Overview
Japan is the third-largest economy in the world and among the highest emitters. Home to approximately 126.5 million people, Japan consists of several thousand islands most of which are covered by mountains and surrounded by steep shorelines.
The topography limits renewable energy development and 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. A little over a decade on, Japan’s economy is showing signs of recovery – and investors are circling.
For Japan, nuclear has re-emerged as a path to decarbonisation, along with the promise of green hydrogen, offshore wind and energy efficiency. Japan is also one of the world’s largest importers of natural gas. Natural gas is likely to remain as a key part of Japan’s energy generation for the foreseeable future.
With this background, Japan’s nationally determined contribution (NDC) under the Paris Agreement is an ambitious one: a 46% reduction in GHG emissions in 2030 from its 2013 levels and net zero by 2050.
Navigate the opportunities and challenges in the net zero transition:
Energy Transition | Carbon Markets | Financing | Transport | Housing and Buildings | Agriculture | International Collaboration
Energy transition
Challenges
Japan’s electricity and heat generation sector is heavily reliant on fossil fuels, accounting for nearly half of its emissions. Japan has limited potential for renewable energy development. As a result, Japan’s energy transformation is focused on hydrogen, carbon capture usage and storage (CCUS), nuclear, offshore floating wind generation and energy efficiency.
Opportunities
Hydrogen will play a crucial role in Japan’s energy transformation. Japan is a world leader in this space. Japan is focused on reducing the cost of hydrogen production to US$3/kg by 2030 and US$2/kg by 2050. The Basic Hydrogen Strategy, Strategic Roadmap for Hydrogen and Fuel Cells and the Sixth Strategic Energy Plan are all geared towards this aim.
- Raising annual hydrogen supply to six times the current level by 2040 is reported as a key goal
- Japan’s Ministry of Economy, Trade and Industry (METI) has put forward JPY26b in subsidies for the demonstration of hydrogen co-fired gas turbine technology, to incentivise growth in this area.
CCUS is likely to play a major role in the decarbonisation of Japan’s energy supply, along with carbon recycling, due to the nation’s reliance on fossil fuels for energy. New gas and coal-fired power plants are to be constructed as ‘capture ready’ and inefficient coal-fired plants are to be phased out by 2030.
By 2030 Japan is expecting to commercialise CCUS and carbon recycling technology for a number of chemicals, liquid fuels and concrete products. Some examples of Japanese innovations in this space include:
- the successful commercialisation of carbon dioxide-absorbing concrete
- the development of artificial photosynthesis technology separating hydrogen from water before combining the hydrogen with carbon dioxide, to produce plastic raw materials
- the completion of carbon dioxide separation and recovery equipment for power and chemical plants.
Nuclear power has returned as a focus after the 2011 Fukushima-prompted shutdown. Some nuclear power plants have come back online. As of March 2023, just 10 out of 33 operable nuclear power reactors have received clearance to restart, accounting for less than 10% of Japan’s power. In its Sixth Strategic Energy Plan, the Japanese government makes it clear that the restatement of nuclear operations is premised on safety being the top priority. In terms of new nuclear plants, Japan is pursuing the development of fast reactors and small modular reactor technology.
Floating offshore wind is a growth area and research and development in this space is expected to accelerate. In 2021 METI announced the Japanese government would provide up to JPY119.5b to support R&D costs associated with offshore wind power generation. This is expected to help drive down the price of offshore wind floating bases, which could position Japan as a new global leader in this space.
Energy efficiency subsidies have played a critical role for decades. Subsidies on offer as at November 2023 include:
- energy efficient equipment in industry and business
- energy management in SMEs: subsidies to support
- commercial transport sector: support for energy efficiency demonstration projects
- commercial and residential building: subsidies for energy efficiency investments.
This will remain a key arm of the nation’s efforts to decarbonise.
