Listening to Key Persons: The Path to Green Growth - What Strategy Should Japan Adopt? (Chapter 1)

Diverse initiatives are currently underway to establish a carbon neutral society, but a mountain of problems that require innovation lie in the way of achieving it. In the series, Listening to Key Persons, Tatsuya Yamada, a Hitachi, Ltd. official in charge of policy proposals and new business development, asks experts and workers in the field about how they view the current situation surrounding the issues that need to be overcome to build a carbon neutral society and how they are moving toward solutions to them.

In this second part of “Listening to Key Persons” series, we invited Sumiko Takeuchi, who serves as co-representative of U3 Innovations LLC and director at the International Environment and Economy Institute, as an expert in energy and measures to combat global warming. Ms. Takeuchi is active on numerous various expert panels, committees and other bodies related to carbon neutrality, including the Green Innovation Strategy Meeting promoted by the Japanese government, and has been extensively involved in research and advocacy in the field. Mr. Yamada asked Ms. Takeuchi wide-ranging questions about how we can promote green promotion, the strategies for achieving it, and the future roles of energy providers and the energy industry.

In the first part, the discussions focuses on the Green Transformation (GX) Implementation Council which held its first meeting in July 2022, touching on the topics of the stable supply of energy, energy security, and how Japan's energy policy is at a crossroads.

Energy policy needs to look decades ahead

Yamada：Right now, the stable supply of energy has become an urgent issue in light of sharply rising crude oil prices due to the situation in Ukraine, and the shift away from Russian energy sources. How should Japan tackle this going forward?

Takeuchi：Just the other day (July 27, 2022), the first meeting of the GX Implementation Council^*1 was held at the Prime Minister's Office, and I also took part as a member of the council. I noted that in order to promote GX, it is extremely important that we first rebuild the foundations of stable energy supply and energy security. Due to an uncertain outlook for the demand of electricity, climate change, electricity deregulation and other factors, it has become difficult for energy suppliers to make investment decisions. Since deregulation and policies to expand renewable energy are being promoted simultaneously, issues such as the rapid shutdown of thermal power generation and prolonged shutdown of nuclear power generation have been neglected, but now those issues have come to the fore, and we have been undeniably ill-prepared to manage those risks.

Over the last dozen or so years, Japan and many other developed countries have pivoted too far towards the environment in the context of energy policy, on the premise that the policy structure of Western countries will continue in a stable fashion. While the environment is extremely important, a major issue to reflect on is how we have neglected to pay attention to stable supply, security and economics. Policies aimed at GX and carbon neutrality are themselves no longer sustainable.

However, GX is a major change that is even greater than the Industrial Revolution, and the transitional period will be longer than most people expect. In other words, initiatives need to be pursued on a timescale of decades. That is something that needs to be kept in mind.

Yamada：As you mentioned, we manufacturers often consider time on the scale of a fiscal year of the three years of a mid-term management plan, but electric power utilities and other energy suppliers consider decade-long capital investments, so they need to think in ten-year increments.

Takeuchi： That's right, and from the perspective of shifting infrastructure, a decade is not far into the future at all, it may as well be tomorrow.

Yamada：The government has declared its Nationally Determined Contribution (NDC) of reducing greenhouse gas emissions by 46% by the year 2030 from their fiscal 2013 level, and the goal of achieving carbon neutrality by 2050, but from the standpoint of electric power companies and other energy suppliers, if they can't see a path forward at this stage, it is going to be hard to achieve.

Takeuchi：The question is whether the power sources in 2030 are already in use now, or are under construction. Electricity accounts for around 30% of all energy, and while there are initiatives on the demand side, the NDCs aim to almost halve reduction of CO₂ emissions, something that has never been seen before.

What is the role and vision of the GX Implementation Council?

Takeuchi：I think it is commendable that this council was given the name "GX" (green transformation). The aim of carbon neutrality and decarbonization is to reduce CO₂ emissions. But there is no direct line to CO₂ reductions making people feel happier. Undoubtedly we need to remedy the unfairness of the situation where emitters win by ignoring external diseconomies^*2. However, to transition to a sustainable society, I think it is necessary to create added value.

I see the creation of added value as the main purpose of GX. Just as DX is not merely about using digital tools but instead seeks to make people happier by improve efficiency with IT, engaging in more productive work, transforming work and consequently giving people more free time to spend with their families, the purpose of GX should be to create a sustainable society in which people can live in happiness. I also mentioned at the GX Implementation Council that the creation of added value should be a focus.

To achieve that, the first thing we need to discuss is the rebuilding of energy, which is currently undergoing a liquefaction under our feet.

I think there are three powers that will propel us towards carbon neutrality.
The first is the power of regulation. Regulations that have coercive force are highly effective. For example, if you make a rule that only cars with odd-numbered license plates can drive on odd-numbered days, it would significantly contribute to lower CO₂ emissions, but would also be inconvenient and reduce productivity.
Sometimes ill-conceived regulations can run counter to the efficient allocation of resources. As regulations can be a double-edged sword, we must be careful about using them.

