In October 2020, Japanese Prime Minister Yoshihide Suga made a surprise announcement to commit to net zero carbon emission by 2050, reversing the previous administration’s reluctant stance.
In December, the government released an ambitious roadmap to achieve this goal. However, many experts criticise it as being simply a wish list of new technologies and lacking a comprehensive strategy, especially in terms of how the energy sector’s high reliance on fossil fuels (Exhibit 1) can be reduced. We believe delaying decarbonisation is becoming a major long-term risk for Japan’s economy and industries.
Exhibit 1: An ambitious shift to renewables for electric power
Two steps forward, one step back
Japan’s decarbonisation efforts have stagnated for decades. According to International Energy Association data, Japan’s share of global CO2 emissions was 3.2% in 2018, ranking fifth after China, the US, India and Russia. Unlike Europe and the US, in the past 30 years, Japan has been slow to reduce CO2 emissions per unit of GDP (Exhibit 2).
The major cause of the slow decarbonisation progress is the energy sector, which still relies on fossil fuels, especially coal, almost all of it imported. The still-high share of coal reflects the relative costliness of natural gas, which needs to be liquefied for marine transportation. In addition, the Fukushima nuclear plant disaster in 2011 increased demand for fossil fuels to compensate for a decline in nuclear power generation. All nuclear reactors were stopped for safety inspections, and only nine out of 60 have resumed operations so far. Nuclear plants’ share of electricity generation has tumbled from 24.6% in 2010 to just 6.4% in 2019.
More importantly, compared to Europe, the Japanese government has been slow to develop renewable energy sources given the limited prospects of lowering costs enough to be competitive with fossil fuels. One major obstacle stems from geographic disadvantages such as the lack of flat, unused land for solar panels. Additionally, deep oceans increase the cost of offshore wind power. Furthermore, the entrenched electric utility sector has blocked the entry of new renewable energy power generators by limiting their access to existing electricity transmission lines.
Exhibit 2: Japan’s progress in decarbonisation hasn’t kept pace with Europe and the US
An ambitious plan
Just a few months after the Suga administration’s abrupt announcement, the government released a roadmap to achieve the goal of net zero carbon emissions by 2050. While stressing that it’s nothing more than a reference without committed targets, the roadmap envisages a drastic change in the composition of energy sources to generate electricity by 2050. It projects that the share of renewables will rise from 19% in 2019 to 50-60% in 2050, while that of nuclear and fossil-fuel plants (combined with carbon capture and storage) will be 30-40% (Exhibit 1). The remaining 10% will be filled by completely new energy sources: hydrogen and ammonia.
To achieve this ambitious goal, the roadmap counts on the development of new technologies and energy businesses, which it argues will also become new forces of economic growth. However, many experts criticise the plan as merely a wish list with slim prospects of coming to fruition, and they call for a more comprehensive strategy and government support.
A major cause for Japan’s slow decarbonisation progress is the energy sector, which still relies on fossil fuels, especially coal, almost all of it imported.
So far, the government has committed only to establish a catalyst fund of JPY2 trillion ($19 billion) and tax incentives to encourage private sector R&D and investment. Compared to the European Green Deal, with investment of at least EUR1 trillion ($1.22 trillion), the scale of Japan’s committed fiscal support is disappointing. Clearly, more funding, including investment in infrastructure, will be needed to achieve the roadmap’s lofty targets.
Take offshore wind power. The government sees it as a cornerstone of renewable energy, with plans to generate 45 million kilowatt-hours by 2040 by building large windmills equivalent to 45 nuclear plants. That’s a surprising departure from past policy because the government has been reluctant to develop offshore wind power given its high costs. But now it argues that the cost can be reduced from more than JPY20 per kilowatt-hour to JPY8-9 through deregulation and more efficient use of existing transmission lines. Although the roadmap stresses new business opportunities, European and Chinese companies currently dominate the offshore wind power market.
Poorly planned
The roadmap is poorly developed in many ways. That is partly because the ministries had only a few months during the coronavirus pandemic to work on it after Mr Suga’s surprise announcement. They will have to add more details in coming months with input from concerned industries. More worryingly, the roadmap has already picked the low-hanging fruit such as new subsidies and tax incentives to promote R&D investment and left a challenging agenda untouched.
