Japan: Policies to Grow Credible Transition Finance

January 4, 2024Published by Climate Bonds Institute

Japan’s transition finance plan could provide a global model for driving growth through emissions reductions if adjusted to be strictly 1.5°C-aligned, says this report from Climate Bonds Initiative (CBI). The authors say the greatest opportunity for impact comes from the plan’s financial and policy support for energy efficiency, renewable energy and grid improvements.

The green transformation (GX) plan aims to make Japan a leader in financing low-carbon technology, but certain fundamental elements must be strengthened to deliver its goals and prevent accusations of greenwashing, says the report.

The plan provides a 10-year roadmap for the economy-wide changes needed to cut emissions by 46% by 2030 and outlines financing options to raise the US$1tn of public-private investment needed. These include a sovereign green transition bond, blended finance initiatives, an emissions trading scheme and a carbon levy for fossil fuel imports.

The report says a 1.5°C-aligned sovereign transition bond is “critical to build investor confidence and to mobilise private capital for the transition” and explains how the underlying transition strategy can be refined.

The authors make seven recommendations, including prioritising investment in mature technologies, a strong carbon price, regulation of green fuels, and firmer commitments to phasing out fossil fuels including natural gas.

As deep emissions cuts are needed by 2030, the report’s authors say Japan’s strategy should prioritise proven technologies that can deliver quick emissions reductions, in particular the faster growth of renewables which can offer mature, low-cost and technologically viable options.

Separate research found that Japan can generate 70% of its power by 2035 with a combination of renewable sources, battery storage, inter-regional transmission systems and energy efficiency. Decarbonising the power sector will facilitate decarbonisation of other sectors, from heating and cooling to transportation, says the CBI report.

Newer unproven technologies such as the use of low-carbon hydrogen and ammonia as alternative fuel sources present a more complex picture. While the report says they are “essential for climate action”, it also recommends clear regulations to ensure their production is consistent with climate goals.

For instance, generating hydrogen is very energy intensive and tougher criteria are needed to ensure transition investments only go to projects powered by clean energy and have sustainable supply chains. To date, Japan’s hydrogen projects have been highly polluting, including the 2022 pilot which used imported coal-generated hydrogen.

The authors also stress that gas must be phased out in the long-term and that clear boundaries are needed for short-term gas investment to avoid undermining the credibility of the transition label. Evidence shows that methane leaks create emissions on par with coal, so transition investments should be limited to implementing full-value chain-leak reduction technology and lifecycle emissions assessments.

Furthermore, the report emphasises the need for clear timelines for phasing out coal with full decarbonisation trajectories, as this will provide market clarity and spur investments in alternatives.

Finally, the authors recommend enhancing and expanding transition plan requirements to the private sector. As part of this, the Ministry of Economy, Trade, and Industry’s sector roadmaps should be reassessed to ensure they support comprehensive, science-based transition plans for companies, investors and financial institutions.

This page was last updated January 8, 2024

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