Japan has embarked on formulating its Seventh Strategic Energy Plan, which will set the course of its energy policies. The plan has considerable potential for folding energy policy and circular economy policy into a single package. This could help bolster the country against the risks inherent in energy and economic security, and it could also keep decarbonization costs down while creating domestic value worth up to one trillion yen annually. Key is whether policymakers can disincentivize “micro-optimization.”
Japan’s Seventh Strategic Energy Plan: Toward merging Carbon Neutral and the Circular Economy approaches
One trillion yen in new domestic value awaits
2024: Rethinking energy goals and policy
Twenty twenty-four is set to be a transformative year, with big changes afoot. Internationally, they are in politics: A number of places—foremost among them Taiwan, Russia, India, and the US—have held or are slated to hold major elections. Domestically, they are in the economy. Prices and wages are both trending upward, developments that prompted the Bank of Japan (BoJ) to shift monetary-policy gears by raising interest rates for the first time in 17 years.
And 2024 could be a transformative year also for energy policy in Japan. Its Strategic Energy Plan, which policymakers are legally bound to re-examine every three years, is up for review. Debate for formulating and setting the next one, the Seventh Strategic Energy Plan, is about to begin (Figure 1).
And 2024 could be a transformative year also for energy policy in Japan. Its Strategic Energy Plan, which policymakers are legally bound to re-examine every three years, is up for review. Debate for formulating and setting the next one, the Seventh Strategic Energy Plan, is about to begin (Figure 1).
Figure 1: Events since Japan’s carbon neutrality declaration of 2020
Source: Mitsubishi Research Institute, Inc. from various sources
GHG reduction targets in the seventh plan look set to align with Japan’s Nationally Determined Contribution (NDCs) and will be submitted to the UN’s COP30 climate-change conference in late 2025. What will change from the past is the target year for achieving interim goals: It will be moved back, to “2035 or later.” Until now most of Japan’s energy policies cited 2030 as their interim and 2050 as their final year for meeting targets; but new checkpoints are being added to the seventh plan, necessitating more clearly defined scenarios for the country's transition to carbon neutrality.
As the gap between carbon-neutrality ideals and reality widens, we propose three major points for policymakers to plug into their scenarios for formulating the new plan.
As the gap between carbon-neutrality ideals and reality widens, we propose three major points for policymakers to plug into their scenarios for formulating the new plan.
1) Turmoil on the international stage
The first is turmoil at the international level. Japan’s sixth (and current) Strategic Energy Plan was approved by the Cabinet in October 2021, several months before events like Russia’s incursion into Ukraine and the Israel–Hamas war further widened already creeping fractures in international society. The result of November’s US presidential election will also greatly impact the direction the world moves in. Thus while Japan’s sixth energy plan already touched on the importance of energy and economic security to some degree, there are likely to be demands for more in-depth debate on reality-oriented specifics in formulating the seventh.
2) Changed electricity demand forecasts
The second is changes in demand forecasts for electricity. Demand for power was trending downward for several years against a backdrop of shrinking population, advances in energy-efficient technologies and products, and uptake of home-mounted solar generation systems.* But according to January 2024 forecasts for the coming decade by the Organization for Cross-regional Coordination of Transmission Operators, Japan (OCCTO), demand will start rising again as foreign players launch massive investments in data centers and new sitings of semiconductor plants in Japan, among other factors (Figure 2). Rising inbound investment is great for employment and the economy, but it also increases the already huge challenge of how to accommodate new demand in a country already short on decarbonized generation capacity.
*OCCTO’s forecasts are for power from the grid (i.e., retail demand), which tends to fall as more end users generate their own electricity with roof-mounted solar and other domestic generation systems. Thus though demand over the grid has shrunk, actual power consumption has not
Figure 2: Changing forecasts for electricity demand
Source: Mitsubishi Research Institute, Inc. from Organization for Cross-regional Coordination of Transmission Operators, Japan (OCCTO) demand estimates
3) Merged energy and circular economy strategies
The third is the folding of energy strategy and circular economy strategy into a holistic plan integrating both. MRI has long advocated transforming Japan into a carbon-neutral resourcing powerhouse*—in policy-speak, holistically pursuing carbon neutrality and the circular economy—and proposed it as key to transforming resource-challenged Japan’s society into a fully sustainable one. The circular economy has been identified as one area for use of the ¥20 trillion in GX Economic Transition Bonds, but the integration of energy and circular economy policies is still in its infancy. Unambiguously positioning their integration in the Seventh Strategic Energy Plan will be crucial. Various benefits await in merging the carbon neutrality and circular economy approaches into a single policy package.
Merged policy package could create ¥1 trillion in value-added annually
Planners must make clear the synergies to be gained from merging carbon neutrality and circular economy approaches, and the merger must also be examined against other policies to determine its priority. Looking ahead to 2050, we posited three scenarios to see how they would compare: one maintaining the status quo (the business-as-usual [BAU]* scenario), one pursuing carbon neutrality only (the CN scenario), and one pursuing the circular economy in addition to carbon neutrality (the CN+CE scenario) (see Figure 3). The significance of the holistic CN+CE approach is immediately apparent, in three ways: It promises better energy and economic security, lower decarbonization costs, and new domestic value.
