Policy Proposals Environment and Energy Proposal on Japan's long-term growth strategy under the Paris Agreement - Business-led innovation to address challenges towards decarbonization -
In December 2015, the 21st Session of the Conference of the Parties to the United Nations Framework Convention on Climate Change (COP21) adopted the "Paris Agreement", a new international framework for global warming countermeasures, replacing the "Kyoto Protocol". The Paris Agreement invited each of the Parties to submit a "long-term low greenhouse gas emission development strategy" (long-term strategy) by 2020, looking at the second half of this century (2050 and beyond). The Japanese government also intends to formulate Japan's long-term growth strategy (long-term strategy as a growth strategy) by the G20 Summit to be held in Osaka in June this year. The process is currently underway#1.
Against the backdrop of the adoption of the Sustainable Development Goals (SDGs) as well as the Paris Agreement by the United Nations in 2015, the international community is increasingly committed to global warming countermeasures, in particular promotion of long-term and substantial reductions in greenhouse gas emissions (decarbonization#2), as can be seen in the strong international move towards expanding ESG investment, which promotes investment in companies actively incorporating in their business practices the following three principles: Environment, Social and Governance.
It is under these circumstances that Japan takes up the presidency of the G20 Summit for the first time, and it should take the lead on global warming countermeasures by demonstrating its "proactive" stance to the international community through its long-term growth strategy being formulated this time, linking efforts on global warming issues centered on innovation to economic growth and contributing to the achievement of SDGs as well as by sharing such vision and ideas with other countries.
Keidanren's stance on long-term countermeasures against global warming has been shown in a series of "Meetings on a Long-term Strategy under the Paris Agreement as Growth Strategy" and in our "Proposal for Future Global Warming Countermeasures" (October 2017). Now that the discussions at the government meetings are reaching a culmination, Keidanren will once again share our proposal on Japan's long-term growth strategy (hereinafter referred to as "long-term strategy").
1. Promotion of business-led innovation as the key to long-term and substantial reductions (decarbonization)
As pointed out in the speech by Prime Minister Abe at the World Economic Forum Annual Meeting (Davos Conference) in January 2019#3, the key to global and long-term substantial reduction of greenhouse gas emissions (decarbonization) while realizing global economic growth is the generation of business-led disruptive innovation. Through its long-term strategy, Japan should send a firm message domestically and internationally outlining its stance on innovation-based decarbonization, by developing a wide range of innovative technologies and deploying them smoothly in society through cost reduction#4.
In order to maximize the vitality of companies as key players in innovation, while maintaining and expanding R&D (research and development) and investment resources of the private sector, the government should focus on improving the investment and business environments through measures including regulatory and institutional reforms under public-private partnership#5. What is also required is the development of seamless support measures that encourage corporate efforts from initial demand generation to securing international competitiveness. Also required are strong and continuous measures to complement risks that cannot be taken solely by the private sector. Furthermore, as ESG investment expands worldwide, it is also important to ensure that companies actively engaged in innovation are evaluated and funds are made available for such companies.
In order to create innovation on a global scale, including bringing the cost of existing technologies down, it is essential to accelerate international collaboration. An effective way to do this would be to converge the world's wisdom by making use of international forums such as the Innovation for Cool Earth Forum (ICEF) hosted by the Japanese government, thereby to share common issues concerning innovation, to discuss measures for international collaboration, and disseminate them internationally.
Meanwhile, strengthening explicit carbon pricing#6, such as carbon taxation and emission trading schemes, will lead not only to a decline in economic activity and international competitiveness through a further rise in Japan's energy costs, which are already very high by international standards, but also to a reduction in R&D as well as investment resources of companies. Indeed, explicit carbon pricing measures will be a barrier to business-led innovation essential for long-term countermeasures against global warming, thus the business community has been consistently opposing such measures.
