Japan Must Promote Its Green Transformation (GX) Strategy to the World

Key Points for Presentation and Discussion

First, Mr. Kobayashi emphasized that the GX Strategy is a best-mix policy which is unique to Japan and which takes into account counterpart policies such as the EU Green Deal, Fit for-55, and the U.S. Inflation Reduction Act (IRA).
Under Japan's GX strategy, financial support of 20 trillion yen over the next 10 years beginning in this fiscal year (FY2024), financed by GX Economy Transition Bonds, will be provided first to promote GX investments by the private sector (150 trillion yen is the target for public-private investment over the next 10 years), followed by carbon pricing regulations that will be introduced in the form of GX-ETS from FY2026, carbon surcharges for fossil fuels (carbon tax) from FY 2028, and emission quota auctioning by power producers from FY2033. In other words, the carrot is offered first, followed by the stick. The U.S. IRA basically does not include carbon pricing, but provides tax and financial incentives totaling 369 billion dollars. The EU Emission Trading Scheme (EU ETS) has been introduced into the EU's climate policy since 2005, and the Green Deal investment plan published in 2020 aims to achieve 1 trillion euros of public-private investments (the public sector mainly provides loans) over 10 years. This is essentially a combination EU ETS regulation first, followed by government loan funds.

Regarding carbon pricing, Japan will introduce a form of the EU ETS that is adapted to the Japanese environment, and will also introduce a carbon tax, which is called the GX Fossil Fuel Surcharge. The EU has not introduced an EU-wide carbon tax (although it has been introduced in some EU countries). In the United States, some states such as California have introduced Emissions Trading Programs (ETP), but they have not been introduced on a federal level.
These differences in policy content reflect the differences in each country's circumstances (including political background) and can be said to be a concrete manifestation of the "one goal, various pathways" policy that Japan advocated and shared at the G7 and G20.

Second, regarding carbon pricing, Mr. Kobayashi emphasized that the carbon price aims to accomplish the three goals of economic growth, energy security, and emissions reduction by combining the quantity control system called the ETS, and a price control system called the carbon tax. Under the ETS, emissions are determined as a CAP, and the actual carbon price, aside from the possibility of setting upper and lower price, is determined in the market as a result of trading, without targeting a specific price level in advance. In contrast, the tax rate for carbon surcharges for fossil fuels (carbon tax) will be set at a specific rate (e.g. price per ton of oil) based on future discussions.

Related to this topic, regarding the EU's Carbon Border Adjustment Mechanism (CBAM), Mr. Kobayashi stated that Japan should not aim for a specific carbon price (the carbon price under the EU ETS as of April 2024 is approximately 70 euros/CO2t) to avoid the imposition of CBAM in Japan but should undertake comprehensive measures to achieve the necessary emission reductions. He also stated the EU needs to design and operate a fair system in accordance with international rules such as the WTO, so that the operation of CBAM does not have a trade-distorting impact on small and medium-sized enterprises or other entities.

Third, regarding the current status of the EU green policies, Mr. Gaussorgues suggested that the basic direction of future climate policy is unlikely to change even after the European Parliament elections in 2024. He emphasized that with regard to the European Green Deal published in 2019, the European Commission has made over 70 legislative proposals, including not only climate-related but also environmental goals, and that the 27 member countries have adopted over 30 pieces of legislation, mainly related to climate change. He also noted that although there are sensitive issues related to biodiversity, rising energy prices due to war and inflation, dissatisfaction in the agricultural sector, and deliberations have stalled just before the European Parliament elections in June 2024, important climate policies such as raising the renewable energy target to 42.5% by 2030 and in principle banning internal combustion engine vehicles by 2035 have already been finalized.

Mr. Kobayashi expressed his impression of the discussions at the Japan-EU Green Alliance Inter-Departmental Meeting in February 2024. He noted that with the European Commission's proposal to target a 90% emissions reduction by 2040 (compared to 2010 levels), it will no longer be sufficient to only implement measures focused on energy efficiency and renewable energy, and that serious efforts must address the so-called hard-to-abate sectors and advances must be made in Carbon Capture and Storage (CCS) and hydrogen power generation to achieve net-zero in the electricity sector, and that there is growing momentum toward strengthening cooperation with Japan, which is advancing comprehensive efforts in these areas.

