IEEJ：March ©IEEJ 2023
Special Bulletin
A Japanese Perspective on the International Energy Landscape (630)

March 31, 2023

Energy Transition and the Importance of Industrial Policy
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
This week, I had various opportunities to discuss developed countries’ initiatives regarding
relations between decarbonization and energy transition, and growth strategies or industrial policies.
At a morning question corner of the NHK radio program “My Asa Radio” from 7:30 a.m. on March30, I had an opportunity to make comments related to the topic. In the following, I would like topanoramically review Japanese, North American and European conditions regarding the topic
looming as a key matter of concern to the world.
Decarbonization or carbon neutrality initiatives are a key challenge to prevent global
warming and conserve the global environment. Every country is required to make maximum efforts
to prevent various serious climate change problems, such as frequent global extreme climate events,
desertification, adverse impacts on agriculture and food production, and sea level rises, and protect
the survival of mankind. In 2020, major countries around the world announced carbon neutrality
goals one after another, accelerating the decarbonization trend. As the Ukraine crisis has madeenergy security a top urgent priority, short-term crisis response actions such as a comeback to coal
have been seen. From the middle to long-term perspective, however, striking a balance between
decarbonization and energy security enhancement has been recognized as significant again.
Meanwhile, decarbonization remains a tough challenge. Given that the world, including
developed countries, depends on fossil fuels for some 80% of energy supply and that social andeconomic infrastructure and supply chains for fossil fuels are long-life assets or stocks, revolutionarychanges may be required to achieve global carbon neutrality by 2050. This challenge may bedifficult for developed countries and even far more difficult for developing countries. As a matter ofcourse, the basic prescription for decarbonization has been understood globally and sufficiently. It
calls for promoting energy conservation to the maximum extent, for accelerating the use ofrenewable energy, nuclear and other non-fossil energy sources, for decarbonizing fossil fuels, forpromoting electrification and for reducing emissions from power generation. However, thisprescription alone is not necessarily sufficient. Contributions from innovations such as CO2-freehydrogen use and negative emission technologies are indispensable. The world is now attempting toenhance efforts to tackle the tough challenge.
Energy transition to strike a balance between decarbonization and energy security
enhancement amounts to a revolutionary structural change in energy supply and demand and exerts
broad impacts on economy, industry and society. In this respect, energy transition’s relationship withindustrial policies and growth strategies has become a focus of attention in many countries.
Significant relevant initiatives include the European Union’s Green Deal. The EU has concluded thatclean energy investment towards the 2050 carbon neutrality goal will contribute to preventing
climate change and drive a long-term growth strategy. Investment in climate change prevention ispositioned to produce new economic growth and achieve long-term growth in Europe. When1IEEJ：March ©IEEJ 2023
COVID-19 was rampant in 2020, the EU additionally positioned clean energy investment tocontribute not only to long-term growth but also to economic reconstruction from the COVID-19disaster. Decarbonization investment was recognized as a significant contributor to both long-term
growth and reconstruction from the COVID-19 disaster.
At the same time, however, another interesting development has come in the EU. There
has been concern that if climate change countermeasures are enhanced further, it will increase costs
for regional industries including the manufacturing industry, damaging their international
competitiveness. The EU has thus devised and considered a Carbon Border Adjustment Mechanism
to protect EU industries and prevent industrial outflow and carbon leakage by imposing some kindof charges on imports of manufactured goods from countries that fail to implement climate change
countermeasures equivalent to those in the EU. In this way, the EU has planned a defensive
industrial policy in some sense to address problems that may arise when decarbonization ispromoted.
However, the next major development indicated an offensive industrial policy in contrast
with the defensive EU industrial policy. In 2022, the United States under the Biden administration
enacted the Inflation Reduction Act (IRA). I will not go into the details of the act herewith. But, insummary, IRA attempts to promote clean energy investment with $369 billion in fiscal support
mainly in a form of tax credits. The size, detailed guidelines and flexibility of the fiscal support arehighly attractive for the business community, having remarkable impacts. Fiscal support under theact is predicted to stimulate investment in the United States and attract investment from Europeanand other foreign countries. Clean energy investment expansion is expected to contribute todecarbonization, vitalize the U.S. economy and industry, and increase employment. These big
impacts have led the EU to worry about the outflow of European companies to the United States.
Coming next in the EU were the Green Deal Industrial Plan announced in February 2023
and the Net-Zero Industry Act proposed by the European Commission in March as a key pillar of thePlan. The proposed act for carbon neutrality is designed to promote the local production of key
technologies and components/goods and attract investment in such production by giving priority toNet-Zero Strategic Projects that will benefit from shorter permitting timelines and streamlined
procedures. The act will be materialized through coordination and deliberations at the EU Council
and the European Parliament. In a sense, these European initiatives can be interpreted as checking
and countering the U.S. IRA.
In such a situation, a green transformation promotion bill is under consideration at Japan’s
parliament known as the National Diet. Japan is required to promote energy transition in pursuit ofcarbon neutrality in 2050. The problem is how to promote investment in various clean energytechnologies that is indispensable for energy transition. To promote green transformation (GX), thegovernment is required to materialize the GX Roadmap discussed at the GX Implementation Council.
The GX Roadmap envisages a total of 150 trillion yen in investment. The government plans to invest
20 trillion yen over 10 years first in order to induce 130 trillion yen in private sector investment. A
growth-oriented carbon pricing framework has been proposed to raise financial resources for 20trillion yen in government investment. The government plans to issue GX transition bonds to backup the investment. Annual government investment is projected at 2 trillion yen. As a percentage ofgross domestic product, the annual government investment seems to be comparable to that under theU.S. IRA envisaging some 5 trillion yen in annual investment. The key point is how to materialize
clean energy investment in GX Roadmap. A detailed investment design with clear, transparent andreliable guidelines like those in U.S. IRA and the attractiveness for businesses holds the key to the2

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future.
As explained above, how to secure economic growth and maintain and develop theindustry sector amid the promotion of decarbonization and energy transition has become an
extremely important issue in the world in particular in developed countries as of now. The issue
indicates both positive contributions to growth and the risk of negative impact of excessive
nationalistic and “me-first” approach. This is likely to become one of the key issues involving futuredecarbonization initiatives and should be watched closely.

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