Carbon Pricing in Japan: A policy perspective

Carbon pricing, a scheme that puts a cost burden on carbon dioxide emitters, is coming to Japan too. In February 2023, the Cabinet approved the Basic Policy on Green Transformation (GX*), and on May 12 the Diet passed the GX Promotion Act (formally, Act for Promoting a Smooth Transition to a Decarbonized Growth-Oriented Industrial Structure; translation tentative). As a first step, Japan will now be moving ahead with the development and deployment of technologies to achieve carbon neutrality by 2050. The effort will be funded by GX Economic Transition Bonds (“Transition to a Decarbonized Growth-Oriented Industrial Structure Bonds”) to be issued over the coming decade to the tune of some ¥20 trillion.

To secure the transition bonds’ principal, Japan will begin full-scale implementation of a voluntary emissions trading scheme in fiscal 2026, before instituting fossil fuel (i.e., carbon) levies in 2028 and then auctioning carbon-emission allowances to power generators in 2033.

The pricing scheme is intended to support the transition to carbon neutrality by steering capital to where it’s needed most. However, we need to explore whether carbon neutrality can indeed be achieved under the scheme. It is currently designed with a ¥20 trillion limit on GX Transition Bonds to cap the carbon levy so it does not bring additional costs associated with energy policies to taxpayers.

There are still numerous hurdles over the short and medium term to making commercially viable technologies for electrification and for manufacture and use of hydrogen, prerequisites for carbon neutrality. From totaling up emissions reductions measures based on scale, deployment costs, and timing, we estimate that a some ¥70 trillion in government support* will be needed up until 2050, and this is premised on maintenance of FIT and FIP programs^† (see figure). And we forecast the need for assistance ballooning as deployment of new technologies picks up around 2030.

Japan’s taxpayers will inevitably have to pick up more of the tab if government assistance for decarbonization hits the ¥70 trillion level. And further, analysis suggests that the carbon pricing scheme could well wind up systemically skewed to be hardest on small emitters in the consumer and industrial sectors*, though this depends on the scheme’s final design.

We therefore believe that, to bolster the scheme, consensus needs to be built upon debate which, along with carefully discerning how much of the costs everyday consumers and businesses can bear, addresses head-on the best way to distribute decarbonization costs fairly across economic and business sectors.

Our analysis posits scenarios on the way to carbon neutrality in 2050 that, while referencing the government’s technology development roadmap, envision ultimately recovering and eliminating CO2 from difficult-to-electrify heat-intensive industrial processes, by firing them with hydrogen or synfuels from abroad, to reach carbon neutrality by 2050. In reality, though, these are not the only viable scenarios, as ones envisioning other means are also possible.

Japan’s search for the optimum path to carbon neutrality is just getting started. People tend to focus on the massive amounts of money needed and on the development and deployment of the most advanced technologies; but in the end, these are not the most crucial elements of the undertaking. Rather, what Japan needs to do is identify winner domains—ones where it can overcome the rise in energy costs and prevail—and focus investments in those areas if it is, especially in the context of increasingly intense international competition, to ensure that green transformation-oriented government investment leads to economic growth.