Carbon markets
Three interrelated facets of carbon markets form the heart of Japan’s 2021 Green Growth Strategy to achieving Paris Agreement targets: voluntary carbon credit trading, carbon taxation and carbon border adjustment measures.
Voluntary carbon credit trading is largely undertaken via the J-Credit Scheme, Japan’s most developed carbon trading mechanism. Under the J-Credit Scheme, the government certifies the amount of GHG emissions reduced or removed by sinks such as forests. Initially traded over the counter, J-Credits were added to the Tokyo Stock Exchange in September 2022 as part of a four-month trial. The government is considering expanding the scheme to new technologies such as hydrogen, ammonia and CCUS/carbon recycling. After a successful trial run, the Tokyo Stock Exchange announced that it plans to establish the Carbon Credit Market to begin trading around October 2023. Further, the GX League is scheduled to launch a voluntary emissions trading system by 2023 and realise full-scale operation by 2026. At a high level it will serve as a framework for companies to invest towards reducing emissions and voluntarily start emissions trading.
Carbon tax discussions are underway within the Japanese government, as it looks to introduce a carbon levy on fossil fuel importers in 2028-29. There are existing energy taxes that apply a levy to imported or extracted fossil fuels, transportation fuels and electric power generation.
Carbon border adjustment measures are seen by Japan as a mechanism through which to prevent carbon leakage and provide other countries with ‘an incentive to implement more effective climate change countermeasures’. Japan is currently considering carbon border adjustment measures and is paying close attention to the discussions taking place in other nations, such as the US and the EU.
More than 550 Japanese companies that account for 40% of Japan’s emissions form part of the GX League. Set up in April 2022, the network is managed by a combination of government (METI), Nomura Research Institute and Hakuhodo (an advertising firm) officials. The member companies commit to lead supply chain decarbonisation, support the creation of green markets and follow a roadmap to carbon neutrality by 2050. A three-phase timeline includes a target of launching emissions trading system by 2026 and the auctioning of allowances in the 2030s.
Under the roadmap, the plan is to realise over JPY150t of public-private investment in decarbonisation initiatives over the next decade.
Financing
Green finance is steadily expanding. To further promote Japan’s green bond market and green finance more generally the Japanese government reformed its green bond and green loan and sustainability linked loan guidelines in 2020.
Transition finance is encouraged and guided by industry-specific ‘roadmaps’ that assist financiers to determine whether a company’s strategy or project qualifies. The Basic Guidelines on Climate Transition Finance were released by METI in 2021. These establish a sustainable finance taxonomy and serve as reference for borrowers, financiers and other market participants. The iron and steel, chemical, power, gas, oil, pulp and paper, cement, automobile, international shipping, domestic marine transport and aviation sectors are covered. Useful case studies are provided on large Japanese companies as examples of what projects may qualify for transition finance.
Innovation finance is provided by the Japanese government via the Green Innovation Fund. This supports the upscale of green technology. Key projects include offshore wind power generation, next-generation solar cell development and large-scale hydrogen supply chain establishment.
Transport
2030 hydrogen targets
Targets and incentives relating to the decarbonisation of transport cover the automobile, shipping and aviation sectors. Examples include:
Automobiles: Japan is aiming to introduce 800k hydrogen fuel cell vehicles, 1.2k hydrogen fuel cell busses and hydrogen fuelling stations by 2030. METI plans to allocate JPY300b from the Green Innovation Fund for the development of hydrogen import and supply chain, in addition to JPY70b to develop large-scale electrolyser projects for hydrogen production.
Shipping: Japan aims to start a demonstration project for zero-emission ships by 2025, to enable cross-border trade of clean energy. Japan’s Green Growth Strategy notes that shipping is likely to play a major role in the import and export of decarbonised fuels such as hydrogen.
Aviation: Japanese companies are potentially competitive players within the electrification of aircraft due to their extensive experience within the related battery and motor fields. In 2022 METI signed an agreement with Boeing to collaborate on researching and developing electric and hydrogen powered aircraft.
