Navigating Net Zero: APAC Climate Guide - Japan

Source: https://www.iea.org/countries/japan/emissions; https://gain.nd.edu/our-work/country-index/rankings/ 

Japan is the fourth-largest economy in the world and among the world’s highest emitters. Home to approximately 124 million people, Japan consists of more than 14,000 islands most of which are covered by mountains and surrounded by steep shorelines[1].

The topography limits renewable energy development. Further, Japan’s susceptibility to natural disasters such as typhoons and earthquakes has impacted nuclear generation following the 2011 Fukushima Daiichi Power Plant accident. Triggered by the Great East Japan Earthquake, this event tipped Japan’s economy into recession[2]. A little over a decade on, Japan’s economy is showing signs of recovery – and investors are circling.

For Japan, regional growth strategies that lean on local strengths are key. Investors should focus on sectors poised for transformation while navigating regulatory complexities.  

Listen to Tokyo-based partner Yoshiki Tsurumaki and Perth-based senior associate Richard Shi as they talk about the energy transition in Japan in our KWM Podcast.

Download the full publication or navigate the sections below:

Energy Transition | Carbon Markets | Financing | Region Focus: Wind

Investment opportunities and challenges: our top 5

The evolving regulatory and corporate landscape

Japan is decarbonising its economy by implementing stringent regulations, promoting renewable energy projects and enhancing transparency through mandatory sustainability disclosures. Measures to help developing countries to adapt date back a decade. Others have emerged more recently. Collaborative efforts across local areas are growing - and are a key initiative to watch.

Aligning sustainability disclosures with global standards

The Sustainability Standards Board of Japan (SSBJ) is developing a Japanese version of disclosure standards based on global sustainability disclosure standards, expected to apply to securities reports. These are based on the global baseline set by the International Sustainability Standards Board (ISSB) in standards released in 2022. The proposed disclosure of climate-related information is moving towards becoming mandatory for listed companies and voluntary for others[3]. Consultations are ongoing.

Encouraging renewable energy projects in local areas

The Regional Decarbonisation Promotion Project expanded in 2024. This project empowers municipalities to set promotion areas based on environmental conservation standards established by the national and prefectural governments. The effect is to promote the introduction of renewable energy projects that are harmonised within each region.

By 2030, the government is aiming to have created at least 100 Decarbonisation Leading Areas.

An increasing number of financial institutions are addressing regional resources and challenges through medium- to long-term policies. They are establishing collaborative frameworks with prefectures and municipalities, working to support client companies from both financial and non-financial perspectives.[4]

Around 50% of financial institutions...

• recognise decarbonisation as a management challenge and have incorporated it into strategies
• are advancing collaboration with local governments to promote ESG and Sustainable Development Goals (SDGs).

Other measures are noted in the Energy Transition section below.

Helping developing countries to decarbonise

The Joint Crediting Mechanism (JCM), introduced in 2013, aims to facilitate the transfer of Japan’s advanced low-carbon technologies, products, systems, services and infrastructure to developing countries. This contributes to sustainable development such as reducing greenhouse gas emissions in those countries, sharing Japan’s results bilaterally[5]. As of January 2024, there are 29 partnered countries including Indonesia, Vietnam, Thailand and the Philippines.

In 2024, Japan amended the ‘Act on Promotion of Global Warming Countermeasures’[6] to strengthen the Implementation Framework of the JCM. This includes by improving reporting and streamlining processes to transfer technology and project approvals.

Japan’s ambitious target to set up at least 100 Decarbonisation Leading Areas by 2030 highlights opportunities for companies to engage in regionally-focused renewable energy initiatives." KWM Partner Yoshiki Tsurumaki 

Renewable energy is encouraged via the Energy Basic Plan, but this has not resulted in significant innovative changes. There are challenges related to technical issues, infrastructure and policy adjustments in the development and use of new renewable energy. Ongoing advances in hydrogen energy development and energy storage technologies are key to future success.

Regulatory settings and government efforts to encourage change

Committing to carbon neutrality: the Basic Energy Plan

The latest version of the Energy Basic Plan, revised in 2021 (the 6th Energy Basic Plan), outlines Japan's commitment to achieving carbon neutrality by 2050 and reducing greenhouse gas emissions by 46% by 2030 compared to 2013 levels[7]. This plan emphasises maintaining nuclear energy, reducing dependence on fossil fuels and increasing the proportion of renewable energy. As at 2024, the 7th Energy Basic Plan is under development.

Promoting decarbonisation across the region

By explicitly stating the goal of achieving carbon neutrality by 2050 in the Act on Promotion of Global Warming Countermeasures, Japan aims to:

• enhance the continuity and predictability of policies
• accelerate efforts, investments and innovations toward decarbonisation, and
• promote regional decarbonisation initiatives utilising renewable energy as well as corporate decarbonisation management.

The recent legislative amendments noted above have established procedures for the issuance and management of JCM credits by the competent minister[8].

