon tax is the most effective policy for reducing emissions (6.8%). Nonetheless, this improvement incurs economic costs, as output and welfare fall by 0.85% and 0.35%, respectively. Renewable energy subsidies have no unbalanced effect. They reduce emissions by 3.2%. However, they support output by 0.42% and welfare by 0.28%. It occurs through substitution and investment effects. The most prominent outcomes of energy-efficient design are 1.2% increase in output, 0.75% increase in welfare, and 2.5% decrease in emissions. It also indicates the degree of decoupling. The carbon price is vital to achieving decarbonization; however, policies that support improved energy efficiency and clean energy could be accompanied by differential pricing. Findings indicate that a coordinated policy mix would be most effective for Japan in meeting emissions targets without harming growth or improving welfare.