Social and Economic Impacts of Carbon Neutrality in 2050

The invasion of Ukraine in February 2022 drove a sharp rise in global energy prices and brought the issue of energy security to the center stage once more. Countries across Europe have embarked on measures to address energy security, including diversifying suppliers, building up coal stores, and filling out natural gas reserves. Yet Europe is not just returning to fossil fuels. The region is working to make its energy more self-sufficient by accelerating the uptake of renewable energy and energy saving solutions; the shift toward longer-term decarbonization is in fact becoming the norm.

Globally, over 130 countries have pledged to become carbon neutral and these pledges are now being incorporated in actual business rules. Carbon neutrality will be a driver of significant structural change across society and its impacts need serious consideration—Japan is no exception.

A number of scenarios can be envisioned for reaching carbon neutrality. All require the maximum possible introduction of renewable energy, plus energy saving and electrification on the demand side, and will result in enormous change from the current energy supply-demand structures. In terms of the power mix, to ensure power supply and demand balancing capability to support the large-scale adoption of renewable energy, thermal power supply will have to be decarbonized as well, for example through a switch to hydrogen or ammonia fuels. The scenarios differ in the amounts of and costs for reductions to greenhouse gas (GHG) emissions. A combination of behavior changes and technological innovation will be essential to ensure a smooth transition to carbon neutrality.

Japan can become more energy self-sufficient through increased use of renewable energy. However, decarbonization will require more assets such as power lines, renewable energy equipment, and storage batteries. These are built with specific resources, some of which are mainly found outside Japan and in some cases in countries governed by authoritarian regimes. The markets for these materials, more so than for fossil fuels, tend to be oligopolies. Heavily reliant on other countries for assets needed in solar and wind power generation, Japan will see increased economic security risk as it transitions to carbon neutrality. Resource circulation and a circular economy will become paramount.

Decarbonization is poised to provide Japan’s economy with positive effects on a national level. However, the spread will not be uniform. For example, power generation and electric equipment industries will expand but conventional automotive industries will contract; industrial structure will change significantly. A smooth transition to a decarbonized society will be based on a shift of employment into those industries in demand, with workers executing their roles in new fields. Human resource development must follow suit, taking a long-term approach to cultivate the technical and creative prowess needed for growth industries during decarbonization, such as digital talent. To minimize the negative effects of higher consumer prices, including electricity, on personal finances, the government will have to address the major challenge of how to spread the burden fairly.

Gray rhino is a term to indicate something that is very likely to occur and has large effects despite often being overlooked. The data explosion already unfurling across the world is a gray rhino. As data volumes increase exponentially due to the digital transformation of society, technology needs to keep evolving so that the corresponding increase in energy consumption can be offset. Distributed system architecture needs to encompass data transmission and power generation, for example by matching additional electricity demand arising in a given region with regional power supplies such as renewable energy.

There are also concerns over how climate change will intensify storm and flood damage, plus the likelihood of megathrust earthquakes on the Nankai trough and beneath Tokyo. Japan needs to move forward with decarbonization on the assumption that such natural disasters will happen. Decarbonization of combustible energy sources, which can be easily stockpiled and transported, is an important and meaningful during both day-to-day normalcy and extraordinary emergency.

Carbon neutrality will have far-reaching consequences for Japan’s society and economy that will spread beyond energy-related industries. As we move toward carbon neutrality, rising demand for resources will bring new geopolitical risk and changing industrial structure will have a direct impact on employment policy. An excessive rise in energy demand due to the data explosion could also hamper both carbon neutrality and digital transformation. These issues are beyond the scope of traditional vertically organized industry and government bodies. Japan must implement programs with a transdisciplinary approach.

Japan faces numerous hurdles on the road to carbon neutrality: its current industrial structure sees manufacturing account for a relatively high share of GDP, much of the country’s energy coming from thermal power generation, a lack of domestic zero-carbon energy supplies, few locations suitable for renewable energy, and frequent major natural disasters. But other countries are tackling similar challenges head on. Overcoming these obstacles will set Japan on the road to new business opportunities and competitive capabilities, and also position it to help other countries become carbon neutral. While the world has experienced a number of setbacks on the road to decarbonization, it is poised for irreversible progress over the medium and long term. Rather than being passive in the face of these waves of change, stakeholders in industry, government, and academia should work together to turn the social changes driven by decarbonization into a new competitive edge for Japan’s industries.