2. Realization of energy transition ensuring S+3E at a high level
About 90% of Japan's greenhouse gases are CO2 emissions from the energy sector, so global warming countermeasures and energy policies are inextricably linked. Therefore, it is necessary to develop energy policies that have achieved to the extent possible a sound balance of S+3E#7, that are in line with the "5th Strategic Energy Plan," and are based on geographical and economic features of Japan#8. Looking specifically at how to achieve long-term substantial reductions in greenhouse gases (decarbonization) while achieving economic growth, what needs to be done is first, to make further improvements on "energy efficiency" (specific measures are described in "3. Contribution to avoided emissions through Global Value Chain (GVC)"), and second, to make maximum efforts towards "energy transition" that ensures S+3E at a high level#9.
In order to realize energy transition, it is essential to promote renewable energy as the "major power source" through fulfilling the three requirements of "low cost", "stable supply" and "sustainable business"#10. What is also needed is continuous utilization of nuclear power with the prerequisite of securing safety, high-efficiency of thermal power that plays an important role as an adjustable power source, dissemination and expansion of decentralized energy sources contributing to improvement of energy efficiency and strengthening of resilience, as well as improvement of a next-generation power grid connecting all of the above. It is also expected that technological and economic challenges are solved for key technologies, such as storage batteries, hydrogen and CCUS#11, thereby making progress on their social deployment. In addition, the role played by oil during emergencies such as those caused by natural disasters in Japan needs to be carefully considered from the viewpoint of S+3E.
Furthermore, coal-fired power generation, the subject of various international discussions, is expected to play a certain role in Japan and internationally during the transition period towards full energy transition and decarbonization#12. Under these circumstances, development of advanced coal utilization technologies, and expanding them globally is likely to be Japan's contribution to global warming countermeasures for the time being. Therefore, regarding high-efficiency power generation facilities that adopt the best available technologies (BAT), it is also important to develop them internationally in emerging and other countries in compliance of the OECD rules#13 while carefully identifying international market trends among others.
On the other hand, in Japan, investment needed to advance energy transition is not circulated sufficiently to the electric power sector and the heat supply sector. If the current situation is left unheeded, the long-term substantial reductions (decarbonization) required by the Paris Agreement will become difficult to achieve, and there may also be disruptions to energy supply on which people's lives and business activities are based.
To achieve the energy transition necessary for long-term substantial reductions, the government, based on the "5th Strategic Energy Plan", is required to enhance predictability on energy supply and demand, and improve an environment that encourages private investment by promptly carrying out cost / risk analysis within "energy systems", and "scientific reviews" for flexible determination and revision of priority issues while identifying progress and feasibility of technological innovation, as well as showing the overall vision of sustainable electric power and energy systems toward the future, including clarification of respective responsibilities and norms of major stakeholders#14.
3. Contribution to avoided emissions through Global Value Chain (GVC)
With population growth and economic development in both emerging and developing countries, global greenhouse gas emissions have surged over the past 20 years and are expected to continue to rise substantially. Global warming issues are literally on a "global scale", and are not confined to one country but require global actions.
At present, companies are expanding their business activities globally and constructing value chains. Japanese companies will contribute to effective global warming countermeasure on a global scale, aiming to realize a "virtuous cycle of environmental protection and economic growth" that draws upon the growth of emerging countries, by actions to avoid emissions through the global value chain (GVC), which means the entire life cycle approach of energy saving and low-carbon goods and services#15.
Aiming to improve energy efficiency worldwide, the Japanese government should initiate a game change, in which countries compete to contribute to global reductions through market development of high-efficiency technologies and products owned by companies around the world. Moreover, to be internationally competitive, Japan must further refine technologies and products that contribute to improvement of energy efficiency, and carry out public-private collaboration for their deployment and dissemination in Japan and overseas.
At that time, the government should support contributions by the business community for avoided emissions through GVC, by working to improve the business environment for dissemination of energy-saving and low-carbon goods and services by Japanese companies including inter-governmental cooperation to establish enabling policies and systems in countries where such goods and services are extended.
These contributions to avoided emissions through GVC are considered as part of efforts leading to United Nation's SDGs, and are also considered to be working to make use of Japan's strengths. Therefore, these contributions should be launched on all fronts as a concept that constitutes a major pillar of the long-term strategy.
4. Encouraging proactive actions by companies and organizations
As mentioned above, private companies play key roles in innovation and the global value chain needed to reduce global scale, long-term emissions. As a matter of fact, Japanese companies and organizations have long been proactive in taking global warming countermeasures.
