Issues Facing the Japanese Economy in 2009

Tackling Global Warming and Energy Issues amid the Global Economic Crisis

OZAKI Masahiko
Senior Fellow, RIETI

Impact of the global economic crisis

The ongoing global economic crisis has been referred to as the return of the Great Depression of 1929. However, in certain aspects, the situation we face today is distinctly different from 80 years ago. Before the economic crisis took hold we were already confronted with major global challenges, namely, how to address the problem of climate change and, on the reverse side of the same of the coin, how to improve the supply and demand structure of energy. And depending on how we respond to the economic crisis, we may be able to effectively address these long-standing global challenges, thereby bringing about sustainable changes that are beneficial to the world economy.

Prior to the outbreak of the subprime loan-related problems, efforts to curb global warming and tackle related energy issues had been trapped in an odd stalemate. Both the Stern Review on the Economics of Climate Change and the Fourth Assessment Report of the International Panel on Climate Change (IPCC) have warned amid a range of undeniable facts - extreme weather and other ecosystem changes caused by global warming - that not much time remains before carbon dioxide (CO2) concentration levels in the atmosphere reach a point where climatic change begins causing irreversible effects. All of these warning signs point to a much-needed paradigm shift in the structure of energy demand, including a shift to renewable energy sources.

At the Conference of Parties to the United Nations Framework Climate Change Convention (COP) and the Group of Eight (G8) summit meetings, government leaders discussed and in some cases proposed medium- to long-term reduction targets and philosophical visions for reducing greenhouse gas (GHG) emissions. Yet actual reductions in global GHG emissions have been slow to materialize. The situation has been frustrating for concerned individuals; it is as if we can see a spectacular fireworks display, yet surrounded by darkness that prevents them from reaching their goals.

But the impact of the global economic crisis may change all of that. It is true that when the crisis envelopes a country and weakens the economy, it diverts the nation's resources and reduces its capacity to implement changes, while at the same time discouraging government leaders from taking steps toward addressing less politically-sensitive issues such as global warming and other energy-related concerns. However, the economic crisis may turn out to be a golden opportunity to tackle this difficult task. By defining global warming and energy policy as a priority area when implementing counter-crisis measures, a country may be able to achieve otherwise hard-to-reach consensus by sidestepping or overcoming vested interests and philosophical differences. The possibility of achieving such positive effects would be greater if a government opts quickly for counter-crisis measures focusing on global warming and energy policy.

U.S. green initiatives and their impact on Japan

Under President Barack Obama, the U.S. is set to launch a green New Deal program. Obama's New Energy for America plan, a comprehensive energy policy package, calls for investing $150 billion over the next ten years to help create five million new jobs and reduce GHG emissions by 80% of their 1990 levels by 2050. Also, in his Jan. 10 radio address Obama said he would create three to four million new jobs by the end of 2010, primarily by increasing the production of alternative energy, investing in energy efficiency, and developing relevant infrastructure - all as part of a large economic stimulus package. The administration of outgoing President George W. Bush on the whole demonstrated little enthusiasm for combating global warming and related energy issues, with the notable exception being bio-ethanol. With this month's change in administration, the U.S. is now heading in a new direction.

Efforts at the state level have been more forthcoming. Even before the shift in the federal government's stance, 12 states were seeking to establish a carbon emissions trading market comparable to the European Union Emission Trading System (EU ETS), and a total of 25 states have introduced legislation mandating utilities increase the amount of electricity they produce from renewable sources to 30%. Likewise, in private-sector investments in the rapidly expanding area of renewable energy, U.S. companies have come to show a strong presence, second only to their EU counterparts.

It has been reported in Barron's and other media sources that a gigantic green energy investment project is about to be launched in the U.S. under the name Pickens Plan. Proposed by T. Boone Pickens, the project calls for investing $10 billion to construct 150,000 to 200,000 wind power turbines near the Canadian border. The plan's goals include supplying 20% of U.S. electricity demand by 2020, and reducing by half the $700 billion that the U.S. annually spends on imported oil.

