Four Scenarios for a Carbon Neutral Japan

30 November 2022

Japanese version: 1 August 2022

Ryusuke Shida
Center for Policy and the Economy


  • The shift toward carbon neutrality is becoming the norm despite ongoing energy-market turmoil
  • Carbon neutrality will have far-reaching consequences beyond energy-related fields
  • Behavior change and technological innovation are both prerequisites for a smooth transition

Shift toward carbon neutrality sets in despite invasion of Ukraine

Global energy markets are currently experiencing unprecedented turmoil.

In mid-2021, fossil fuel prices reached historic highs as economic activity resumed after the pandemic and upstream investment in resource development stalled with the wave of change toward decarbonization. The trend was further fueled by Russia’s invasion of Ukraine in February 2022. West Texas Intermediate crude oil reached $130 a barrel in March 2022, the highest since it peaked in 2008, and prices for natural gas and coal continue to grow.

High energy prices impact prices for everything else, too—so much so that since March 2021, energy prices have constituted 40 percent of the rises in average consumer prices in Japan, the U.S., and Europe.

The invasion of Ukraine has been a reminder that old notions of energy security are still important. For example, to reduce its dependency on Russia for energy, Germany is looking at diversifying what it buys, including LNG, and building up national reserves of coal and natural gas. The UK also has a renewed awareness of how important its oilfields in the North Sea are.

Growing awareness of energy security does not signify a return to fossil fuels. The European Commission’s March 2022 REPowerEU1 plan to rapidly reduce dependence on Russian fossil fuels suggests that a clean transition, including switching to renewable energy sources, will provide greater energy self-sufficiency for EU member states.

Our conclusion is that the invasion of Ukraine has further entrenched the trend toward decarbonization over the medium to long term. Countries are revising their energy strategies with their sights on decarbonizing and ensuring energy security in tandem.

Four pathways through to 2050

The wave of change towards decarbonization is getting stronger all around the world. We have looked at what course Japan needs to steer through its energy policies, given the ongoing turmoil in energy markets. We have developed four possible scenarios for the future as Japan works to reach the government’s target of carbon neutrality in 2050, based on behavior change on the demand side and technological innovation on the supply side (Figure 1).
[Figure 1] Four scenarios for future carbon neutrality
Four scenarios for future carbon neutrality
Source: Mitsubishi Research Institute, Inc.
The demand side consists of energy users, both companies and consumers. Behavior change here aims to prompt users, using incentives or support for a shift in values, to choose to begin decarbonization. This could include switching the type of energy purchased or changing equipment used, as well as rethinking energy use, saving electricity and conserving energy.

In scenario 1, there are no breakthroughs in behavior change or technological innovation, and Japan continues along its current trajectory with a gradual decrease in emissions through 2050; it does not achieve carbon neutrality.

In scenarios 2 and 3, breakthroughs are achieved in behavior change and technological innovation respectively. In scenario 2, the goal is to achieve carbon neutrality through concerted efforts to change energy use by the demand side, which leads to reduced energy use, resource use, and consumption.

In scenario 3, the goal is to achieve carbon neutrality through technological innovation on the supply side that makes energy saving and electrification the logical decision.

Finally, in scenario 4, Japan reaches carbon neutrality through both behavior change and technological innovation.

Carbon neutrality will have broad societal and economic impact

We examined what changes will be common among all four scenarios through three perspectives. Using our TIMES-based* proprietary energy supply/demand model and an economic model (future input–output table), we quantitatively envisioned (1) energy supply-demand structures, (2) economic security, and (3) industry, employment, and personal finances.

*The Integrated MARKAL-EFOM System (TIMES) model is a framework developed by the International Energy Agency (IEA) and used by numerous research bodies. The model generator uses linear-programming to produce a least-cost energy system, optimized according to a number of user constraints, over target time horizons

(1) Impact on energy supply-demand structures

As we approach carbon neutrality in 2050, energy supply-demand structures will be very different from today, but our analysis of scenarios 2, 3, and 4, where carbon neutrality is achieved, uncovered some common themes.

First, decarbonized energy accounts for 70–80 percent of the primary energy supply in these scenarios. They result in substantial progress in energy saving and electrification on the demand side: halving in final energy consumption and a doubling in electrification rates versus current levels.

Our analysis shows that thermal power supplies would still account for 30 percent, even assuming increased use of storage batteries and expansion of the electric power system in the energy generation mix. Thermal power itself must be decarbonized, through technologies such as hydrogen and ammonia, to mitigate potential setbacks to carbon neutrality.

Any scenario reaching net zero features maximum possible introduction of renewable energy, a resulting conservation of energy and electrification on the demand-side, and decarbonization of thermal power.