For example, the Japanese business community has been actively working on global greenhouse gas reductions and achieved proven results by making effective use of the PDCA cycle centering around the four pillars featured in "Keidanren's Commitment to a Low Carbon Society" i.e. "emissions reduction from domestic business operations", "strengthening cooperation with other parties" (reduction through product life cycles, etc.), "promoting contributions at the international level", and "development of innovative technologies"#16.
Furthermore, the adoption of the Paris Agreement and the expansion of ESG investment have prompted many companies and organizations to formulate "long-term visions" looking ahead to 2050, and the movement toward formulation is to be further expanded#17. Some of these "long-term visions" take ambitious directions, such as "with the long-term goal of the Paris Agreement in mind, a challenge to ultimately achieve ‘zero carbon steel’ by hydrogen reduction technology etc." (Japan Iron and Steel Federation), and "proposal and implementation of solutions that lead to GHG reduction from the perspectives of carbon cycle, process energy innovation and LCA, contributing widely to global warming countermeasures" (Japan Chemical Industry Association). Indeed, a major momentum centered on the business community is emerging for the realization of a sustainable society through long-term countermeasures against global warming. As Keidanren, we will aim to expand and deepen these business-led movements.
The government should make every effort to reflect the ideas shown in the "long-term vision" of these companies and organizations into Japan's long-term strategy as much as possible, and support proactive challenges for innovation by companies and organizations through, among others, improving the business and investment environments.
5. Aiming for enhanced ambition under a multiple track scenarios towards a "vision" or "goal"
(1) Mid-term target as "target", long-term goal as a "vision" and "goal"
In July 2015, ahead of the adoption of the Paris Agreement, Japan formulated its mid-term target (NDC) of a 26% reduction in greenhouse gas emissions by FY2030 as compared to FY2013 and submitted this to the United Nations. This is an ambitious target formulated through combining to the maximum extent relevant measures including the energy mix in FY2030 taking a S+3E balance, BAT, as well as the "Keidanren's Commitment to a Low Carbon Society". This should be understood, in a sense, as an international pledge, that must be achieved through concerted efforts by both public and private sectors#18.
Conversely, the "Plan for Global Warming Countermeasures", decided by the Cabinet in May 2016, has a long-term goal which "aims to reduce greenhouse gas emissions by 80% by 2050", under certain conditions#19 #20. This long-term goal towards 2050 is placed as a "vision" and "goal" indicating a direction to be aimed for, and this is clearly distinguished from the mid-term target for FY2030 as the "target" to be achieved.
The year 2050 is 31 years from now. Thirty one years ago (in 1988), we were not able to see well into the future as to where we stand now in 2019 in terms of economy, society and technology in Japan and the world. In the same way, it is extremely difficult to accurately predict where we will stand in 2050#21. If we come up with a rigid pathway by backcasting emissions caps in a linear way taking the long-term "vision" and "goal" as if they were a "target", then it may also lead to eliminating disruptive innovations that are essential for substantial reductions of greenhouse gases.
To this end, the long-term strategy being formulated this time should be positioned as a "vision" or "goal" indicating a future direction to be aimed for, to achieve "decarbonization through business-led innovation". The strategy should advocate a flexible and resilient approach in that direction, and should be clearly treated as something distinguished from the mid-term "target".
(2) A long-term goal Japan should aim for
The Paris Agreement has the "2°C target" as its long-term goal for all countries, to keep the increase in global average temperature to well below 2°C above pre-industrial levels while at the same time, it has the so-called "1.5°C target" to pursue efforts to limit the temperature increase to 1.5°C, as a goal to strive towards#22.
As mentioned above, Japan has already set an extremely ambitious goal of "80% reductions by 2050" in its "Plan for Global Warming Countermeasures". Moreover, companies and organizations in Japan have also formulated their own "long-term vision", ready to take up the challenge of developing and disseminating a wide range of innovative technologies.
