Since the March 2011 earthquake that struck off the Pacific coast of Tōhoku, Japan (also called the “311 Earthquake”) that saw the country suspend operations of all of its nuclear plants, Japan has accelerated its transition towards a low-carbon economy through the introduction of the Feed-In-Tariff (FIT), a price floor mechanism launched in 2012 where the government is obliged to purchase renewable energy from the private sector at a guaranteed price. However, with the country’s public finances worsening due to an ageing population, COVID-19 and the postponing of the Tokyo Olympics, the FIT scheme is set to receive diminishing financial support from the Japan government, presenting obstacles to the country’s low-carbon economy goals.
Despite having the world’s third-largest economy, valued at USD$4.97 Trillion as of 2020, Japan faces the longstanding problem of low energy self-sufficiency. For instance, in 2010, Japan was only able to fuel around 20% of its energy consumption domestically, the lowest among the top ten economies (figure 1.). This situation went further acute following the 311 nuclear disaster after which the country was forced to temporarily suspend all five nuclear power plants due to safety concerns (Figure 2.). In 2018, the country was only able to supply 11.8% of its consumed primary energy domestically.
Figure 1. Overall Energy Self-Sufficiency (%), 2010 level (Source: International Energy Agency).
Figure 2. Share of Nuclear Energy in Total Energy Supply in Japan from Fiscal Year 2009 to 2018 (Source: Statista, 2020).
To fill the void left by nuclear power, Japan resorted to a greater reliance on overseas natural gas and coal, pushing the country’s fossil fuel importation rate as high as 96% in 2015.
With greater dependence on dirty fossil fuel comes a greater emission level that stands well above the G20 average (9.9 tCO2e/capita vs. 7.5 tCO2e/capita). The country currently produces 32% of its electricity from coal and is looking to further establish 22 more coal power stations in 17 sites in the coming decade. This puts them out of reach of achieving the goals of the Paris Agreement.
The country’s low energy self-sufficiency and heavy reliance on fossil fuel has not gone unnoticed by officials, and their elected prime ministers since 2012, Sinzo Abe and Yoshihide Suga had envisioned a long-term target of carbon neutrality which first aims to have 22-24% of electricity generated by renewable energy sources by 2030, then, achieve an 80% reduction of greenhouse gas emission by 2050. Following the announcement of this plan came the introduction of the “promising” FIT scheme. Essentially, the end goal of this scheme is to not only encourage traditional oil and gas companies to supplement their businesses with generating renewable energy but also serve as a bait to lure newly established companies into this new market by buying electricity generated from renewable sources at an “inflated” price hence relieving the R&D expense burden from the private sector (Figure 3.).
Via this scheme, some of Japan’s established oil and gas companies entered the unchartered water of renewable business. For example, JXTG is amongst Japan’s largest energy providers that contributes up to 50% of gasoline sales within the country. Under the heavy influence of the FIT, the group has built 18 large solar power stations since 2012 and other renewable energies including biomass, hydropower, wind power and geothermal, and has accumulated a total generating capacity of about 54 megawatts as of June 2019.
Another example would be Japan Renewable Energy Corporation (JRE) which was established in 2012, right after the Japan’s Minister of Economics, Trade and Industry (METI) announced the FIT scheme. Despite only having a short operational history, the company has expanded rapidly by riding on the R&D rebate capacity of FIT and the company now operates 47 renewable power plants from Hokkaido down to Okinawa that generates 418 MW, equivalent to a 227 984 t-CO2 emission reduction.
2020 however, saw this positive progress falter as the METI threatened to slash the FIT subsidies i.e., reducing the guaranteed purchase price for electricity generated by renewable power plants, as the country became engulfed in a short-run recession (one year economic setback) induced by COVID-19, the Tokyo Olympics were postponed, as well as the ever-growing aging population problem.
While countries worldwide are suffering heavily from the COVID-19 pandemic, Japan’s public finance took a particularly severe hit owing to the postponed Tokyo Olympics. Since the Abenomics era (the period of Prime Minister Sinzo Abe being in power), intensive quantitative easing as well as the advanced transportation network and beautiful scenery made the country the most visited tourist destination in 2018. With an ever-growing number of inbound visitors, approximately 2% and 9.6% of the country’s GDP and employment respectively are contributed by the tourism industry. However, Japan’s biggest visitors, including the Greater China area, South Korea and the US have suffered immensely from the pandemic. To prevent SMEs from defaulting en masse and a spike in unemployment, the Japanese authority has rolled out 4 stimulus packages since February 13 totally approximately 300 trillion yen, close to 50% of the country’s annual GDP. Postponing the Olympics cost the country an extra 200 Billion Yen. Because of these unexpected costs, Japan feels like it has to put the transformation to a low-carbon economy on the backburner.
Since the burst of Japan’s housing bubble in 1992, a prolonged gloomy economic outlook has imposed a repellent effect on the country’s birth rate. According to the Central Intelligence Agency (CIA), in 2017, Japan’s birth rate sat at 7.7 births per 1 000 people, the 4th lowest across all nations and sovereign states worldwide. With a shrinking workforce supporting an ever-growing elderly group, the country’s public finance is due to expect a heavy toll. To illustrate the seriousness of this issue, we can regress Japan’s government tax revenue against the country’s old age dependency ratio (The ratio of 65 or above against all age groups.) (age) and its squared term (age2). From this relationship, we get a downward opening parabola with a global maximum of 22.9% (Figure 5.); any level above or below this indicates a drop in tax revenue. With reference to the country’s old age dependency ratio in 2019 which was 28.8%, however, Japan has long surpassed the 22.9% threshold and should expect further decline in tax revenue should the workforce remain unreplenished.
Indeed, with solar energy being the sole source triggered by the scheme, it is understandable to see the authority backtracking on their prior promise (Figure 6.). Yet, with the country hosting the 8th largest geothermal power deposit, it is arguably premature to say that the country is detouring from its track to a sustainable future. Hence, instead of rendering the FIT, the Japanese government could follow the footsteps of Germany, Australia and France who have adopted a combination of low-interest loan and tax relief for corporates willing to invest in renewable energy development. Through such measures, these countries managed to have 20-47% of electricity generated by renewable sources. As for Japan, they can even offer zero interest loans owing to the country’s unique monetary policy regime. By acting as a venture loan, the authority can operate a two-track system for principal repayment, once when a certain profit level is met, or once when a pre-agreed date has arrived.
Figure 6. Japan’s Renewable Energy Generating Capacity as of 2019 (Source: Statista).
Seeing Japan on one hand promising to transform itself into a low-carbon economy, while on the other hand slashing its support for this transition is somewhat contradictory. However, given the mounting pressure on their public finance, it is understandable to put a halt on supporting renewable energy. Yet, with the Paris Agreement still being recognised and discontent from energy developers being heard from within the country, it is expected to see Japan from making alteration from their backtracking.