The roadmap also tries to promote decarbonisation of the non-energy sector through electrification. As a result, demand for electricity is projected to increase by 30-50% by 2050. But if the energy sector fails to reduce emissions, all the efforts by the non-energy sector will have been in vain.
In addition to technical difficulties in developing low-cost new energy, decarbonising the energy sector will be tough because of politically sensitive nuclear power policy, on which the roadmap avoids a clear stance. The government envisages that the sum of nuclear and fossil-fuel plants will have a share of 30-40% of electricity generation without specifying the composition.
Surveys show that 60-70% of Japanese still think nuclear power plants are dangerous, but ensuring sufficient safety against another disaster is extremely costly. The roadmap stresses the safety benefits of small modular reactors, but their business prospects aren’t clear because they are also costly. Poor profitability has already forced many global manufacturers to withdraw from the business.
Without a thorough strategy for the energy sector, the roadmap still sets ambitious timetables for business transformation, focusing on 14 designated industries with good growth prospects during decarbonisation. These include offshore wind, ammonia fuel, hydrogen, nuclear energy, cars, shipping, airlines, semiconductors, logistics, agriculture, carbon recycling, housing, energy recycling and individuals’ lifestyles.
Again, the roadmap doesn’t offer a strategy for how to get through the expected painful adjustment phase, including for the steel industry, the largest industrial emissions producer. Reducing the steel industry’s emissions is possible only through a fundamental change in the production process, which requires infrastructure to provide large amounts of low-cost hydrogen. The government has yet to provide a plausible plan for lowering the cost of hydrogen to a level acceptable to the steel industry.
If Japan lags other countries in making progress in decarbonisation, its companies will increasingly face the risk of being cut off from global supply chains.
And although the auto industry is designated as one with good growth potential, it has serious concerns about the impact of decarbonisation. A big worry is the pace of shift towards electric vehicles (EVs). The government roadmap revealed a dramatically faster plan to ban the sale of new gasoline-powered vehicles (excluding hybrids) by the mid-2030s. A speedier transition to EVs will be a serious blow to the auto industry because it must completely transform its business models and technologies, which takes time. The industry prefers a gradual shift to EVs, with a long transition period for hybrids, in which they already have an established advantage.
The government is determined to provide full support for a smooth transition to EVs because the long automotive supply chains involve a wide range of industries and are responsible for massive employment (Exhibit 3). Given that technologies and knowledge required for EVs are completely different from those for gasoline and hybrid vehicles, auto companies are worried about surviving the transition. It’s naïve to assume that all existing suppliers, especially small companies, will come through unscathed.
Exhibit 3: The automotive industry’s long supply chain
Looking to the future
Decarbonisation is challenging for any country. Japan isn’t alone in facing the difficult and highly uncertain development of new low-cost energy sources, reducing fossil fuel use and making painful adjustments. And there are real concerns that Japan may lag other countries in reducing emissions in the coming decades. Its decarbonisation effort has stagnated for years for many reasons, and the legacy of the Fukushima disaster will continue to constrain policymakers’ hands.
Delays in reducing energy sector emissions will threaten the competitiveness of all Japanese industries in the long run. Globally, companies are increasingly under pressure to conduct due diligence on the environmental and social impacts of their operations and supply chains. In addition to dealing with new regulations, companies will be expected to demonstrate their commitment to responsible and sustainable business to investors, consumers and their local communities.
If Japan lags other countries in making progress in decarbonisation, its companies will increasingly face the risk of being cut off from global supply chains. And if energy sector emissions remain high, Japanese companies may no longer be able to keep business and employment in Japan. They will have to make tough decisions about relocating their domestic production sites abroad where emissions costs are lower.
Shigeto Nagai
As the head of Oxford’s Tokyo office, Shigeto helps the firm’s clients understand key macro-economic developments and trends worldwide, and their implications in Japan and across Asia. As a senior member of Oxford’s worldwide economist team, he leads the firm’s Japan research. Shigeto joined Oxford in 2017 from the Bank of Japan (BoJ), where he was previously Director-General of the BoJ’s International Department. In addition to his expertise in global research, he also has extensive experience in foreign reserve management and central bank cooperation in Asia. He was seconded to the IMF in Washington DC from 1993 to 1996 as a member of the Fund’s economics staff.
