Japan faces a unique journey on the road to net-zero, with the government needing to strike a balance between ushering in a greener future whilst heeding lessons from the country's recent past, and all while protecting the economy. The key will be whether the government can successfully bring all parties along for the ride.

The world's third largest economy aims to cut greenhouse gas emissions by 46% from 2013 levels by 2030 and reach net-zero by 2050.¹ While there are doubts about whether sufficient investment has been earmarked for the transition, the shift to zero-carbon energy also brings with it a controversy that is specific to Japan, with some in the country concerned about the future role of nuclear and fossil fuels in the power mix.

Nuclear power in Japan's power mix

There remains a strong public distrust of nuclear power in the country following the accident in Fukushima in 2011. The nuclear meltdown prompted power producers to rely more heavily on fossil fuels, which accounted for 73% of Japan's electricity in 2022, according to data from think tank Ember.²

The strong dependence of Japanese industry on fossil fuels could prove tough to reduce, particularly without harming the economy. According to the World Nuclear Association (WNA), Japan was generating 30% of its electricity from nuclear reactors up until 2011, and the plan is now to generate at least 20% by 2030, from a depleted fleet. According to the WNA, the first two reactors restarted in August and October 2015, with a further nine having restarted since. 16 reactors are currently in the process of restart approval.³

Compounding the nuclear issue is a sense from the government that the country cannot rely on renewable energy options to the extent they would like. One difficulty is that the costs of renewable power generation are high because Japan is an island state with steep mountains[4], which limits the area of land available for wind farms. Meanwhile, supply chain costs have surged globally. As in other countries, when it comes to infrastructure build there have been delays and setbacks. Such issues are putting pressure on the wind industry's goal of generating a third of Japan's power by 2050.⁵

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Japan's net-zero strategy

These challenges have translated into a net-zero strategy that aims to utilise carbon emissions extraction more heavily than its G-7(20) counterparts. As part of this, Japan plans to build carbon-capture storage facilities in conjunction with several southeast Asian countries.

The strategy has attracted critics, who would prefer a more complete renewable energy solution. Meanwhile, a coalition of climate groups have been stepping up pressure on Japan's big three banks to cut financing linked to fossil fuels.⁶

Japan is also targeting the increased use of hydrogen, and is spending USD 107 billion on hydrogen supply chains, aiming to have 1% hydrogen or ammonia in the power mix by 2030. However, critics have highlighted the current inefficiency of hydrogen technology, and added their voice to calls for the country to focus more on renewable energy solutions such as wind, solar and grid storage.⁷

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As the 2050 deadline approaches, these difficulties could be compounded by the likely need for increased investment, given the country's challenging pathway to net zero.

According to a report by BloombergNEF, Japan is set to invest USD 3.2 trillion in energy supply and demand between 2022 and 2050, averaging USD 115 billion annually. However, to achieve net zero emissions while avoiding emissions overshoot or reliance on unproven technologies, the country might need to more than double its investment rate to an annual average of USD 239 billion, about 3.8% of the expected gross domestic product.⁸

At Lombard Odier, we believe that although carbon data are widely available, focussing only on low-carbon companies may not be the best approach. Industries such as steel and cement are highly emitting, but the world will continue to need these materials. These sectors need to invest in greener manufacturing processes to reduce their emissions. Starving them of capital isn't the answer. In short, we must look beyond a company's footprint today, and understand its trajectory and alignment to the transition. 

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Looking ahead

The wheels of the transition are in motion, however, with markets and businesses already adapting to the challenge of meeting net-zero targets. For example, trading has recently begun on Japan's first carbon-credit exchange as the country seeks to put a price on emissions.⁹

The market is being run by the Tokyo Stock Exchange, and participants can trade so-called J-Credits, a locally issued unit certified by the government, that is awarded to projects that reduce emissions and can be used by companies or institutions wishing to offset their pollution. There will be J-Credits in six categories, including renewable energy and agriculture.

Between now and 2050 the world will move from 20% economy-wide electrification to 70%, as entire sectors transition from fossil fuels to renewably-generated electricity.¹⁰ Over the last decade, as technology has advanced, the installed prices for wind and solar generation have plunged more than 80% – solar is now the cheapest form of electricity generation in history.¹¹ In 2022, 83% of all new electricity generation capacity came from renewables alone.¹²

We are also moving from large-scale centralised electricity production to a mix of large-, medium- and small-scale distributed generation and storage, increasing grid resilience in the process, and creating new opportunities for governments to achieve energy independence.¹³

This kind of adaptation is nothing new for Japan. It has already had to navigate the sensitive issue of shutting down and then restarting its nuclear reactors, rolling back an energy policy that transformed its economy over the past 10 years. The challenge now will be keeping hearts and minds on board as the government plots the next steps of an energy transition that reconciles its unique recent history with building a sustainable future.

Doing this amid calls for an increased focus on renewable energy, with all Japan's topographical and power-generation challenges, will require patience and flexibility from all concerned: the government, power producers and the public.

¹ https://www.reuters.com/business/energy/japan-has-serious-work-cut-out-with-carbon-cutting-ambitions-maguire-2023-10-12/
² https://www.reuters.com/business/energy/japan-has-serious-work-cut-out-with-carbon-cutting-ambitions-maguire-2023-10-12/
³ https://world-nuclear.org/information-library/country-profiles/countries-g-n/japan-nuclear-power.aspx
⁴ https://japan.kantei.go.jp/101_kishida/statement/202201/_00008.html
⁵ https://www.reuters.com/sustainability/wind-industry-aims-provide-third-japans-power-by-2050-2023-05-29/
⁶ https://www.reuters.com/business/sustainable-business/japans-three-megabanks-face-votes-climate-change-sources-2023-04-10/
⁷https://knowledge.energyinst.org/new-energy-world/article?id=138336
⁸ https://solarquarter.com/2023/07/27/bloombergnef-report-japans-transition-to-net-zero-emissions-unveiled/
⁹ https://financialpost.com/pmn/business-pmn/japan-starts-its-first-carbon-credit-exchange-in-net-zero-push
¹⁰ https://www.lombardodier.com/electrification
¹¹ Solar is now 'cheapest electricity in history', confirms IEA (carbonbrief.org).
¹²Record Growth in Renewables Achieved Despite Energy Crisis (irena.org).
¹³ https://www.lombardodier.com/electrification