*The business-as-usual scenario assumes no steps taken to deal explicitly with climate change.
Figure 3: Three scenarios for decarbonizing by 2050
Source: Mitsubishi Research Institute, Inc.
1) Greater energy and economic security
Figure 4 shows primary energy sources and energy self-sufficiency in each scenario. In the CN+CE scenario, fossil-fuel imports will decrease due to recycling of plastics and other petroleum-derived products as well as increasing use of alternative energy sources like hydrogen, biomass, and sustainable aviation fuel (SAF). Further, grid-ready storage and EV batteries will see a boost in demand in conjunction with decarbonization, from growing use of variable power sources, like solar and wind, and following progress in the transition to electric vehicles. Better recycling of metals will help ease economic security risks. It is worth noting that current mainstream lithium-ion batteries do come with problems of their own since the lithium, cobalt, nickel, and other elements needed to make them are concentrated in certain countries or could run out.
Figure 4: Primary energy sources and energy self-sufficiency in scenario simulation results
Source: Mitsubishi Research Institute, Inc.
2) Lower decarbonization costs
Figure 5 shows the marginal abatement cost curves* in the CN and the CN+CE scenarios. The horizontal axis shows the rate of GHG reduction in 2050 and indicates that the greater the GHG reduction, the higher the cost per unit of reduction. Meanwhile, comparing the two scenarios, we can see that in the CN+CE approach the trend line is lower, indicating that merging energy and circular economy policies will yield a pronounced reduction in decarbonization costs. This is especially true when we get to reductions in the 90%–100% range, when expensive measures (like direct capture of CO₂ from the air, DAC) will have to be deployed, causing the marginal abatement cost to spike. Though some may argue against the feasibility of reaching a 100% reduction with domestically oriented policies alone, no matter how we look at combining the carbon neutrality and circular economy approaches promises to lower the overall abatement cost of decarbonization.
*The cost necessary to reduce a unit of GHG emissions is called the marginal abatement cost. Marginal abatement cost curves as shown in Figure 5 are a graphic representation of the correlation between marginal cost and emissions reductions.
Figure 5: Marginal abatement cost in our scenarios
Source: Mitsubishi Research Institute, Inc.
3) New domestic value
Japan depends on imports for most of its fuel and raw materials. Developing the circular economy would help reduce that dependency: Using as feedstock for its domestic furnaces the iron scrap it currently exports and reusing as inputs the plastics and textiles it currently incinerates would reduce imports of iron ore, coking coal, naphtha, textiles, and more. This totals up to a potential ¥1 trillion annually in new domestic value—a huge boost to Japan’s economy.
Overcoming micro-optimization
Pursuing carbon neutrality and the circular economy in tandem has the potential to effect these and other synergies. And for some initiatives, the integrated approach is economically rational from the broader social-cost perspective. Yet progress in integrating the two remains elusive.
One reason is the tendency for players to prioritize their own interests over more macro-level concerns—in other words, micro-optimization. Figure 6 shows a simplified comparison of this, taking as an example the difference between the flow of plastic materials with and without resource circulation.
As explained above, progress in developing the circular economy would reduce imports of naphtha, moderating the overall social costs for Japan while also cutting GHG emissions. But at the micro level, the transition from incinerating waste plastic to recycling it, would raise costs for plastic users. That means they have little incentive to adapt the circular-economy mindset: For them, avoiding resource circulation would best way to minimize their short-term costs—a choice inspired by individual interests.
Such micro-optimization can be overcome if policymakers are able to integrate circular economy measures into greater decarbonization initiatives defined by the seventh plan. And the key to this will be identifying optimum intersections between the CN–CE trade-offs corporations face, facilitating cross-industry communication, and proper distribution of the costs.*
One reason is the tendency for players to prioritize their own interests over more macro-level concerns—in other words, micro-optimization. Figure 6 shows a simplified comparison of this, taking as an example the difference between the flow of plastic materials with and without resource circulation.
As explained above, progress in developing the circular economy would reduce imports of naphtha, moderating the overall social costs for Japan while also cutting GHG emissions. But at the micro level, the transition from incinerating waste plastic to recycling it, would raise costs for plastic users. That means they have little incentive to adapt the circular-economy mindset: For them, avoiding resource circulation would best way to minimize their short-term costs—a choice inspired by individual interests.
Such micro-optimization can be overcome if policymakers are able to integrate circular economy measures into greater decarbonization initiatives defined by the seventh plan. And the key to this will be identifying optimum intersections between the CN–CE trade-offs corporations face, facilitating cross-industry communication, and proper distribution of the costs.*
Figure 6: How micro-optimization hinders integration of the carbon neutral and circular economy approaches
Flow of materials with and without resource circulation: Plastics example
Flow of materials with and without resource circulation: Plastics example
Source: Mitsubishi Research Institute
Author profile
Ryusuke Shida
Center for Policy and the Economy
Since joining Mitsubishi Research Institute Dr. Shida (EngD) has been involved in consulting work and policy formulation assistance in the energy field. From 2014 to 2016 he worked at a trading house in the US providing backup for the development of petroleum, natural gas, and renewables businesses. He is currently involved in research on energy for MRI and formulates proposals for energy policymakers.