Green Innovation for Changing the Future of Japan

MANAGI Shunsuke
Faculty Fellow

Consulting Fellow

It seems that the 21st century started off with "creative destruction." The rapid economic growth of China has remapped the world's security and economic orders. The country embracing a population of more than 1.3 billion will soon join the advanced world that has been hitherto reserved for a privileged population of some 700 million, with more people shifting toward urban living. This is having an enormous impact—10 times greater compared to some 40 years ago when Japan, with a population then of slightly more than 100 million, joined the advanced world with a population then of 500 million—on the world in many ways and aspects.

Turning point

Last year was a big turning point in energy and environmental issues. The earthquake, tsunami, and nuclear accident on March 11, 2011 destroyed much of the foundation upon which Japan energy and environmental policies had been premised. Prior to that, it was essentially a tacit assumption that Japan should pursue the balanced achievement of economic growth and abatement of global warming through greater use of nuclear power. However, as the sheer magnitude of the risk involved in nuclear power generation and eventual reactor decommissioning costs became apparent, the viability of this assumption has been thrown into question. Meanwhile, the soaring supply of unconventional shale gas has provided the world with a new energy balance and scenario. It has also changed the geopolitical balance. For instance, in the United States, energy and environmental issues had been placed at the top of policy agenda because of the need to end its dependence on the Middle East. However, the emergence of shale gas as a major exploitable energy source has opened new prospects for achieving that goal, resulting in an overall decline in the priority accorded to the development of renewal energy sources.

Furthermore, in correspondence with these changes in the external environments, various problems embedded in the Kyoto Protocol and conventional schemes designed to address global warming have been brought to the surface. Particularly, many of those that have been acclaimed as ambitious attempts are now being called into question regarding their sustainability. European countries, which had been promoting a shift to renewable energy premised on a significant increase in the public financial burden, have been forced to review their policies in the face of swelling fiscal deficits. Various environmental measures implemented as part of national programs for promoting domestic industries have also failed to deliver their intended results because the effects of such programs transcend national boundaries quite easily in today's globalized world. As such, their limitations as growth policies have become apparent. There have been profound changes in the international framework for addressing global environmental issues over the years. Europe and Japan—which used to lead global initiatives to address environmental issues—have declined in relative importance in the face of the growing presence of China, which is firmly focused on economic growth, and the United States, which places market rationality with minimal government intervention at the core of its policies. Meanwhile, following a shift in the regime governing the world economy from the Group of Seven (G7) to the Group of 20 (G20), the conventional demarcation between advanced and developing countries in the global warming negotiations has begun to change.

Urgency of issues

The 17th Conference of the Parties to the United Nations Framework Convention on Climate Change (COP17), held in December 2011, provided the occasion to bring all of these simmering issues to the fore. At the meeting, the Kyoto Protocol was maintained as a framework. However, Japan and Canada rejected taking on new greenhouse gas (GHG) emission reduction targets in the second commitment period, leaving the Kyoto Protocol to cover only 17% of GHG emissions in the world. It was also agreed that a new framework including all of the major emitters should be developed in the next four years for implementation by 2020. Effectively, this means that the second commitment period, potentially through the end of 2020, will have no viable emission reduction agreement. This will likely prompt many countries to reexamine their pledged reduction targets in terms of priority among various domestic policies.

This turn of events, however, is not to deny the urgency of energy and environmental issues. In China, which has a population of 1.3 billion, the economy is continuing to expand and so is energy consumption. India and many other emerging economies are following the path of China to turn into an automobile-dependent society and live an urbanized, electricity-dependent lifestyle. It remains the reality that the environmental load of continuing to rely on coal in the conventional manner is too large to make it a viable option, and there is urgent need to find an alternative way to address the rising energy demand. Oil prices, which can be taken as a symbolic indicator of energy problems, are persistently high, fueled in part by political uncertainty in the Middle East. On reflection, energy and environmental issues—in the form of either global environmental concerns or energy supply problems depending on the case—have consistently urged us to diversify energy sources including renewables and improve energy efficiency. This remains unchanged today.

Prescriptions for dealing with energy and environmental issues

In this context, we can say that now, when we are being tossed about by waves of changes discussed above, is the golden opportunity to rethink prescriptions for dealing with energy and environmental issues by focusing on long-term sustainability. In doing so, there are some factors that should be taken into consideration. The first factor is the role of technology. Various social problems have been solved to date by technological advancement, and this holds true for energy and environmental issues. And we have just undergone a paradigm shift in technology development, driven by globalization and the emergence of the Internet. Today, various connections and networks, which are crucial to technological innovation, can be identified instantly and realized across national borders. It has become apparent that the presence of an environment allowing for free and open encounters, creative thinking, and the testing of new ideas provides the best seedbed for technological innovation. In this regard, it has long been pointed out that despite the presence of many seeds of technology, Japan lacks a free and open environment that encourages and enables their utilization and commercialization. The energy business field has been no exception. Japan's conventional energy policy framework, under which major power utilities guarantee the infallible supply of power in their respective regions, has suffered a jolt and is now on shaky ground. This, in a sense, might have liberated the creative and innovative spirit of Japanese entrepreneurs.

The second factor is the market function. Enabling the exchange of knowledge and choices among an infinite number of people, markets motivate more people to participate. Most of them will be driven by economic motivation, but there will also be those joining for various non-economic reasons such as contribution to society.

The third factor is sustainable policy support. It is markets that provide a link between technology seeds and their users and accelerate their commercialization. Therefore, the designing of markets is crucially important. What is required here is the employment of far-sighted policies that can achieve two goals—demand expansion and lower supply costs—at the same time, for which there must be a reasonable prospect of sustainable growth in demand.

For instance, significant progress can be expected in the automotive and electricity fields. In the former, rapid advancement is being made toward higher fuel efficiency both in the development of products—such as electric, plug-in hybrid, mini, and diesel engine cars—and on the relevant basic research front. Since many of such next-generation vehicles are not reliant on production know-how for conventional engines, various new players, including both big and small companies, are joining the race. Such development of basic technologies and participation of diverse players will link new technologies to the market, thereby providing the seedbed for breakthroughs.

Meanwhile, in the electricity field, smart grid technologies are particularly counted on for significant progress. Smart meter technologies, initially developed to enable demand-side adjustments to electricity consumption, have been combined with other technologies to constitute smart grids to provide social infrastructure crucial to enabling the visualization of energy information. Furthermore, expectations are growing that these technologies will be applied to broader areas—transportation, water and sewerage, and urban management services—to create general-purpose infrastructure.

Needless to say, possibilities that may be opened up by technology and market breakthroughs are not limited to those discussed above. In almost all fields, including housing and social systems, we will face and respond to various challenges. We will be doing the same in the renewable energy field. Japan has been the seedbed for various technological breakthroughs to date. Economic and industrial policies designed to diversify energy sources and improve energy efficiency are extremely effective in promoting economic development in energy-consuming countries. In particular, Japanese technologies, business models, and lifestyles will have a significant impact on the future course of those Asian countries with high-growth potentials. In addressing energy and environmental issues, Japan has many strengths that can be taken advantage of, ranging from its status and experience as the "forerunner" in being confronted by a host of challenges to the close relationship between those on the shop floor and those engaged in technology development. Indeed, this is the area that is counted on to serve as a new source of growth for the Japanese economy.

November 6, 2012
  1. Managi, Shunsuke and Ryozo Hayashi (Ed.), 2012, Green Innovation for Changing the Future of Japan, Chuokeizai-sha, Inc.

November 6, 2012