Fixed renewable energy prices and market-based incentives

Enacted in 2012, the Act on Special Measures Concerning the Promotion of Utilization of Renewable Energy Electricity introduced the Feed-in Tariff (FIT) system to promote the widespread adoption of renewable energy. Under the FIT system, a fixed price is guaranteed for electricity generated from renewable energy sources such as solar, wind, biomass, and geothermal.

In 2022, the law was amended to introduce the Feed-in Premium (FIP) system. This provides market-based incentives to renewable energy producers, encouraging more competitive pricing while continuing support for green energy[9].

Japan is a member of several global and regional initiatives to transition to a net zero economy. The most recent is the Asia Zero Emission Community (AZEC), launched in March 2023. The 11 Asian member countries are committed to accelerating the energy transition towards net-zero emissions. AZEC aims to promote decarbonisation strategies, financial support for clean energy infrastructure and the development of interoperable standards for decarbonisation technologies.

We will foster public-private partnerships and cooperation among private sectors to accelerate energy transitions through creation of specific energy transition projects." AZEC Leaders' Joint Statement, Dec 2023, Tokyo

Role of the private sector

Renewable energy generation projects

• Guaranteed return on investment for selected renewables

Private companies can invest and engage in the development and operation of projects such as solar, wind, biomass and geothermal power generation. The FIT and FIP systems ensure a return on investment for renewable energy projects, presenting a significant opportunity for companies.

Hydrogen energy technologies

Japan aims to take a leadership role in hydrogen technology globally and is committed to hydrogen energy development. This brings a good opportunity for companies to develop technologies related to the production, storage, transport and utilisation of hydrogen. Incentives include:

• Subsidies for innovation

Organisations such as Japan’s research and development agency NEDO (New Energy and Industrial Technology Development) and the Ministry of Economy, Trade and Industry provide subsidies to support research and development of hydrogen-related technologies.

• Subsidies for fuel cell vehicles and hydrogen stations

Subsidies are available for the purchase of fuel cell vehicles and establishment of hydrogen stations, creating an attractive environment for businesses.

There is currently no systematic legal framework specifically dedicated to hydrogen energy development. Companies must pay attention to existing regulations covering energy more broadly, such as the Gas Business Act and the High-Pressure Gas Safety Act.

Energy storage technology

Private companies can play a crucial role in supporting a stable energy supply by working on the development and implementation of large-scale batteries and other energy storage systems. In recent years, the importance of grid-scale battery systems, which can flexibly charge and discharge, has increased due to the expansion of renewable energy adoption.

• Subsidies for batteries

To support the introduction of storage batteries, the government has introduced subsidies and amended the Electricity Business Act to establish connection environments between grid-scale batteries and power plants. Additionally, the inclusion of these systems as eligible for support in long-term decarbonisation power source auctions, which provide long-term income predictability, has significantly increased the number of participants in this industry.

In Japan, carbon market regulations are still under development. Companies do not currently face significant challenges, but as detailed below, various aspects of regulations are under consideration. This includes the second phase of an emissions trading scheme (ETS) first piloted in 2023 known as the GX League[10]. Additionally, a ‘carbon levy’ based on the amount of carbon emissions is expected to be introduced for importers of fossil fuels such as oil and coal around fiscal year 2028.

Carbon credit market – established in 2023

The carbon credit market opened on the Tokyo Stock Exchange and began trading on October 11, 2023. Over the first year of operation (until Oct 31, 2024), the market saw cumulative sales of 554,355 t-CO2 in total, including 374,778 t-CO2 from renewable energy (electricity)[11].

Companies from various industries that endorse the GX League are working together to develop a vision of the future society, make rules for market creation, and prepare a carbon credit exchange scheme with the aim of having the league fully operational from FY2023 onward." GX League

Promoting carbon trading via an ETS from 2026

The first phase of Japan's ETS, the GX League, started in fiscal year 2023 (April 2023 to March 2024). The GX League was a voluntary ETS pilot that involved companies with ambitions to achieve carbon neutrality. Participating companies accounted for more than half of Japan's greenhouse gas emissions (by comparison, approximately 40% of companies within the EU are required to participate in the EU-ETS).[12]

Discussions are accelerating in preparation for the second phase: the implementation of GX as a voluntary ETS from around 2026. Various regulatory enhancements are being considered. The introduction of a mandatory cap-and-trade system that imposes emission limits on high-emission businesses is one option, but implementing such a system requires examining legal issues.

To address this, the Ministry of Economy, Trade and Industry and the Ministry of the Environment are examining legal issues that arise when applying the ETS of other countries and domestic carbon credits (such as J-Credits, described below) to Japan's legal system.

They are organising their thoughts from both academic and practical perspectives to aid in the specific design of the ETS, holding a study group on legal issues that contribute to the consideration of emissions trading systems for the realisation of GX.

In April 2024, the 'Guidelines on the use of Eligible Carbon Credits in the GX-ETS’ were established[13].

Carbon Offsetting is developing – what are the pros and cons?

The Japanese government and financial regulatory authorities have not introduced a comprehensive sustainable finance taxonomy. However, they have developed various sustainable finance initiatives and tools, some of which relate to the purposes of a taxonomy.