Fourth, regarding hydrogen, Mr. Kobayashi pointed out that Japan plans to launch multiple projects based on a balance of various types of hydrogen (green hydrogen, blue hydrogen, domestically and internationally produced), and that while price is the most important factor (if the price is low, the planned price gap subsidies (in total of 3 trillion yen) would be minimal), it is not the only the issue.

He also mentioned that if U.S. hydrogen and ammonia are competitive, there is potential for imports to Japan, and in terms of cooperation with the EU, which is working on hydrogen from renewables and nuclear-derived hydrogen within its own region, there is potential for technical cooperation. In addition, he mentioned that EU energy companies (fossil fuel-based) are enthusiastic about hydrogen supply, and there is the possibility of cooperation in procurement, including for blue hydrogen.

Fifth, in regard to the supply of funds to meet Asia's growing energy and decarbonization demand, Mr. Kobayashi highlighted that strengthening the power grid represents a challenge for the introduction of renewable energy in Asia, and that public financing is necessary to promote grid strengthening and private financing is necessary to promote renewable energy development. As electricity demand rises, he mentioned that due to the insufficient amount of renewable energy, transition financing will be necessary for liquefied natural gas (LNG) power generation toto fill the supply gap. These issues need to be addressed in series. In relation to this, he noted that the EU’s inclusion of natural gas in EU taxonomy is noteworthy.

Mr. Gaussorgues emphasized that Asia’s circumstances are complex, but that the EU is accustomed to risk assessment due to the complicated situations in the 27 EU member states. He also highlighted that natural gas is an important transition energy source, and that pragmatic approaches are necessary. In addition, he noted that public funds are necessary for GX investment in Asia and that private financing should be promoted through the banking system. Moreover, he expressed that he is generally optimistic about the future of Asia, considering the maturity and decreasing cost of technologies such as renewable energy and Japan’s push toward GX in the region.

Author’s Impressions

As mentioned above, this policy seminar was a useful policy dialogue incorporating in-depth discussions on GX (decarbonization) between Japanese government officials and EU private sector experts. Below are some impressions I formed through the discussion.

First, even private sector stakeholders are embracing the legitimacy of the EU Green Deal policy, and efforts are being made by both the public and private sectors to promote its global adoption. Although Mr. Gaussorgues is a private-sector representative, it was impressive that he spoke so eloquently about the EU Green Deal. This mission-driven, public-private collaborative strategy implementation is one of the strengths of EU policy and likely the reason behind what is referred to as the "Brussels Effect." Japan should take inspiration from this approach in its future strategic efforts.

Second, Japan's GX strategy is an ambitious policy package, and detailed design is still underway. However, as seen in this online seminar, there is strong interest from overseas. For the policy to be effective, private sector involvement and public-private communication are extremely important, as in the case of the EU.

Furthermore, the formulation of the Japan’s basic GX Strategy, which has been led by the METI, is viewed as a rare and significant policy success in recent years. However, as the saying goes, the devil is in the details, so the design of future systems will be important. Constructive public-private dialogues and efforts to explain the policy both domestically and internationally will be essential throughout this process.

Mr. Kobayashi's presentation and responses received high praise from the audience. Such efforts should continue to be prioritized during the policy-making process. Through such efforts, it is hoped that the GX strategy established in Japan will serve as a model for the rest of the world.

Third, the key to solving global climate change issues lies in Asia. Asia's energy demand, decarbonization demand, and the corresponding financial requirements are on the rise. Japan’s leadership, as recognized by the EU, is expected to help to respond to these challenges.

Expectation for Japan’s leadership were further highlighted by the results of the ISEAS–Yusof Ishak Institute survey introduced on April 18, 2024 during the RIETI BBL seminar "Southeast Asia & Japan―The good, the bad & the ugly" (The survey shows that Japan is seen as playing a more prominent role in climate change leadership than both the EU and China).

ISEAS Survey, Presentation Materials for the BBL Seminar on April 18, 2024

In order to meet the expectations from Asian countries, Japan should strengthen public-private efforts, including initiatives such as the Asia Zero Emission Community (AZEC), infrastructure development, decarbonized businesses expansion, and finally to demonstrate its contributions to the world.

Note: The comments made by the speakers in this text are based exclusively on the author's understanding.

April 26, 2024
>> Original text in Japanese