IEEJ：February 2020○ｃIEEJ 2020
Special Bulletin
A Japanese Perspective on the International Energy Landscape (469)

February 27, 2020

Energy Transition and Future of Fossil Fuels (4)Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanThe 464th, 465th and 467th issues of “A Japanese Perspective on the International Energy
Landscape” discussed energy transition and the future of fossil fuels from various viewpoints. Thistime, I would like to discuss the matter from the viewpoint of costs.
The first important point I would like to make is that if the current energy supply anddemand structure’s transition to a new one is accompanied by responses to externality, the transition
will inevitably generate cost hikes and burdens. Externality responses are related to various areas
including energy security and environmental problems such as climate change. A point common tothese areas is that some policy intervention is indispensable as market forces alone cannot guarantee
appropriate responses to these externalities.
Undoubtedly, one of the most important factors behind the ongoing energy transition is thethorough enhancement of climate change countermeasures. Particularly, the modality and possibilityof energy transition to realize very ambitious climate change goals including “net zero” greenhousegas emissions are attracting attention from energy policy and industry stakeholders. It is clear that
more ambitious energy transition means greater changes from the current system and more costs.
The current global energy supply and demand structure has resulted from the effects ofnatural market choices and policies in the past. The structure features that fossil fuels including oil,coal and natural gas account for 85% of world primary energy supply, holding a dominantlyimportant position. Why do fossil fuels have such high share? Because fossil fuels are dominantly
competitive as energy. Oil, coal and natural gas have been selected in the market as very costcompetitive, abundant and highly convenient sources of energy in each country and respective
economic sector. If energy transition is to be implemented to achieve “net zero” GHG emissions, theworld has no choice but to greatly expand non-fossil energy sources’ share or promote fossil fueldecarbonization including CCS (carbon capture and storage) and CCUS (carbon capture, utilizationand storage). Such energy transition may generate considerable costs that the world should shoulder.
Solutions to the cost problem would include technological development and the emergenceand diffusion of innovative technologies that could dramatically cut energy transition costs. It is
pointed out that technological development has substantially and rapidly reduced solar photovoltaics
and wind power generation costs. As indicated by the IEEJ Outlook 2020 (published in October2019), however, overall costs for electricity supply, including those for integrating intermittent
renewable energy power generation into the grid, will increase as intermittent renewables’ share ofpower generation expands. The potential of CO2-free hydrogen utilization as an innovation is also
attracting attention. In the case of blue hydrogen that would be produced from fossil fuels with CCS
technology used, costs would be higher than for ordinary fossil fuel utilization because of additional
measures and infrastructure. As a matter of course, it is possible and important for technological
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IEEJ：February 2020○ｃIEEJ 2020
development and existing infrastructure utilization to hold down cost hikes. However, some
additional costs will be inevitable.
If cost hikes are assumed, energy transition may be seen from the viewpoint of relevant
countries’ and their consumers’ ability and willingness to pay higher costs while holding down cost
hikes as much as possible.
Reviewing the history of responses to externality and their costs, we can remember Japan’s
responses to oil crises in the 1970s as an interesting example. Japan then depended heavily on oilfrom the Middle East for primary energy supply and had no choice but to tackle unprecedented
hardships and challenges in the face of the oil crises. Japan promoted energy conservation,
alternative energy sources and oil stockpiling through national efforts. This was because Japan thenmet the conditions of ability and willingness to pay additional costs. Japan had the ability as theworld’s second largest economy. Regarding willingness, the government and private sectors shared astrong sense of crisis.
As indicated by the above Japanese case, the world will have to meet the two conditions ofability and willingness to pay if it is to implement strong energy transition to achieve ambitious
climate change goals. In this respect, however, it must be noted that realities regarding the conditions
widely differ by region or country. While European and some other countries accelerate their pursuitof aspirational goals, developing countries have no choice but to give priority to basic needs
including economic and social development, poverty countermeasures and energy access. Realities
regarding the two conditions are thus very different. From the viewpoint of how to meet theabovementioned basic needs, the effective and clean use of fossil fuels may be a key point.
Another key point regarding the ability and willingness to pay is that how much therealization of “net zero” GHG emissions would cost through the current energy transition has notnecessarily been clarified. Although technological development is expected to cut costs, how muchto pay for responding to the externality has not been specified for each country and consumers. How
much to contribute exerts great influence on the ability and willingness to pay. As a matter of course,
this is an important, serious problem for developing countries with lower income levels. Dependingon situations, however, this may become an unignorable problem even in developed countries. As
how much to contribute grows clearer, various political, social and economic challenges regarding
the two conditions may emerge even in developed countries. This is because discontent and divide
structurally exist, with wide income gaps becoming social and economic problems, even indeveloped countries with relatively higher income levels. Who should pay how much? This is adifficult question.
Energy transition costs exert great influence on each country’s growth, industrial
competitiveness, national livelihood and trade problems. We will have to check who will be affectedby costs for global benefits and what reactions would come to such costs.

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