This research examines the impacts of using carbon and energy taxes to reduce carbon emissions from the Japanese energy system. A partial equilibrium model of the Japanese energy sector has been developed to forecast changes in the energy system out to the year 2040. The model accounts for the changes in energy technology capacities, fuels, and consumption in response to policy initiatives, such as taxes. We find that carbon and energy taxes will decrease carbon dioxide emission to a proposed target. The total cost in terms of supplying energy will be similar for either approach. However, the model also indicates that carbon taxes cause a shift in resources used from coal to gas. IGCC does not penetrate the market in carbon tax case. Since energy security is a primary concern to Japan, maintaining a diverse base of resources is very important. Policies that would eliminate coal, and efficient coal-based technologies, may not be desirable. The development of clean coal technologies and advanced transportation technologies suitable for Japan's energy systems should be the next target to overcome the limit of carbon taxes.