IEEJ： April ©IEEJ 2024
Special Bulletin
A Japanese Perspective on the International Energy Landscape (685)

April 18, 2024

Reviewing Japan’s Energy Policy History (2): Market Liberalization andResponses to Environmental Issues
Ken Koyama, PhD
Chief Economist, Senior Managing Director
The Institute of Energy Economics, Japan
Following on from the previous issue of “A Japanese Perspective on the International Energy
Landscape,” this essay reviews Japan's energy policy history in order to provide a perspective that willcontribute to discussions toward the formulation of the next Strategic Energy Plan. In the second
installment of the series, I would like to discuss "Market Liberalization and Responses toEnvironmental Issues."
Japan recognized the oil crises in the 1970s as the most serious problem that threatened
Japan's survival, positioned energy security policy as the most important challenge, and launchedmaximum efforts and endeavors to respond to and overcome the crises. For Japan, a huge energy
consumer with a remarkably low energy self-sufficiency rate, securing a stable supply of energy was
the top energy policy priority. This situation has basically remained unchanged so far. Initiatives toplace the top priority on energy security continued in the 1980s and beyond.
In the 1980s, however, new important energy policy issues emerged. The first was the startof market liberalization and deregulation. Originally, energy has been often placed under government
regulation as a special case. This is because there has been a belief that it is not appropriate to fully
leave energy to market forces since energy is a strategic commodity and has an importance that canhave a decisive influence on people's lives and national management. The belief became a real issue
in the 1970s due to the oil crises, which underpinned the need for strong government regulation andintervention.
Another reason for the need for regulation in energy market is the problem related to naturalmonopolies. Economies of scale have often played an important role in the formation of energy-related
supply chains and infrastructure, paving the way for natural monopolies to arise. Under thesecircumstances, there has been a basic idea that the government should regulate and manage the energy
industry, which gains a huge presence while pursuing economies of scale, to avoid the harmful effects
of monopolies on the national economy and secure national economic benefits. As a result, the energy
industry has tended to be put under strong government regulation. The oil crises strengthened thetendency.
In the 1980s, however, the idea that it was important to liberalize the market as much as
possible, introduce competition, and pursue efficiency in economic policy became widespreadworldwide. The impetus for this is thought to have been the neoliberal economic policies pursued
under the Reagan administration in the United States and the Thatcher administration in the UnitedKingdom. As this trend spread to the energy market, calls grew globally for promoting competition asmuch as possible to improve efficiency in the energy market, which had been considered to be special.
In Japan under the influence of such calls, liberalization and deregulation of the oil market began in1

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earnest in the late 1980s, with a five-year action plan for deregulation implemented to abolishcompany-by-company crude oil refining and gasoline production quotas. Following the liberalizationof petroleum products imports in the 1990s, the Petroleum Business Act was abolished in 2002 tocomplete the liberalization of the oil market.
The liberalization of the electricity and gas markets in Japan began to make progress in the1990s. Deregulation proceeded in steps, including the liberalization of the power generation sector
and the gradual liberalization of the retail market. In the 2000s, this trend seemed to have come to ahalt. After the Great East Japan Earthquake and the Fukushima nuclear power plant accident in 2011,
however, an energy policy overhaul was implemented. Then, the electricity and gas market reformwas thoroughly implemented, leading the liberalization and deregulation of the electricity and gas
markets to make significant progress, including the full liberalization of the retail market. All of thesepolicies aimed to reduce and rationalize costs by promoting competition and thoroughly pursuingefficiency, bringing about significant changes in Japan's energy market through market restructuringand market players’ behavioral reform. At the same time, however, these policies led to challenges
such as the increased vulnerability of the energy market amid the reduction of spare capacity andsurpluses through rationalization and how to secure supply capacity amid the increased difficulties
regarding long-term investment and fuel purchase contracts.
As a new energy policy challenge that emerged in the latter half of the 1980s, we must notforget global environmental issues. Interest in the issue of global warming increased rapidly in thelatter half of the 1980s due to the frequent occurrence of abnormal weather, especially in Europe andthe United States. Following the Earth Summit in Rio de Janeiro in 1990, the United Nations
Framework Convention on Climate Change was established, leading the Conference of the Parties tothe UNFCC began to be held. At COP3 in 1997, the Kyoto Protocol was adopted, imposing legallybinding obligations on a limited range of countries such as Japan and European Union members toreduce greenhouse gas emissions.
Since energy-related CO2 emissions occupy an extremely important part of GHG emissions,
GHG emission reduction targets have an extremely large impact on the energy supply and demand
structure of these countries. They were required to change their energy mixes according to theiremission reduction targets. In order to reduce GHG emissions, Japan was required to enhance energy
efficiency and conservation, promote nuclear power, and accelerate the introduction of liquefied
natural gas. The promotion of clean coal use emerged as an important policy issue. Comprehensive
initiatives for these measures were positioned as an indispensable challenge.
Efforts to address the global environmental issues from the 1990s can be positioned as “lowcarbonization initiatives”. The initiatives to reduce GHG emissions by some target years were anambitious challenge for promoting energy transition. However, the ambitious challenge changed
dramatically when the carbon neutrality goal was decided on. Then, the world launched“decarbonization initiatives”. Policy initiatives to transform the energy supply and demand structure
into a compatible one with the ambitious GHG emission reduction targets to achieve decarbonization
have become more difficult to develop and implement.
As global environmental issues emerge and become increasingly important, another issue
that has emerged from the perspective of energy policy is the importance of international negotiations.
In addition to the importance of negotiations to set GHG emission reduction targets, the issues of how
to proceed with international cooperation to promote the global interest of preventing climate change
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and how to protect and maximize Japan's national interests through such cooperation have arisen. The
growing importance of international negotiations has created a situation in which Japan must exert
more power than ever before in the world of rulemaking. How to develop and implement a newinternational strategy while promoting Japan’s domestic GHG emission reduction measures hasbecome an extremely important challenge for Japan.
Global environmental and climate change issues have become a new factor that has led tothe emergence and aggravation of the North-South confrontation. Developing countries holddeveloped countries responsible for global warming and perceive that it is unfair for developed
countries to request developing countries to enhance GHG emission cuts, considering that developed
countries become affluent through massive fossil fuel consumption before developing countries. To
overcome this issue, the principle of "common but differentiated responsibilities" has been agreed on.
The more emission reduction targets have been enhanced, however, the more intense the confrontation
between developing and developed countries has become. In this context, how to achieve cooperationand collaboration with developing and emerging countries in Asia in particular has become an
important policy challenge for Japan. As a new externality, environmental issues have exerted massiveand diverse impacts on Japan’s energy policy.
Contact: report@tky.ieej.or.jp
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