Listening to Key Persons: Initiatives for the Achievement of Carbon Neutrality ―― The Future Being Unlocked by Power Supply-Demand Scenarios (Chapter 1)

In this series of articles, under the theme of achieving carbon neutrality, we invite experts who are working on energy issues in various fields to engage in a discussion with Tatsuya Yamada—Division General Manager of Hitachi, which is working on policy proposals relating to electric power and energy—and introduce trends in each industry. Through these discussions, we consider carbon neutrality from various angles, such as the formulation of a process and vision for achieving carbon neutrality, initiatives aimed at achieving it, and environmental development.

Our guest this time is Hiroki Kudo. Mr. Kudo has been active in various government committees at the Ministry of the Environment, Agency for Natural Resources and Energy and other organizations, specializing in energy supply-demand analysis and forecasting, policies to tackle global warming, new energy and renewable energy policies, and policies on energy conservation.

The Study Group on Future Power Supply-Demand Scenarios is currently engaged in activities under the Organization for Cross-regional Coordination of Transmission Operators, Japan (OCCTO). As a member of the study group, Mr. Kudo introduces some aspects of the group, while discussing the roles to be played by industry and society in power supply and demand from the perspective of achieving carbon neutrality, Japan's energy policies, and an outlook for future society.

The similar but different issues of energy and climate change

Yamada: Today we are faced with a host of unpredictable changes, ranging from a series of natural disasters to regional conflicts and the rapid advance of generative AI. Of particular concern are rising geopolitical risks, chief among which are the conflict between the US and China, Russia's invasion of Ukraine, and fighting between Israel and the Islamic group Hamas. As a specialist in environmental issues, how do you see these international developments impacting initiatives and progress on the issue of global climate change?

Kudo: As you noted, with the international community currently becoming increasingly fragmented, there are rising geopolitical risks. Particularly for Japan, which is an energy importing nation, these circumstances pose extremely difficult challenges in terms of how to align energy policy with climate change goals. That's because even if we achieve our climate change goals, we don't want to make it more difficult to use energy and impede economic activity as a result. That is why the concept of "energy security" is attracting attention, as you are aware. We need to pay close attention to both climate change issues and energy security while working to ensure that neither is disadvantaged.

There have always been aspects to these two concepts that make them similar, yet different. To that point, in the case of energy, top priority is given to protecting the interests of one's own country, such as through proper procurement and cost reductions. The actions of European countries are illustrative of this; as the supply of natural gas was cut off from Russia, they scavenged supplies from other countries. They didn't consider what effects that would have on other countries as a result. In fact, as a result of these countries purchasing large volumes of natural gas from the market, prices rose sharply, the impact of which also spread to Japan.

However, when it comes to the climate change issue, the ultimate goal is to avoid climate change at the global scale. In other words, if each country is only concerned with its own goals, we may never achieve a true solution. With the world becoming fragmented at an increasing rate as each country strives to safeguard its own energy security in response to rising geopolitical risks, the question is whether the world's nations can truly find common ground toward the shared global goal of action on climate change. How as a species we will separate and balance energy and climate change issues — in other words balance the interests of individual countries against the interests of the entire planet — stands as a major challenge for humanity as a whole.

Each year the World Economic Forum issues a report on global risks, and in the latest report observed that "cooperation on urgent global issues ... could be in increasingly short supply, requiring new approaches to addressing global risks." The top risk cited in the report was none other than "extreme weather." This suggests they share the concern that rising geopolitical risks may manifest negative effects on global initiatives to address climate change. Therefore to answer Mr. Yamada's question, I believe that geopolitical risks will indeed have a substantially negative impact on global initiatives and progress to address the issue of climate change.

Yamada: It seems you are saying that while the issue of climate change is far from an economic one, with the world becoming increasingly fragmented, it is extremely difficult to strike a balance between action on climate change and securing energy. I also think that while securing energy is an urgent issue, global environmental issues need to be tackled over the long term, and those differing time scales also make it difficult to balance the two.

