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Report author Lorenzo Sani, Associate Power Analyst said: “Now is the time for the Japanese government to move away from inefficient and costly coal-ammonia co-firing and embrace carbon pricing as a means to deliver a faster transition to renewables and reduce emissions. Renewables, including offshore wind, would bring benefit to the whole Japanese economy by reducing energy prices, increasing energy security, and protecting Japanese exports from the impacts of potential carbon border adjustment mechanisms being considered in the EU and USA”.

Mr Kenichi Ishida - Executive Advisor at the Japan Climate Leaders Partnership (JCLP) – and member of the subcommittee on carbon pricing at the Ministry of Environment said: “As a corporate coalition aiming for decarbonization, JCLP believes that the introduction of carbon pricing, which benefits both companies and consumers by reducing CO2 emissions, is necessary to achieve the NDC by 2030. This report shows that effective carbon pricing can accelerate the transition from fossil fuels to renewable energy, prevent national wealth drain from fossil fuel imports, and contribute to stable electricity prices. What we need now is the political will to make it happen.”

Political will is vital to make the required policy changes happen

LONDON 26 OCTOBER Amidst an energy crisis and a power supply crunch, today the Japanese power sector is experiencing unprecedented stress owing to its deep dependence on fossil fuels. The country, in addition to adopting a 2050 carbon neutrality target has recently subscribed to a G7 pledge of achieving a predominantly decarbonised power sector by 2035, but Japan’s current policy framework is insufficient to deliver this goal and a significant acceleration in renewables deployment is required.

The new report from Carbon Tracker, ‘Put a Price on It’ finds that the current carbon price of $2.6/tonCO2 must be replaced with a minimum price of at least $30/tonCO2 to prevent gas to coal switching and drive clean energy transition.

‘Put a Price on It’ finds a transition to renewables could decouple Japan from its history of high electricity bills, bring lower prices, increased stability, and greater energy security to Japanese consumers. To achieve this, we show that Japan must increase carbon pricing to a minimum of $30/ton_CO2, while immediately closing existing loopholes that allow green funds to be diverted to unproven and inefficient “clean” fossil fuel technologies such as carbon capture and ammonia co-firing.

Regardless of a recent increase in the country’s 2030 renewables share target, Japan’s current level of ambition still falls short of what it could achieve. The country is too slow at deploying new renewables, while technical and regulatory obstacles keep the price of building wind and solar capacity among the highest in the world.

Figure 1: Japan has some of the highest construction costs for renewables in the world

Source: Carbon Tracker (2022)

The Japanese government is currently in the process of reviewing its existing carbon pricing mechanism. With this report we aim to contribute to current and future discussions by illustrating the impact carbon pricing could have on the Japanese power sector, both over the short- and long-term. In ‘Put a Price on It’ we model three different carbon pricing scenarios ($30, $60 & $80/ton_CO2) to understand the impact of different ambition levels. We find $30/ton_CO2 is a minimum starting point to ensure the effectiveness of the measure.

Figure 2: Carbon pricing can shift the economics towards renewable generation

Coal and Gas operating costs in mid pricing scenario ($60/ton_CO2) vs projection of renewables LCOE, Carbon Tracker (2022)

Report author Lorenzo Sani, Associate Power Analyst said: “Now is the time for the Japanese government to move away from inefficient and costly coal-ammonia co-firing and embrace carbon pricing as a means to deliver a faster transition to renewables and reduce emissions. Renewables, including offshore wind, would bring benefit to the whole Japanese economy by reducing energy prices, increasing energy security, and protecting Japanese exports from the impacts of potential carbon border adjustment mechanisms being considered in the EU and USA”.

A minimum carbon tax of $30/ton_CO2 increasing to $60/ton_CO2 by 2025 would remove the business case for continued investment in coal generation while reducing dramatically the window of opportunity for gas power plants. In only five years’ time, the role of gas plants as baseload and flexibility providers can be replaced at a saving by renewables and battery storage.

The impact of carbon pricing will not be limited to increasing costs for coal and gas plants. By reinvesting the proceeds from a carbon price of $60/ton_CO2, the government could build more than 10 GW of new renewables annually. This would accelerate cost reductions and allow Japan to take advantage of its vast offshore wind resources. The impact could be further multiplied by attracting private capital through expanding the existing support scheme for renewables.

Replacing imported fossil fuels with domestically produced renewable energy could immediately have a positive impact by reducing the import bill for fossil fuels and bringing down electricity costs over time.

The analysis, in the midst of a global energy crisis, shows once more that solar and wind can provide a secure, reliable and affordable power system free from exposure to global commodity and energy crises. Carbon pricing can be a key tool to deliver this transition in a fast and efficient way.

Mr Kenichi Ishida – Executive Advisor at the Japan Climate Leaders Partnership (JCLP) – and member of the subcommittee on carbon pricing at the Ministry of Environment said: “As a corporate coalition aiming for decarbonization, JCLP believes that the introduction of carbon pricing, which benefits both companies and consumers by reducing CO2 emissions, is necessary to achieve the NDC by 2030. This report shows that effective carbon pricing can accelerate the transition from fossil fuels to renewable energy, prevent national wealth drain from fossil fuel imports, and contribute to stable electricity prices. What we need now is the political will to make it happen.”

Methodology

Carbon pricing can be a powerful tool to accelerate the transition to renewables in the Japanese power sector, raising the funds necessary to deploy renewables at scale, while permanently reducing dependency on imported fossil fuels. However, current policies and energy targets in Japan are not aligned with the country’s climate objective to achieve a predominantly decarbonised power sector by 2035.

In this report we have combined and updated the results of our asset-level coal and gas models and analysed the impact that different carbon pricing scenarios can have in accelerating the energy transition in the Japanese power sector. In previous research^[1]^–[2], we have highlighted the financial risks for Japan of continued reliance on gas and coal power generation.

Once embargo lifts the report can be downloaded here: https://carbontracker.org/reports/put-a-price-on-it/

To arrange interviews please contact:

Joel Benjamin Jbenjamin@carbontracker.org +44 7429 637423

Dan Cronin dcronin@carbontracker.org 1-617-678-5263

About Carbon Tracker

The Carbon Tracker Initiative is a not-for-profit financial think tank that seeks to promote a climate-secure global energy market by aligning capital markets with climate reality. Our research to date on the carbon bubble, unburnable carbon and stranded assets has begun a new debate on how to align the financial system with the energy transition to a low carbon future. www.carbontracker.org