Challenges for Japan's Economy in the Decarbonization Process

As efforts to address climate change advance globally, Japan has also stated that it aims to significantly reduce CO2 emissions by FY2030 with stable economic growth, under the carbon neutrality target for 2050. This paper presents the main challenges facing Japan's economy in the process of transitioning to a decarbonized society. It introduces the facts on energy conservation and decarbonization, the hypothetical scenarios analysis on energy prices, and the efforts of industry. Until the early 1990s, Japan's progress in decarbonization in terms of CO2 emissions per real GDP was amongst the most remarkable in the world. Since then, it has been overtaken by advanced European countries due to a stagnation in energy conservation under low growth domestically and the slow decarbonization of energy sources following the Great East Japan Earthquake. Japan's current situation underlines once again that the orderly transition to a decarbonized society is not an easy task. In Japan, (1) economic growth during the transition period could be significantly affected by the cost of installing renewable energy in the diffusion process and the trend of procurement costs of existing fossil fuels. On the other hand, (2) efforts and new investments toward decarbonization have the potential to improve the productivity and growth rate of the Japanese economy through technological innovation and the increased corporate propensity to spend, capturing new demands in the global market. In order to realize the positive progress of (2), it is also important for Japan's society as a whole to enhance its responsiveness in adapting to structural change, such as through increased capital and labor mobility between different sectors. Since these efforts are likely to take a considerable amount of time, the public sector is expected to provide long term support for proactive moves by firms and others.