Kudo: Working within that framework, what holes a vital key for Japan is the development of innovative technologies that are internationally competitive, and their marketization. But with the world becoming increasingly fragmented, it's uncertain whether markets or mechanisms can be established to enable those technologies to be shared as a single asset. In the end, as was the case with the COVID-19 pandemic, when a country's own interests are prioritized, consideration for other countries, particularly developing nations, is diminished, and arguably the issue of climate change bears a similar structure.

Outlook for the Seventh Basic Energy Plan

Yamada: Grappling with those difficult aspects, this year the Japanese government looks set to formulate its Seventh Basic Energy Plan in anticipation of the 30th Conference of the Parties (COP30) to the United Nations Framework Convention on Climate Change to be held in 2026. What is your outlook for this plan?

Kudo: The fundamental purpose of the Basic Energy Plan is to outline the direction of the country's energy policy considering current challenges, but it is by its nature linked with the reduction targets of the Paris Agreement and Nationally Determined Contributions (NDCs). In that sense, while we may refer to the Basic Energy Plan, in practice we cannot avoid considering it in tandem with initiatives to address the issue of climate change. At COP29, there were discussions that the 2035 reduction targets would need to be a reduction of up to around 60% from the base year, but I think one important point is how Japan, as a member of the international community, should commit to these discussions.

One other thing as I mentioned before is the essential perspective of properly paying attention to energy security against the backdrop of heightened geopolitical risks. I think there needs to be a proper discussion about policies that can contribute to energy security, including our energy self-succificency rate.

From the perspective of the energy self-sufficient rate, measures that strengthen efforts to make renewable energy a main source of energy will be another key point. The utilization of nuclear power generation will also feature in discussions in relation to that. While future hopes are pinned on next-generation nuclear reactors, for the time being it is vital that we pursue the restarting of existing nuclear power plants. As public approval is also a key factor in the resumption of nuclear power generation, this will likely attract a lot of attention.

At this time it will be essential to consider electricity supply and demand forecasts, and I think discussions in the Study Group on Future Power Supply-Demand Scenarios which is currently operating under the Organization for Cross-regional Coordination of Transmission Operators, Japan (OCCTO) will serve as a reference in this regard. I'll touch on what that entails in more detail later, but the discussions have yielded some viewpoints suggesting that the current situation does not show the true supply and demand of electricity. In recent years, the demand for electricity from the grid has been decreasing so rapidly that it appears as if actual demand is decreasing, but it has been pointed out that in fact demand itself may not be decreasing but only appear to be so due to the effects of private power generation such as roof-mounted solar power generation. In crafting the Basic Energy Plan, I think ascertaining total electricity demand will be an extremely important perspective.

I also believe that the Seventh Basic Energy Plan will involve creating greenhouse gas reduction target for 2035, but as it will be tough to achieve this by bolstering renewable energy alone, I think questions of how policies can be strengthened toward this target, including through energy conservation, will be a point of focus.

Will 2035 also be a challenging reduction target?

Yamada: What about specific figures for the greenhouse gas reduction targets? The current target is a 46% reduction by 2030.

Kudo: Of course it's possible that a 46% reduction could be plotted on a straight line going from the current situation to carbon neutrality in 2050, with a further 2035 target indicated on that line. But the current target itself has always been challenging, and I don't think anyone believes that CO2 emissions will decrease in a linear fashion. At present, we don't have CO2 reduction options that represent a savior, something where we could say if we just do these things, it will turn out alright. That's why we have no choice but to engage in more in-depth discussions on how we should tackle this challenging plan.

Yamada: I suppose that is because it is hard to predict that technological innovation will rapidly advance and costs will decline.

Kudo: That's right. It's difficult to predict what technologies will emerge and at what time, but on the other hand, if the goal of achieving carbon neutrality by 2050 is not going to be shifted, then perhaps the story is that there is no way to paint a picture that deviates significantly from a linear decrease.

Meanwhile, another key point will be how to express our degree of seriousness toward the targets. It becomes a question of whether we build upon various measures and then go all out trying to meet our targets with additional regulations and public policy aimed at making up the shortfall, or whether we give our plans more flexibility, adopting a somewhat more long-term roadmap while anticipating future technological innovation and other factors. That will of course be dependent on what direction is taken with policy. That's because the carbon neutrality by 2050 goal was originally formulated back in 2020, and we can't say that any significant technological innovations have emerged since then.