The second is the power of capital. Funding is the lifeblood of society, and as exemplified by ESG investment and divestment by pulling funds away from thermal power generation, it can play a major role in social change.
However, if you try to change society through the power of funding in the absence of alternative technologies it can cause distortions. For example, even though there are no alternate technologies with which to replace thermal power generation, if you simply pull funds away from that sector, you will only lose the means to produce electricity. If you accept that we cannot lead our lives without electricity, investments in thermal power generation could become risk money, and only have the effect of increasing costs for consumers. It is only when an alternative technology is in place that the way funds are provided becomes meaningful.

Given this, I believe the likely winner in this discussion is the third - the power of products and services. This could also be described as the power of technology, but when you use the word "technology," in Japan it immediately conjures up the image of "technological development," so I express it in terms of products and services. The balance between the environment and the economy will also become possible when we acquire cheap and stable low-carbon energy technologies instead of the energy we use now. Energy is always a means to an end, and CO₂ is the result of our activities. Just as few people decide on what to eat for dinner with concern for the waste it will generate, there are limits to what you can compel people to do even if you tell them to change their behavior with the resultant CO₂ emissions in mind. Instead, we need to create products and services with proper added value whose usage ends up reduces CO₂ emissions.

Yamada：So you mean that differs from technological innovation.

Takeuchi：Yes. It differs from the general impression we have of innovation. We don't need the kinds of technologies that appear in a fictional world like Doraemon. The things used in the infrastructure that supports people's lives are technologies that have been well used and verified, have lower costs and are both stable and reliable, and these are goods and services. While we often imagine technological development when we mention innovation, the process of tapping into existing technologies, thoroughly lowering costs and seriously improving convenience and stability are very important.

Yamada：At the first meeting of the GX Implementation Council, it was mentioned that within the year, a schedule for making investments to the tune of 150 trillion yen between the government and private sector over the next decade would be compiled. 20 trillion yen of this funding will come from newly established GX Economic Transition Bonds (provisional name), but how will the remaining 130 trillion yen of investments be invested from the private sector?

Takeuchi：That is a very difficult point, and also it has been raised, discussions about the specifics lay ahead of us. But in any case, with natural gas and other energy prices expected to remain high over the next several years against the backdrop of the situation in Russia and Ukraine, initiatives aimed at carbon neutrality to reduce our dependence on fossil fuels are something we must all do to protect ourselves, companies and households alike. Up to this point, things like ESG investment may have been seen as necessary from a social standpoint, but it is necessary to pursue carbon neutrality as a part of risk management, and in a sense, I think the current crisis will be a major impetus towards GX.

Electrification of Demand and Decarbonization of Power Generation as Essential Elements of GX

Yamada：Of course, to create products and services that contribute to GX, energy providers themselves will also need to change, won't they?

Takeuchi：That's right. But I get the impression that until now, discussion has been all about the issues faced by energy providers. GX is a major transformation of society that will be bigger than the Industrial Revolution, and it is not something that can be accomplished with supply-side transformation alone. As I wrote in my own book^*3, GX needs to be tackled by multiplying the electrification of demand by the decarbonization of power generation (the supply side). In other words, we all (individuals and companies on the demand side) need to treat it as our problem as well. I also think that the electrification of demand will be the source of added value and the creation of new industries.

Incidentally, the creation of added value is not an area in which traditional energy providers excel. Instead, the better option might be to work across industry boundaries with new players such as venture companies that are good at creating value. Energy issues cannot be solved through the efforts of the energy industry alone. In fact, the publication of my book led to my speaking with people from a wide range of industries, from automotive and housing to home appliances and retail, so I was able to have conversations that spanned different industries. What I found was that an increasing number of companies are tackling carbon neutrality as their own problem, and transformation is accelerating.

Yamada：Hitachi's energy-related business units are also doing increased business related to renewable energy, and have been fielding more consultations regarding distributed energy sources including the use of hydrogen. Since the sharp rise in energy prices is also having a major impact on household finances, the general public's attitude is also changing.

Takeuchi：And due to those circumstances, the NDCs I mentioned earlier, which are essentially the government's targets, are also being updated. Back in 2017 when I wrote my first book, Japan's target was to reduce greenhouse gas emissions by 80% by the year 2050. Given that, it was estimated that if all cars were made electric, all hot-water units used heat pumps and energy demand was thoroughly electrified, while adopting an energy source configuration of 50% renewable, 20% nuclear and 30% thermal, we could achieve reductions of a whopping 72%. Even with all that, we weren't able to reach 80%. But now that goal has become net-zero emissions, making the hurdles even higher.

However, we must not forget that Japan is a country that could face a serious predicament if it gets its energy policy wrong. Since Japan produces almost no fossil fuels, it would not be able to survive as a country if the procurement of energy resources was disrupted. Japan went through the very painful experience of the oil shock during the 1970s. In response, it stepped up the use of natural gas and increased nuclear power generation to shift away from its reliance on crude oil and Middle East. Japan has also pursued the development of renewable energy and energy conservation through the Sunshine Project^*4 and Moonlight Project^*5. It took a great deal of investment and effort to get where we are now, where we can enjoy our lives while taking it for granted that the lights will be on. If we say that nuclear is not good because it's scary, thermal is bad because it emits CO₂ and renewable energy is a nuisance because of the facilities it requires, we will be pulled in all directions. It is only when everyone understands the need for energy and the role of the transition that we can have constructive discussions about it.