(2) Impact on economic security

With a lack of fossil fuel resources, the rise of decarbonized energy will help make Japan more energy self-sufficient, for example through renewable energy and nuclear power. However, Japan is heavily reliant on other countries for the materials needed to build renewable-energy equipment including solar and wind power. It needs to better its technology self-sufficiency through a larger proportion of domestic procurement.

Another crucial factor is that these resources, the backbone on which new power lines, renewable energy, and storage batteries are predicated, tend to be available only in certain geographic regions, many of them under the control of authoritarian regimes. The markets for these resources, more so than for fossil fuels, also tend to be oligopolies. Risks will arise at differing times for energy, equipment, and resource supplies. Thus we need to think about economic security from new perspectives as we work to decarbonize.

Some prices for metal resources surged after the invasion of Ukraine. If resource constraints emerge as we transition to carbon neutrality, economic circularity is likely to gain importance as well.2

(3) Impact on industry, employment, and personal finances

The shift to carbon neutrality will also have major impacts across industry. Based on Waseda University’s future input–output table, Figure 2 shows the difference between scenarios 1 and 4 in value added by industry category.
[Figure 2] Change in value added between scenario 1 and 4
Change in value added between scenario 1 and 4
Source: Estimates by Mitsubishi Research Institute, based on the Input–output table for analysis of next-generation energy system for 2015 from the Institute for Economic Analysis of Next-generation Science and Technology and Advanced Collaborative Research Organization for Smart Society (ACROSS) at Waseda University.
As a whole, decarbonization should affect Japan’s economy in a positive way. Effects will, however, not be uniform: some industries will expand; others, unavoidably contract.

Electric power* is one of the industries that will expand. The negatives of less thermal power will be outweighed by the positives from renewable and hydrogen power generation. We expect substantial ripple effects on: the installation of new transmission facilities and equipment for the existing grid, the installation of solar and wind power facilities and equipment, and the manufacture of needed components.

The automotive industry is an example of an industry that will unavoidably contract. While there will be positive ripple effects from the switch to electric and fuel-cell vehicles, this will be outstripped by the negative impacts on existing car manufacturing, automotive parts, and automotive internal combustion engine businesses, which will produce a significant downturn in value added. As well as differences in impacts between industries, we will also see differences in growth and contraction by businesses within the same industry.

Employment will also be affected by the changes in industrial structure. We assume labor demand will rise in growth areas while declining in some older businesses.3 The Japanese workforce will therefore need to embrace lifelong learning aimed at equipping themselves with the skills needed in growth industries. A seamless shift in human resources to growth industries is also a prerequisite for carbon neutrality.

In addition, we cannot overlook the impacts on personal finances. Our estimates show a high probability of higher electricity rates in all scenarios: decarbonization will trigger a significant rise in capital costs from investment in new facilities, and they will outweigh the lower costs from reduced fossil fuel imports and cheaper renewable energy. To minimize the negative effects on personal finances from higher electricity rates and thus higher cost of living in general, the government will have to address the major challenge of spreading the pain fairly across all social stratum.

*Broader scope than the standard industry classification of electricity businesses because here electric power-related industries include construction and facility production etc.

Behavioral change and technological innovation both prerequisites

While all four scenarios do share common elements, they are in no way short of big differences either.

Scenario 4, the combination of behavior change with technological innovation, generates synergies for emissions reductions, the typical focus of any discussion on carbon neutrality. It has the highest percent-reduction in greenhouse gas (GHG) emissions at 90 percent below 2013 levels, before even taking into account activities for negative emissions like afforestation, reforestation, and CCUS (Figures 3-6).

Cost is another extremely important element for a smooth transition to carbon neutrality. Lower costs for society mean companies and consumers are not overly burdened. A comparison of the average cost of reducing emissions shows that scenario 4’s two-pronged approach is the cheapest. Our analysis therefore shows just how important it will be to combine behavior change with technological innovation to reach carbon neutrality.

Behavior change and technological innovation are twin prerequisites, but we expect behavior change to generate results earlier than technological innovation, so we think Japan should prioritize programs to promote behavior change from the very start.

Behavior change will be essential to achieving the Japanese government’s ambitious 2030 target of a 46 percent reduction in GHG emissions versus 2013 levels. The key lies in behavior change in a wide range of fields, such as shifts in employment and a transition to a circular economy driven by the resource constraints discussed above.

We recently published a report with a detailed proposal for how Japan can achieve carbon neutrality.

Behavior change and technological innovation are both prerequisites for a seamless transition to carbon neutrality. We hope the structural changes needed will be transformed into new opportunities for Japan, as we move steadily along the path to longer-term decarbonization.

Works Cited:

1European Commission (2022) "REPowerEU Plan" (Accessed: 11 November 2022)

2Ukai & Arai (2021) "Carbon Neutrality Will Accelerate a Circular Economy" MRI Monthly Review —in Japanese

3Santo (2022) "Career Evolution Models for the Digital and Green TransformationsMRI Monthly Review