Road to Net Zero by 2050

Over a year has passed since former Prime Minister Yoshihide Suga pledged that Japan “aims to become carbon neutral by 2050” in his first policy address to Parliament in October 2020. This declaration was widely reported at the time for its significant impact, and it was followed by a series of announcements from other countries as the world moved together to accelerate decarbonization, including the Biden administration reinstating the US to the Paris climate agreement and the EU approving a ban on the sale of gas and diesel-powered cars. Today, over 120 nations and regions have declared that they will be carbon neutral by 2050, and net zero has become a fairly common political goal.

The general atmosphere regarding the climate crisis changed significantly in just one year, but even greater changes will be needed according to the 26th United Nations Climate Change conference (COP26) held in November 2021. Japan will have to chart a specific plan of action to achieve goals in line with its new emissions reduction targets, specifically its Nationally Determined Contributions (NDCs).

Japan has a big population, large economy, and currently generates over 70% of its power from fossil fuels, so it will not be easy to reach net zero. However, we think it is possible if Japan can mobilize both policy and technology and start to implement specific measures at the right times. We see three key points: (1) changing demand-side behavior, (2) achieving net-zero emissions across the power sector at an early stage, and (3) fostering strategic innovation.

The first of these three key points, changing demand-side behavior needs to happen as early as possible. It is crucial if Japan is to achieve the 46% emissions reduction target. Behaviors need to be actively changed as we approach 2030.

The demand-side is comprised of energy users including both companies and consumers. The goal is to prompt users, through incentives or helping to shift their values, to choose to set off on the process of decarbonization.

Good examples include companies switching the power they purchase to renewable forms of energy or individuals buying electric vehicles to replace their gas-powered cars.
Changing demand-side behavior has been for the most part absent in energy policy discussion thus far, but we have started to see a sharp increase in demand for renewable energy in recent years, particularly in the private sector. Changing demand-side behavior is also crucial in efforts to accelerate decarbonization simply because it can be achieved quicker than the other approaches.

We have done our own calculations to estimate how changing demand-side behavior can be used to further reduce emissions to meet the government’s current 2030 target—a 46% reduction from 2013 levels.

If Japan remains on track as it is now, emissions will only be reduced by 28%, falling short of the 46% target. Specifically, this case simply extends the current trendline which is based on historical data and the systems in place today.

More measures need to be taken to reach the target, prompted by changes in demand-side behavior. We estimate that emissions can be further reduced to 42% by 2030 through: changes in the energy source mix due to demand-side changes in energy choices, a five percentage point reduction; demand-side electrification as energy users switch away from fossil fuels, a four point reduction; and greater energy efficiency due to changes in how energy is used, a five point reduction.

With four points remaining until the 46% target, further breakthroughs are needed. Two such potential measures are: increases in the use of renewable energy, assuming significant changes are made in power generation mix, and greater decarbonization of thermal power supply, including the use of carbon credit trading schemes such as carbon-neutral LNG (CN-LNG).*

However, some uncertainties remain over the inclusion of credit trading calculations in each country’s emissions targets—a major point of debate at the most recent COP meeting. For credit trading to be used effectively, the international community needs to hammer out the rules to ensure the systems are harmonized internationally.

Making the leap to carbon neutrality from 2030 to 2050 will require achieving net-zero emissions across the power sector at an early stage, the second of our three key points. The speed at which this can be achieved will be crucial.

Our analysis suggests that even as progress is made in switching to renewable forms of energy, some thermal power stations will still be needed, simply from a grid-stability perspective. For the entire power generation sector to generate zero emissions, it is essential to move forward with decarbonizing the thermal power supply. We may need to start using other forms of thermal power such as hydrogen and ammonia, as well as carbon capture, utilization, and storage (CCUS) technology.

As more renewables are introduced, losses in energy due to renewable curtailment increases too—we cannot rely solely on the decarbonization of power generation. Multiple measures should be combined such as grid reinforcement, storage battery usage, and relocation of demand-side facilities. This is tangential to minimizing social costs.