From this, the long-term strategy of Japan should not compete for the level of numerical targets, but it should indicate an ambitious stance "towards goals such as the long-term goal of the Paris Agreement, mobilizing all efforts such as ‘business-led innovation’, ‘energy transition ensuring the S+3E balance’ and ‘avoided emissions through GVC’, thereby addressing the challenge of long-term and substantial reductions of greenhouse gases (decarbonization)."
At the same time, a process of "scientific review" is considered to be effective, which examines an ambitious multiple track scenarios and all options towards goals such as the long-term goal of the Paris Agreement#23. It can be said that aiming for enhanced ambition by identifying technologically and economically feasible options through scientific review and by making focused investment can be a persuasive strategy unique to Japan, as a country that places emphasis on innovation.
To ensure the success of the upcoming G20 Osaka Summit in June this year, Japan should demonstrate its leadership under public-private partnership by suggesting measures to address climate change and other myriad challenges facing the international community, and winning empathy from all countries.
The long-term strategy currently being compiled by the government will provide an opportunity for Japan to convey a message on long-term measures against global warming to the world for the first time, and to increase Japan's presence in the international community. We strongly hope that the government will incorporate the above mentioned ideas from the business community into its long-term strategy and launch the vision on the "business-led innovation to address challenges towards decarbonization" on all fronts, thereby gaining empathy and support from all countries and accelerating actions on global warming countermeasures worldwide.
The business community will continue to play a key role in innovation and global value chain, and make proactive and positive contributions not only to the long-term countermeasures against global warming worldwide but also to the wide-scale achievement of the SDGs.
- "Meeting on a Long-term Strategy under the Paris Agreement as Growth Strategy" with experts from the business community and academia was established under the office of the Prime Minister in August 2018, and discussions on long-term strategy are underway. A report on the Meeting will be compiled soon. In spring this year, a government review on formulating the long-term strategy will be scheduled based on that report.
- The "5th Strategic Energy Plan" approved by the Cabinet in July 2018 defines "decarbonization" as "a reduction in carbon emissions by reducing dependency on the use of fossil fuels, etc. in order to achieve a balance between anthropogenic emissions of greenhouse gases and amount of greenhouse gases eliminated through sinks globally in the second half of the current century".
- For full speech, please refer to the Ministry of Foreign Affairs webpage at https://www.mofa.go.jp/ecm/ec/page4e_000973.html
- Future technology trends can change significantly in an unpredictable manner. Therefore, it is important to have a perspective that leads not only to substantial emission reduction (mitigation) but also to climate change impact mitigation (adaptation) and realization of SDGs through Society 5.0 not limited to measures against global warming. This can be achieved by promoting innovation in a wide range of fields including basic technologies such as Artificial Intelligence (AI) and Internet of Things (IoT), rather than pinpointing to the technologies in specific energy and environmental fields.
- In addition to R&D, huge amounts of funding and energy has been invested in social capital stock over the past several decades, and it will take huge investment funding to replace it with the state of the art stock. The premise of these investments is sustainable growth and active economic activities.
- According to the definition by OECD, carbon pricing schemes such as carbon taxes and emissions trading which directly put a price on carbon emissions are known as "explicit carbon pricing". On the other hand, schemes such as energy taxes including petroleum and coal tax, FIT surcharge, or energy efficiency regulations including Energy Saving Act which do not directly put a price but are effective in reducing emissions are known as "implicit carbon pricing". For Keidanren's basic stance on these explicit and implicit carbon pricings, please refer to "Basic Approach toward Carbon Pricing" (October 2017) at http://www.keidanren.or.jp/en/policy/2017/077.html
- The idea of striking a balance among energy security, economy, and environment with the prerequisite of ensuring safety.
- As mentioned above, it is necessary to note that measures leading to the increase of energy cost such as strengthening of explicit carbon pricing upset the balance of S+3E through worsening economic efficiency, causing Japan to become less competitive internationally.
- According to "Kaya Identity", CO2 emissions are determined by three factors, "energy efficiency", "carbon intensity to energy", and "GDP". To substantially reduce CO2 emissions towards the future while increasing "GDP" as much as possible, it is necessary to enhance "energy efficiency" and improve "carbon intensity to energy" (energy transition).
