Estimating energy elasticity with structural changes in Japan

The purpose of this paper is to estimate energy elasticity in Japan taking into account structural changes. We employ a residual-based cointegration model developed by Gregory and Hansen [Gregory, Allan W., Hansen, Bruce E., 1996. Residual-based tests for cointegration in models with regime shifts, Journal of Econometrics. 70, 99-126]. The empirical results show that the three variables have a stable relationship in the long term when considering structural changes in the second quarter of 1993. As compared with the values obtained in previous studies, the income elasticity is higher and the price elasticity is lower. From our analysis, we can confirm whether a carbon tax will meet the objective of the Kyoto Protocol. In conclusion, the tax rate required in the case without structural changes is lower than that in the case with structural changes.