Housing and Buildings
For over two decades the Japanese government has promoted net zero energy houses and buildings (ZEH/ZEB) with a focus on energy saving renovations, the introduction of high performance insulation materials, high efficiency equipment, renewable energy and the promotion and use of wood in buildings.
Renewable energy in the form of next generation solar cells used on domestic and commercial buildings is expected to increase. The Japanese government expects that the country’s mastery of the electronics sector will enable Japanese houses and buildings to make use of next generation solar cells. Being thinner and lighter in weight, next-generation solar cells could provide a power source for buildings that currently are unable to hold solar cells, such as those with small load-bearing capacity or limited roof space. To incentivise research and development into next-generational solar cells, the Japanese government has committed up to JPY49.8b and is seeking to achieve a power generation cost of JPY14/kWh or less by 2030.
Agriculture
Global warming and the associated increase in natural disasters pose a serious threat to Japan’s agriculture, forestry and fisheries sectors.
In response Japan’s Ministry of Agriculture, Forestry and Fisheries (MAFF) released the 2021 Measures for achievement of Decarbonisation and Resilience with Innovation (MeaDRI). At a high level, the MeaDRI aims to completely decarbonise the entire supply chain of the agriculture, forestry and fisheries sectors by 2050 through the introduction of innovative technologies. This includes:
- reducing the use of chemical pesticides and fertilisers
- the utmost use of locally available resources
- restoration of biodiversity
- the dissemination of energy efficient and precision technologies.
The J-Credit Scheme for trading carbon credits, Green Innovation Fund and the direct payments for environmentally friendly agriculture scheme all incentivise the ‘greening’ of Japan’s agriculture, forestry and fisheries sectors.
Japan’s need for clean, healthy and sustainable protein is tackled by global aquaculture company Pure Salmon. Japan is among locations for its Recirculating Aquaculture Systems (RAS). RAS salmon farms are important for adaptation because they are ‘eco-friendly, water efficient, highly productive [and] not associated with adverse environmental impacts, such as habitat destruction, water pollution and eutrophication [and] biotic depletion’. Moreover, RAS compared to conventional aquaculture techniques is less likely to cause disease outbreaks or result in exotic species escaping and parasite transmission. Pure Salmon has already started rolling out RAS salmon farms, including in Tsu City, Mie Prefecture, Japan.
Acting for the Pure Salmon, cross border teams from KWM’s Singapore, Japanese and Australian offices helped Pure Salmon to finance the Mie Prefecture farm.
International collaboration
Indonesia & Japan signed a Memorandum of Cooperation on Decarbonisation Technologies in January 2022, aimed at developing and deploying decarbonisation technologies such as hydrogen, ammonia and CCUS to realise a ‘realistic’ transition.
Australia & Japan announced a clean hydrogen partnership in January 2022 towards a world-first shipment of liquid hydrogen. This provides trade opportunities for Australian businesses working on domestic hydrogen supply chain projects and is connected to the AU$150m Australian Clean Hydrogen Trade Program.
Australia & Japan entered a partnership on decarbonisation technologies in June 2021. In addition to clean hydrogen, other technologies include CCUS, carbon recycling, clean fuel ammonia, low emissions steel and iron ore and lower emissions LNG production.
The EU & Japan established a Green Alliance in May 2021, aiming for climate neutrality by 2050. This prioritises sustainable energy, environmental protection, regulatory cooperation, research and sustainable finance.
The UAE & Japan signed a Memorandum of Cooperation on hydrogen in April 2021. The two will 'seek to cooperate on matters such as exchanging information on hydrogen policy, constructing supply chains (including hydrogen production and transportation to Japan) and exchanging information toward developing regulations and standards'.
Under the Asia Energy Transition Initiative, Japan has committed to providing US$10b to support the regional shift to renewables, energy efficiency and LNG.
This publication is intended to provide a high level overview of the net zero transition in Japan. It is provided for general informational purposes only and should not be construed as legal advice.