- For specific measures, please refer to Keidanren's policy proposal in October 2018 at http://www.keidanren.or.jp/policy/2018/081.html (in Japanese) calling for acceleration of efforts for the utilization of renewable energy as the major power source.
- Carbon dioxide capture, utilization and storage. For example, it includes utilization of chemicals using emitted CO2 or methanation.
- According to the New Policies Scenario of the World Energy Outlook 2018 by the International Energy Agency (IEA), coal is expected to account for the largest source of electricity generation at 26% among the global electricity mix in 2040.
- Outline of the OECD rules on coal-fired power (arrangement on officially supported export credits): 1) In 2015, OECD agreed to grant officially supported export credits only for high-efficiency ones. 2) In the "5th Strategic Energy Plan", the Japanese government clearly states that it will support export credits by abiding the OECD rules. 3) To phase down officially supported export credits to coal-fired power in the future, OECD will review the current rules by the end of June 2019 and consider the new rules to be applied from January 2021.
- For issues concerning Japan's stagnating electric power investment in particular, Keidanren plans to compile a policy proposal in April on recognition of current issues as well as measures and designing systems for solutions to promote adequate electric power investment which supports the base of sustainable economic growth, and conduct active discussions on these issues with the national government and others concerned.
- Keidanren published a concept book on contribution to avoided emissions through GVC in October 2018 and carrying out a public relations drive to convey its ideas and case studies both domestically and internationally by using opportunities such as COP.
- "Keidanren's Commitment to a Low Carbon Society" is positioned as the main measure to achieve mid-term target (reduction target by FY2030) in Japan's Nationally Determined Contribution (NDC) submitted to the United Nations and in the "Plan for Global Warming Countermeasures" decided by the Cabinet in May 2016. Therefore, the business community will proactively and actively continue to contribute to achieve Japan's mid-term target.
- In October 2018, Keidanren called on its member companies and organizations to look into formulating a "long-term vision" up to 2050 and provide relevant information. As of 1 March 2019, more than 250 companies and organizations have announced that they have already formulated (69 companies and organizations), or are in the process of formulating (189 companies and organizations) a "long-term vision". Keidanren is actively disseminating information on actions by Japanese companies and organizations regarding the "long-term vision" through its website at http://www.keidanren.or.jp/en/policy/2019/001.html
- In the "Plan for Global Warming Countermeasures" (Cabinet approval in May 2016), mid-term target (reduction target by FY2030) is regarded as "something we must steadily achieve", and concrete measures to be taken by respective actors such as government, companies and citizens are mentioned. The mid-term target is positioned as the "target" to be achieved.
- Three conditions: 1) under a fair and effective international framework applicable to all major Parties, 2) leading international community so that major emitters undertake emission reduction in accordance with their capacities, and 3) pursuing global warming countermeasures and economic growth at the same time.
- According to the simulation analysis by the Research Institute of Innovative Technology for the Earth (RITE), the CO2 marginal abatement costs were estimated to be around $6,000/t-CO2 and annual costs of mitigation from BAU were JPY 43-72 trillion for Japan's target of 80% reduction in 2050 even if technically feasible solutions exist.
- This would be like asking people in 1988 to what extent they could forecast the global spread of smartphones and the internet today.
- In October 2018, IPCC's special report "Global Warming of 1.5°C" was publicized. The report points out that limiting warming to 1.5°C will mitigate various impacts of climate change such as sea level rise. In the modelled pathways presented in the report limiting global warming to 1.5°C, global net CO2 emissions decline by 45% from 2010 levels by 2030, reaching net zero around 2050. It is stated that the total costs, however, would be roughly 3-4 times higher than the 2°C target, suggesting that these pathways would be extremely difficult in reality. Although COP24 mentioned the word "welcome" with regards the completion of the report, the word "welcome" was not used for the report itself. Therefore, there is still no international consensus on raising the ambition of each country based on the "1.5°C target" beyond a mere non-binding target.
- The "5th Strategic Energy Plan" mentions that Japan will start by focusing all of its efforts on the steady realization of the 2030 energy mix. For 2050, the Plan shows the directions to pursue an ambitious multiple track scenario and possibilities in all options since there is plenty of uncertainty in the process of energy transition and decarbonization including disruptive technological innovation.