IEEJ： May ©IEEJ 2024
Special Bulletin
A Japanese Perspective on the International Energy Landscape (687)

April 30, 2024

Reviewing Japan’s Energy Policy History (4): Transition from Low-carbonization
to Decarbonization
Ken Koyama, PhD
Chief Economist, Senior Managing Director
The Institute of Energy Economics, Japan
In this fourth essay of the "Reviewing Japan’s Energy Policy History" series, I would like totake up the turbulent energy situation in Japan and the rest of the world since the beginning of the2020s and its major impacts on Japan's energy policy. Titled "Transition from Low-carbonization toDecarbonization," this essay analyzes (1) the international energy situation, which has experienced
unprecedented upheaval under the COVID-19 pandemic, and the decarbonization trend, which has
progressed rapidly in that process, (2) energy policy affected greatly by the decarbonization trend, (3)the simultaneous surge in energy prices that occurred amid changes from the COVID-19 pandemic
and the Ukraine crisis, which accelerated the surge, and (4) initiatives and challenges to balance energy
security with decarbonization amid energy price hikes.
The international energy situation in the early 2020s featured tumultuous turbulences due tothe unprecedented political, economic, and social impacts of the COVID-19 pandemic. In 2020, when
the COVID-19 disaster grew serious, with the number of victims continuing to increase amid the rapid
global spread of infections, the global economy experienced a tremendous contraction of more than
3% from the previous year. As sharp economic activity contraction was coupled with lockdowns andother tough measures to prevent the COVID-19 infection spread, global energy demand plunged bynearly 4% from the previous year. The decline in oil demand was the most remarkable due to a sharp
decrease in demand for energy for transportation amid the lockdowns, resulting in a significant
oversupply and price falls in the international energy market. In an unusual event in April 2020, thekey futures price for the benchmark West Texas Intermediate crude oil hit a record low of minus $37per barrel. Thus, the international energy situation in 2020 got off to a tumultuous start with oversupply
and remarkably low prices under the enormous impact of the pandemic, leading recovery from thepandemic to become a top global policy priority.
Under these circumstances, the impact of the COVID-19 pandemic on climate change
measures became a serious matter of interest. In the face of the pandemic, which was intensifying rightin front of us, there was a view that addressing the extremely important but long-term issue of climatechange would be given relatively lower priority. In fact, however, the opposite was the case. In theyear 2020, the trend toward decarbonization accelerated around the world at once, with the carbon
neutrality movement sweeping the world. In addition to the European Union, which took the initiativein setting a goal of achieving carbon neutrality by 2050, major countries such as China and Japanannounced carbon neutrality goals one after another in 2020. The United States joined this trend underJoe Biden, who won the presidential election in 2020. Various factors contributed to the accelerationof this decarbonization trend. I believe that the impact of the EU's "Green Deal Strategy" wasimportant among the factors. This strategy had originally been emphasized by the EU as positioning
green investment for the prevention of climate change as a major contributor to the long-term
economic growth of the EU. When a severe recession occurred due to the outbreak of the COVID-19
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pandemic, however, green investment was positioned as contributing not only to long-term growth but
also to short-term economic recovery. As the pandemic intensified, this strategic concept of promoting
green investment for economic recovery and long-term growth was embraced by countries around theworld. It formed a policy recognition that preventing climate change is economically significant.
The pursuit of decarbonization to realize carbon neutrality will require a fundamental change
in the energy supply and demand structure. In order to envision the future carbon neutrality, a backcast
approach was explored to set the goal of carbon neutrality and provide a path to the goal. Representing
this approach was the International Energy Agency’s Net Zero Emissions Scenario published in May
2021. The "normative scenario," which indicates how the world should change in order to achievecarbon neutrality, began to be emphasized and referenced in energy policy. The world is now requiredto take on enormous challenges, including the complete conversion of long-lived "legacy assets" suchas supply chains and entire infrastructure that support the energy supply and demand structure into a
new system by around the middle of this century and the introduction of advanced technologies thathave not yet been commercialized on a large scale in the conversion process.
However, the upheaval in the international energy situation did not stop there. The reaction
to the pandemic, energy investment shortages, and the vulnerability of the international energy market
after a decline in surplus supply capacity all contributed to the simultaneous surge in energy pricesthat became apparent from around the second half of 2021. Oil, natural gas, LNG, coal, electricity,and other energy prices soared. Energy price hikes emerged as the center of the world’s political,economic, and social problems. From around October 2021, the EU first began to consider theintroduction of energy subsidies. Later, Japan introduced subsidies as a measure to mitigate drasticchanges. Calls for increasing production to curb the rise in crude oil prices grew sharply among majoroil-consuming countries, contributing to increasing the international influence of oil-producing
countries such as the OPEC-plus group. Energy price hikes and the energy supply-demand crunch
behind the hikes were accelerated and aggravated by Russia’s invasion of Ukraine in February 2022.
Energy exports by Russia, known as the world's largest fossil fuels exporter, became the biggest
destabilizing factor, threatening the stable global energy supply. Then, energy security suddenly
emerged as a top policy priority.
While interest in decarbonization remained unchanged, it was only natural that securing astable supply of energy, an indispensable commodity, became an urgent and top priority amid theUkraine crisis. In this respect, new light was shed on the importance of fossil fuels expected to play
an important role in the energy transition in the future or the significance of securing a stable supplyof fossil fuels. Although balancing energy security and decarbonization has been a global challenge
since the outbreak of the Ukraine crisis, the challenge is becoming more difficult now that the world
has shown itself vulnerable to rising energy costs. The question at present is how to minimize energy
transition costs from a comprehensive perspective while taking into account the actual situation of theworld and the conditions in each country.
As the Ukraine crisis has intensified the division of the world based on the U.S.-China
confrontation, the concept of emphasizing economic security regarding strategic goods and technology
has become more influential. Increased interest in critical minerals has led to the need for carefulconsideration of how to proceed with the energy transition from the perspective of economic security.
As mentioned above, the realization of innovation has become a challenge for a successful energy
transition. Industrial policy has come to be emphasized around the world for promoting economic andindustrial development through innovation. The world's major economies are engaging in fierce
competition for successful industrial policies and seeking cooperation and collaboration with strategic
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partners from the perspective of economic security. As the world has become increasingly divided, theimportance of the Global South and resource-rich countries has increased, leading to a global tug-ofwar to win over and cooperate with them. It is essential for international strategies for energy andclimate change measures to respond appropriately to complex international situations.
A new energy policy for Japan is required based on the turbulent international energy
situation since 2020. The current Sixth Strategic Energy Plan was approved by the Cabinet in October
2021. Given the timing of discussion at government advisory councils and other forums that preceded
the approval, it is clear that the central topic of the domestic and international situation at the time was
the global trend toward decarbonization. However, Japan is now required to restructure its energy
policy in light of the ever-changing international energy situation. It must learn from history andconsider energy policy with an eye on the future.

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