If the federal government swings into full gear with its emergency economic package incorporating measures designed to tackle global warming and related energy issues, a string of environmental and energy initiatives currently undertaken at various levels could snowball into a nationwide movement. Should this happen, achieving the goal of 100% renewable electricity within 10 years, as set out in "A Generational Challenge to Repower America" proposed by Al Gore may no longer be a dream. The U.S. has the potential to evolve into a green superpower over the next 10 years. By absorbing money - which has nowhere else to go amid the deepening global downturn - and attracting expertise and technical know-how from around the world, the U.S. can accumulate technologies and promote industries related to renewable energy.

If Japan fails to properly respond to this movement, sooner or later it could lose its comparative technological advantage in solar power generation and hybrid cars. It also risks missing out on new business development opportunities arising from the growing global demand in this area by undermining Japanese companies' international competitiveness as a supplier of advanced environmental and energy technologies. Furthermore, if Japan fails to fulfill its GHG emissions reduction obligation by the end of the first commitment period as pledged under the Kyoto Protocol, or if it is unable to keep up with the global trend calling for industrialized countries to reduce their GHG emissions (by 20% of their 1990 levels by 2020, and 60-80% by 2050) and increase their proportion of renewable energy (to 20% by 2020), and so forth, Japan's status in the international community could diminish and lead to drawbacks in various aspects of diplomatic negotiations.

Steps the government needs to take

What the Japanese government needs to do now is draw up action plans for achieving medium- to long-term targets covering the period through 2050. In response to the growing risks arising from the prevailing uncertainty caused by the global economic crisis and substantial downturn in demand, the government needs to present, without delay, a viable future vision and implement demand-boosting measures including those requiring fiscal spending.

In addition to those designed to enhance medical care and other social safety net systems, measures to combat global warming and address related energy issues should be given top priority. Based on this recognition, the government should objectively determine the comparative advantage of Japanese technology in the area of global warming and energy, and then explicitly express to the people of Japan and the rest of the world, in the form of actionable plans, its intention to prioritize technology areas with comparative advantages for allocating government resources, including government procurements.

For instance, in the area of electric vehicles (EVs), Japan has the most advanced technology in the world at the moment. By procuring a large number of EVs, the government might be able to lower the prices of EVs to levels comparable to their gasoline-powered counterparts in terms of driving range. The decline in vehicle prices on top of extremely low fuel costs could lead to a rapid increase in the use of EVs. And if this pump-priming scheme successfully boosts market expectations, it may pave the way for the development of new industries and low-carbon transportation systems by mobilizing resources not only in the automobile industry, but in related industries too. If this is realized in a way to keep pace with moves in the U.S., Japan may be able to set global standards in some areas of the environmental and energy industries, thereby securing its position alongside those secured by the U.S. and the EU in the global market.

Another important role that the government needs to play is enhancing normative consciousness. The behavior of both companies and individuals is affected by social norms, laws and regulations, and market principles. In a society that has weak social norms, laws and regulations are ineffective and illegal profit-taking activities are bound to occur in the market, as was observed in the run-up to the current financial crisis. This poses a particularly serious problem in addressing global warming because the distinction between offenders and victims is unclear, making it extremely difficult to reconcile interests across generations or measure the cost of future damage. These peculiarities unique to global warming make it all the more important to enhance people's awareness and insist upon compliance with social norms.

To begin with, it is necessary to clarify and present in an explicit and measurable manner what would happen in the event of global climate change, what needs to be done to counter it, and what progress has been made toward intended goals through the implementation of specific measures. The achievement of these goals is predicated on the availability and transparency of accurate information. Thus, it is imperative for the government to promote the compilation, reduction, and dissemination of relevant, high-quality information that is maintained by government agencies.

But these measures alone are not enough. Economic rationality based on knowledge as a mere accumulation of information is subject to change depending on individual circumstances, and so is normative consciousness on an emotive level. A typical example of this can be observed in new vehicle sales in the U.S. for December 2008, where the number of hybrid cars sold during the month dropped sharply (on a year-over-year basis) while sales of trucks and sport utility vehicles fared relatively well, reflecting falling gasoline prices amid the slumping economy. Thus, it is necessary, despite the difficulty involved, to consider exploring the possibility of forming norms on a sentient level very close to unconsciousness, which may sound like a dream. However, by supporting relevant interdisciplinary research and embarking on this project, the government may be able to provide a springboard for various initiatives that could drastically change people's lifestyles, which is the fundamental challenge to resolving global warming and energy problems in the future, if not in our lifetime.

January 20, 2009

March 3, 2009

Article(s) by this author