However, support measures for the market adoption of technologies are already underway. For instance two trillion yen has been invested in the Green Innovation Fund for carbon neutrality-focused R&D and social implementation, and Green Transformation (GX) Economic Transition Bonds (20 trillion yen over ten years) to finance decarbonization funds are being issued. I think a picture of the future will be drawn while making predictions about the success of these kinds of measures.

Yamada: It's important to keep on pushing. Because these are very ambitious targets, if we give up we might not achieve them by half. Instead of that, government, the private sector and individuals all need to come together as Team Japan, and even if we can only set our sights on 75 or 80 out of a 100, we must keep challenging ourselves and working toward the target.

Positioning carbon neutrality initiatives as a growth strategy

Kudo: As you noted, to build up that kind of momentum, I think we need to link carbon neutrality efforts with Japan's growth strategy. For example, it's vital that we promote market formation to get Asian countries to use Japanese environmental technologies that can be competitive. To that end, I think dialogue and understanding through entities such as the Asia Zero Emission Community (AZEC) will be essential.

Yamada: That is a very important initiative. Rather than framing things like carbon pricing and regulations in a negative light, I think it will be really important to link things in a positive direction that contributes to economic growth, together with actions such as support measures for decarbonization investment that will lead to improvements to Japan's industrial competitiveness.

However, even if there are the seeds of a good technology, from the standpoint of a private sector company, whether or not it can continue to be pursued as a business when cost factors are taken into account is a decision made by its top management. Initial investment is always essential for the development of technologies, because there is a time lag up until a new technology debuts on the market, starts to sell at a certain volume and generates profits. To put a technology on track as a growth strategy, corporate strategy and corporate efforts are of course important, but I believe support from policy and the creation of demand will also be very important. If you look at the past, Japanese companies have the capabilities to develop new technologies but tend to stumble when it comes to commercializing them. That's why not just in energy but in healthcare, services and other areas, they are often overtaken by Western companies and others.

Kudo: Indeed, I think it is very important to provide support through policy while also paying attention to overseas markets. For example, in the case of renewable energies where the running costs are not as large, if we provide supplementary support in the operational side while continuing to place an emphasis on support for CAPEX (capital expenditures), I think progress will be made on the adoption front.

One more thing: I think everyone is under the illusion that "zero emission" is a keyword that needs to be applied to every technology and service. This is a point the world will reach two decades or more in the future, and we need to think about what to do during the transitional phase leading up to that point.

Once I assisted China when it was promoting energy savings based on a national plan, but I saw a situation where Japanese companies were trying to sell high-priced products with high added value and were having difficulty growing their market share. In other words, at the time what China needed was reasonably priced products that contributed to energy savings to a certain degree. In this way, since each country differs in terms of its development stage and public policy, it's not always possible to bring shiny new zero emission-capable technologies to market immediately. Of course I am well aware that it is difficult for Japan to compete on price, but we do need to take a good look at what technologies will be needed during this transitional phase.

In other words, as Mr. Yamada noted earlier, we need to consider within what timeframe will we add which technologies into our growth strategy, and consider those aspects together with market strategies. I think the key question is whether that will truly function within an economic system. In that sense, it also raises the point about ESG investment which, having attracted all that attention, doesn't currently seem to functioning all that well. The E in ESG refers to the environment, and directly relates to initiatives contributing to carbon neutrality, but if those efforts don't function well, it could lead to changes to the metrics used by financial markets to evaluate them. There may be something inherently impractical in trying to comprehensively evaluate companies in terms of environment, social and governance, a mishmash of elements that are each vast and disparate in nature. What indicators should be adopted is of vital importance when considering social persuasiveness and transparency, but as a practical matter, it is equally important to tackle the activities underlying these indicators as a strategy, in order to motivate investors and companies. Instead of merely setting numerical targets and diligently adhering to them, I think future initiatives will truly depend on how well we manage to make carbon neutrality a source of competitive strength as a growth strategy.