Decarbonisation funding and sustainable finance initiatives

The Ministry of Economy, Trade and Industry’s ‘Climate Innovation Finance Strategy 2020’[14] emphasises the importance of simultaneously promoting finance across three initiatives:

Since, the government and regulators have taken steps to fund and encourage decarbonisation:

• Chasing net zero and the 2 trillion yen fund: In October 2020, the Japanese government declared its goal to achieve net zero GHG emissions by 2050. It also announced the establishment of a 2 trillion-yen fund to support decarbonisation innovation.
• Action plan towards sustainable finance: The Financial Services Agency established the ‘Sustainable Finance Expert Meeting’ and published four reports that include recommendations for building a financial system that supports a sustainable society[15]. Based on the content of these reports, in 2022 the Financial Services Agency incorporated the promotion of sustainable finance into its ‘Financial Administration Policy’ and has developed and promoted an action plan for this purpose.[16] The initiatives and tools developed include some functions of a taxonomy.

Legal framework for green bonds and loans

In March 2017... The Ministry of the Environment developed the ‘Green Bond Guidelines 2017’. These guidelines provide examples and interpretations tailored to Japan's bond market, supporting decision-making related to green bonds, consistent with the International Capital Market Association (ICMA) Green Bond Principles (GBP).

In 2020... The guidelines were revised to reflect updates to the GBP and market trends surrounding green bonds.

In July 2022... The latest version, ‘Green Bond and Sustainability-Linked Bond Guidelines 2022’[17] was published. This clarifies criteria for assessing ‘greenness’ and adds details on the use of funds, Key Performance Indicators (KPIs) and examples of negative effects in the annex.

In March 2024... The guidelines for green projects that deliver clear environmental improvement effects were revised including the annex (green list). This revision reflects discussions within the working group and feedback received during the public consultation on the green list. This resulted in an expanded list, without significant changes to the content compared to the previous version[18].

Government and private loan programs for CLIMATE Projects

Government guidelines for transition finance (‘de facto’ standard)

The ‘Basic Approach to Climate Transition Finance’ and the ‘Climate Innovation Finance Strategy 2020’ were formulated to promote funding for initiatives that contribute to the transition to a decarbonised society.

While there is no internationally approved general definition of ‘Transition Finance’, the framework in the ‘Climate Transition Finance Handbook’ of ICMA (ICMA Handbook) has significant influence in practice. Japan has developed more specific guidelines, with the Ministry of Economy, Trade and Industry, the Financial Services Agency and the Ministry of the Environment jointly creating the ‘Basic Guidelines on Climate Transition Finance’.[19] Transition finance in Japan relies on this framework[20].

The basic guidelines are non-legally binding soft law that provides a standard the market can rely on and is linked to the subsidy system in the next paragraph, functioning as the de facto standard for transition finance in Japan.

Subsidies promoting the transition of high-emitting industries

The ‘Interest Subsidy Program for Promoting Transition’ was implemented in 2022. This program offers a government subsidy in the form of interest rate cuts: 0.1% for transition finance in the form of sustainability-linked loans/bonds that meet certain criteria, with a maximum of 0.2% if interim targets are met.

Eligible companies are required to set ambitious CO2 reduction targets toward achieving carbon neutrality and to develop a long-term plan of at least 10 years to meet those targets. Additionally, they must obtain authorisation from a designated external evaluation organisation confirming compliance with the basic guidelines and the Sustainability-Linked Loan/GBP. If the plan receives government approval, companies can receive loans from designated financial institutions under the favourable conditions.

Wind power technology has made remarkable progress in recent years, with efforts to reduce generation costs and improve energy efficiency. The government aims to achieve 36-38% of total electricity generation from renewable energy sources by 2030.

Projected renewable energy capacity FY2030

Legal and regulatory landscape

Mandatory renewable purchases

FIT has made it mandatory for electric power companies to purchase electricity from renewable energy sources at a certain price for a certain period of time. Additionally, under the FIP system as detailed above, renewable energy power producers receive a premium that is linked to the electricity market price, rather than receiving a fixed price for selling electricity.

Installation Standards and Environmental Impact Assessment

The installation of wind power generation facilities requires an EIA. There are also an increasing number of regulations based on local ordinances and local government guidelines, which may restrict installation, especially to protect the natural environment and landscape.

Other relevant regulations

Wind power installations in mountainous and forested areas are restricted under the National Land Use Planning Act and the Forest Act, as well as regulations related to structural safety under the Building Standards Act. Safety and proper operation of power generation facilities are regulated by the Electricity Business Act.

Opportunities and mitigating challenges

Onshore opportunities to revitalise local economies

Onshore wind power generation is being introduced in areas rich in wind power resources, especially in Hokkaido and the Tohoku region. In these areas, there are opportunities for regional revitalisation and job creation through wind power generation.

Offshore development encouraged

Offshore wind power generation is expected to become the main renewable energy in the future because wind turbines are installed in coastal areas, so there are few restrictions on land and the efficiency of wind power utilisation is high.

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To learn more about the net zero transition across the region, visit our guides on Southeast Asia, Japan and the Republic of Korea.