Priorities for the Japanese Economy in 2020 (January 2020)

Will the 2020 Greenhouse Gas Reduction Targets Be Met?

Senior fellow, RIETI

1. Greenhouse gas reduction targets for 2020

About 10 years ago (in 2009), under the Aso administration, a greenhouse gas reduction target (of -15% from 2005 levels) was set for 2020.

For this target, an advisory committee conducted an elaborate cost analysis using three types of economic model: an energy supply and demand model, a marginal cost model (comparing marginal costs in each country), and a multi-sector dynamic general equilibrium model (measuring effect on GDP). After presenting a range of options, a nationwide survey was conducted and the target was set by an expert committee based on the survey (the author was also involved in the analysis work while in office at the Agency for Natural Resources and Energy). As background to this, the Kyoto Protocol reduction targets (an 8% reduction for Europe, 7% for the US (not ratified), and 6% for Japan, compared to 1990 levels) were agreed without preliminary discussions concerning the burden of costs, reflected in having to purchase around 1 trillion yen in emissions quotas.

As we enter 2020, will this target be met? The energy situation has changed dramatically in the wake of the Great East Japan Earthquake, and while there is a sense it has been overwritten by the 2030 target (-26% from 2013 levels), I would like to consider its implications for future energy supply and demand.

2. Energy Supply and Cost Burdens

The majority of greenhouse gases come from energy consumption. In the table below, the demand row is the main indicator of energy consumption, while the supply row is the share of non-fossil fuel power (renewable energy + nuclear power).

*The 2020 target (real number) is based on the recalculation of the long-term outlook for energy supply and demand (August 2009).

On the supply side, increased emissions and supply costs resulted from a decrease in the share of non-fossil power after 3.11

On the supply side, the share of non-fossil fuel power fell in the aftermath of the Great East Japan Earthquake, which increased greenhouse gas emissions and substantially increased supply costs. This is due to the fact that nuclear power generation dropped substantially and thermal power generation increased significantly. On the other hand, solar power generation has increased due to the "Act on Special Measures for the Procurement of Renewable Energy by Operators of Electric Utilities" (FIT law).

First, looking to renewable energy, purchasing costs are expected to reach 4 trillion yen annually, and the rate of import of solar panels from China and other countries (2018) has increased 75% (from 30% in 2012). Together with reviewing the FIT system, energy sources that are appropriate to the characteristics of Japan, such as offshore wind, ought to be expanded with increased measures allowing for use of suitable landscapes and sites for offshore wind generation, without an overreliance on solar energy.

Next, the cost of nuclear power has increased due to regulations and the dramatic strengthening of safety standards. There has recently been an increasing possibility that the restarted nuclear power plants will again be shut down due to a lack of anti-terror measures. Further stoppage will again contribute to increased greenhouse gas emissions (fossil fuel costs to make up for this shortage are expected to be of the trillion yen scale, spread across multiple power companies). It might be required to operate in a manner that increases the predictability of administrative processes, such as resetting reasonable construction deadlines in consideration of the difficulty of such countermeasures and providing adequate communication with power generation companies subject to regulations.

Looking to thermal power generation, the rise in liquefied natural gas (LNG) prices and increase in imports (¥2.5 trillion) following the earthquake have proven to be a major factor in the recent massive current account deficit. Today, prices have calmed, and the damage is less acute, however Japan's LNG import prices are unreasonably linked to crude oil prices, and when crude oil prices are high, they often rise dramatically. In addition, there is also the risk of price increases due to increased LNG demand from the rest of the Asian region. In addition to the enhancement of high efficiency and carbon capture and storage (CCS), while avoiding excess reliance on LNG thermal power, Japan's excellent technological capabilities should be deployed overseas.

In terms of demand, the 2020 targets will be met and exceeded due to reduced energy consumption

Looking at the table above, in 2018, overall greenhouse gas emissions were -10% against the 2005 benchmark (preliminary figures), and while it is approaching the 2020 target (-15% against the 2005 benchmark), it seems this will be somewhat tough to achieve. However, energy consumption had decreased by 17% in 2018 (preliminary figures) compared to 2005, and in fact, limiting our view to the demand side (and if there is no increase in supply-side emissions), it is highly likely that the 2020 targets will be met and exceeded.

Japan's energy consumption measures have reversed what had been an increasing trend up to 2005, and consumption has been in clear decline since, particularly following the Great East Japan Earthquake. To continue this trend into the future and to expand this decrease, power-saving measures, straightforward though they may seem, are the most effective.

First, in industry, the use of innovative technologies should be promoted, such as hydrogen reduction steelmaking. Environmental taxes and emissions limits are not as effective because they reduce the international competitiveness of energy-intensive industries.

Moreover, in the consumer sector, energy-saving products will spread through user purchasing behavior; however, from experience of the eco point system in the past, for example, even if a TV is a "low-energy" model, if a large TV is recommended at the point of sale, it becomes a "high-energy" model, so these measures must be reinforced. In addition, "Power-saving through self-control," which imposes inconveniences on people's lives, lacks sustainability. In the future, effective energy-saving policies based on demand function estimates and sensitivity analysis of policy effects will be required.

3. The Importance of Cost Analysis

While energy liberalization continues to reduce prices through market competition, rising energy supply costs will instead increase the public burden at the trillions of yen level, a scale which could be considered equivalent to a consumption tax increase. Supposing we employ a radical power structure involving excessive reliance on renewable energy as the main source, usage of LNG-fired for adjustment and withdrawal from base-load power (nuclear or coal-fired), there is the risk of further significant supply cost increases.

In 2020, calls for Japan to strengthen its measures against global warming will become even stronger. Discussions on greenhouse gas reductions tend to require political "will," but quantitative discussion based on calm cost analysis that is not subject to emotional arguments and policy that is economically rational and effective are both required.

January 9, 2020

March 17, 2020

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