Transition strategy toward carbon neutrality
Mizuho Industry Research
June 14, 2022
Global carbon neutrality efforts are entering a new phase. The November 2021 COP26 agreement, signed by nearly 200 countries at the UN Climate Change Conference in Glasgow, reaffirmed the 2015 Paris Agreement goal of limiting the increase in the global average temperature to 1.5°C. This international agreement, coupled with the ongoing crisis in Ukraine that is constraining global access to energy resources, is pushing nations to rethink their green policies. The EU, in particular, is reevaluating its dependence on certain LNG sources.
This report from Mizuho’s Industry Research Department reflects on the evolution of the EU’s green policies over the past decade and highlights potential implications for Japan as it maps out its own transition strategy.
For many years, the EU has faced the challenge of balancing green policies with growth strategies while creating a public-private financing scheme to support transition efforts. In support of these efforts, and against the backdrop of an escalating war in Ukraine, it announced the “REPowerEU” policy in March 2022. The policy was updated in May with specific action plans to accelerate green energy initiatives and reduce dependence on imported fossil fuels.
While there is a lot for Japan to learn from the EU, the two economies face quite different situations with regard to the availability of renewable energy sources and energy security requirements. Instead of mimicking the EU, Japan needs to develop its own transition strategy that fits the reality of its region and industries.
Specifically, it needs to (1) reconfigure its energy mix to achieve both carbon neutrality and economic growth; (2) support innovation, including collaborative efforts within Asia; (3) align policies and financial schemes to support the transition efforts of its various industries; and (4) draft an overarching strategy for Japan to promote green policies in a consistent and coordinated manner. Finally, continued efforts will be required on the corporate side to upgrade transition strategies and accommodate the ever-changing carbon neutrality trends in an increasingly-uncertain world.
Chapter I describes recent green policy developments in the EU, including the 2019 Green Deal and the impact of Russia’s war in Ukraine.
- Background and issues: The challenges the EU faces can be broken down into three areas: (1) integrating green policies into growth strategies; (2) combining public and private sources to meet enormous financing needs; and (3) providing public support for the transition of so-called “brown” industries. The Green Deal aims at addressing these challenges and strengthening industrial competitiveness by improving energy self-sufficiency within the region.
- Overview and key points of the Green Deal: Within the context of the three aforementioned challenges, the EU’s Green Deal promotes “greenization” by combining comprehensive GHG regulations and support schemes with sector-specific efforts focused on certain technologies.
- Impact of the war in Ukraine on EU policies: As underlined by the recent “REPowerEU” policy and other developments, the war in Ukraine has compelled the EU to rethink its reliance on LNG. However, rather than delaying the phasing-out of coal power, the EU is trying to accelerate the introduction of green energy sources.
Chapter II analyzes the impact of the EU’s green policies on Japan.
- Green policy development in Japan: Although the immediate impact to Japan is limited, over the medium- to long-term the crisis in Ukraine will put Japan in a difficult policymaking position. In May 2022, the Japanese government announced a milestone review of its clean energy strategy and presented a policy package for achieving 2030 and 2050 zero-carbon goals. However, it remains to be seen how the package will translate into specific policy actions and measurable outcomes.
- Similarities and differences between Japan and the EU: While Japan is similar to the EU in that it imports a large portion of fossil fuels and mining products, it lags behind the EU in terms of the development of renewable energy sources. While the EU can improve energy self-sufficiency by expanding the use of these sources, the situation is different in Japan.
- What Japan can learn from the EU’s policies: The report analyzes the direction Japan should take with respect to (1) energy policy; (2) industrial policy; (3) transition policy; and (4) grand strategy. For each category, the report looks into general considerations for the country as a whole and specific considerations for each industry.
What Japan should strive for: Given the geographic hurdles for promoting carbon neutrality in Japan, a holistic strategy is essential for the nation to align sectoral efforts based on a realistic energy policy. In this respect, Japan can learn a lot from the EU’s approach of developing a comprehensive policy package.
Transition strategy must be scientifically explainable: While Japan’s transition roadmap is based on a realistic outlook on technological development and implementation, further efforts need to convince overseas investors of Japan’s relevance to international efforts. Japan needs to present a clear, comprehensive strategy as well as sector-specific strategies – all supported by scientific evidence – to show that its GHG reduction paths are in alignment with the 1.5°C scenario.
Companies need to continue updating their transition strategies: To obtain necessary support from the government, investors, financial institutions, and other stakeholders, Japanese companies need to demonstrate that they are making efforts in alignment with the 1.5°C goal. Plus, they need to show how these efforts are integrated into their medium- to long-term growth strategies for corporate value.