The third of our key points is to foster strategic innovation. Like the net-zero power sector point, this is positioned as a requirement by 2050. Innovation in both technologies and systems will be essential if we are to become carbon neutral, and we expect materials industries like iron and steel, chemicals, and cement to prove particularly challenging.

These industries use the most energy of all the manufacturing sectors and in most cases CO2 emissions during the manufacturing processes are unavoidable. Examples include smelting iron ore using coke that is made from coal, oil refining to manufacture raw materials for chemical products, and producing clinker from coal as a cement intermediate.

To completely decarbonize these fields, radical technological innovation will be essential to transform the manufacturing processes. Strategic investment may then be needed to drive the implementation of these new processes in society.

Much work awaits both to achieve quickly a net-zero power sector and to foster strategic innovation. Hydrogen may be the answer in both cases.

Hydrogen power generation is considered a potential substitute for thermal power generation, and other applications of hydrogen show growing promise. Direct reduced iron (DRI), for example, can be produced using hydrogen as a reducing agent instead of coke. Artificial photosynthesis can use hydrogen, alongside CO2, in producing chemical raw materials . Green hydrogen is produced through electrolysis using renewable energy sources, so it is manufactured without emitting any CO2. We think that the implementation of technologies using green hydrogen in society will be crucial for Japan to both achieve carbon neutrality and maintain its competitive edge in industry.

One of the biggest challenges Japan faces in the use of green hydrogen domestically is the lack of supply capabilities across the nation. Figure 2 shows our estimates of hydrogen supply-demand structures in 2050, under a scenario that assumes a very proactive approach to hydrogen use.

We estimate hydrogen demand in 2050 at a total of around 20 million tonnes, including approximately seven million tonnes for power generation, seven million tonnes for industrial sectors, and six million tonnes for transportation (including fuel-cell electric vehicles), buildings, and other applications. This is on a par with the government’s forecasts for hydrogen demand in 2050.

On the supply side, we estimate that 15 million tonnes of hydrogen will be imported and only five million tonnes, or one quarter of demand, will be produced domestically.

We assume large-scale installation of solar and wind power equivalent to industry body targets, but even so our estimates suggest that Japan will not be able to produce enough zero-emission power for green hydrogen manufacturing. The country will have to rely on imported hydrogen to cover the shortfall, which then brings a new challenge into focus: securing an inexpensive and stable supply of green hydrogen overseas.

Japan’s energy policy is currently designed with a focus on fossil fuels (oil, natural gas, and coal) to achieve energy security, economic efficiency, and environmental sustainability, with safety as a key priority (commonly known as 3Es + S). To reach net zero, policy will shift to decarbonized technologies and fuels like hydrogen.

Attention needs to be paid to potential changes in the content of the 3Es + S from the perspective of energy security, just as caution is advised over geopolitical change.

The new paradigm of carbon neutrality is not only relevant to the energy sector. Carbon neutrality will increase the demand for a circular economy and this will have a societal impact that cannot be ignored. As the economy is decarbonized, we expect constraints on non-carbon resources to become more acute, and this may accelerate change in how societies function with a circular economy.

We anticipate major changes in all sorts of areas, with carbon neutrality driving movement of labor and the acquisition of new skill sets to match changes in industrial structures, plus the increased use of digital and smart technologies changing how we work and live.

The drive to decarbonize is now a major feature in commercial rules—the Carbon Border Adjustment Mechanism (CBAM), for example, in Europe. Reaching net zero will not be easy, but the perspectives should strive for optimism. We need to stop thinking of the necessary steps and challenges as costs and start repositioning them as investments for the future that will boost the competitiveness of industries. As we embark on this road to net zero, we can see the first signs that society is already starting to change. We also need to transform our way of thinking as soon as possible and take action so that we remain competitive.