KKC International Platform
February 22, 2023

Challenges and Opportunities in U.S.-Japan Energy Cooperation
Paul J. Saunders

U.S.-Japan energy cooperation faces significant challenges in 2023 while also offering
important opportunities. Managing the challenges and exploiting the opportunities will be acomplex task for government and business leaders in both countries.
Challenges
The intersection between geopolitics and global markets—for energy as well as energyrelated commodities—is perhaps the most obvious challenge. After decades of stability,
Japan’s liquified natural gas (LNG) imports from the United States have become increasingly
volatile during the last ten years. [ https://www.eia.gov/dnav/ng/hist/ngm_epg0_eve_nusnja_mmcfm.htm ] While some of the volatility reflects the emergence of a meaningful global
spot market for LNG, the year following Russia’s invasion of Ukraine has been especiallydifficult, with a marked shift in U.S. exports toward Europe to compensate for its loss ofRussian pipeline gas imports. Japan’s LNG import price today is roughly double the average
figure across 2019, 2020, and the first three quarters of 2021
[https://ycharts.com/indicators/japan_liquefied_natural_gas_import_price], with few
reasons to expect growth in U.S. or other supplies sufficient to drive down prices in the near
future. As a result, the growing mutual benefit in the U.S.-Japan gas relationship has sufferedsignificant collateral damage from Russia’s assault on Ukraine and U.S. and Western policy
responses.
The collision between geopolitics, the energy transition, and domestic politics poses anotherchallenge. This is primarily a consequence of escalating competition between the UnitedStates and China, on one hand, and growing efforts in the U.S. and allied countries to reduce
dependence on China by increasing domestic manufacturing of electric vehicles (EVs),batteries, solar panels, and other systems or key components, on the other. The problem has
been most visible in public complaints by many U.S. allies about the Inflation Reduction Act’s
EV tax credit, which requires an escalating share of battery materials from the United States
or countries with which Washington has free trade agreements (a restriction that of course
excludes Japan) and requires a rising share battery components from North America. Final EV
assembly must also be in North America to qualify. [https://www.piie.com/blogs/realtimeeconomics/why-us-allies-are-upset-over-electric-vehicle-subsidies-inflation]
Setting aside whether any firms will be able to meet the battery material requirements—
retired U.S. admiral Dennis Blair, the chairman of an advocacy organization supporting1

electric vehicles, expressed doubt as the Congress debated the IRA[https://www.realclearenergy.org/articles/2022/08/05/a_ramp_not_a_cliff_needed_to_buil
d_ev_battery_supply_chains_846531.html] —the dispute reflects broader tension between
America’s goal to unite its allies to compete with China militarily and in other ways while
seeking to promote domestic manufacturing, something that inevitably intensifies
commercial competition with the same allies. Of course, most U.S. allies are simultaneouslyintroducing similar policies to support domestic manufacturing; in fact, some did so wellbefore Washington’s. Relatively low U.S. domestic energy and electricity prices add to this bycreating further incentives to locate energy-intensive manufacturing in the United Statesrather than elsewhere. Even as the United States, Japan, and others work to establish moresecure critical mineral supply chains through the new Minerals Security Partnership[https://www.state.gov/minerals-security-partnership/], many if not most are involved inparallel disputes surrounding manufacturing-promotion policies in clean energy and otherareas.
A third challenge in the United States is in the interaction between domestic politics and theenergy transition. Clean energy is highly contested in the United States, with many
Republican elected officials and voters skeptical toward subsidy-oriented policies such as theIRA’s expansive tax credits and toward broad interpretation and application of federal
regulatory powers. This has led to acrimonious policy debates over energy and climate policy
and to zig-zagging federal policy on some issues.
It would not be easy for Republicans to repeal or revise the IRA, as this would require either
control of both the Congress and the White House or, alternatively, two-thirds majorities inboth the House of Representatives and the Senate, to override a presidential veto. However,
it is conceivable that in 2024, Republicans could retain their House majority (possibly with awider margin) and win the Senate (where Democrats hold a slim 51-49 majority) and thepresidency. Until 2024, or in a second administration that lacks control of Congress, theBiden administration may confront growing pressure from some Democrats to develop new
regulatory policies, especially clean air rules or related efforts to shape the power sector.
These efforts have historically produced long court battles and/or later reversals by a
Republican administration; they make America’s domestic investment environment lesspredictable than it could otherwise be.
At the state and local level, the bitter politics of energy and climate is often expressed inpermitting battles. Journalist Robert Bryce has built a database to track local rejections ofsolar and wind projects, which appear to be growing, although the database tracks thenumber of rejections rather than the rejection rate. [https://robertbryce.com/renewablerejection-database/] One would expect the number of rejections to grow as the number of
proposed projects grows—more important is whether a larger or smaller share of projects
face successful local opposition. Radically increasing the share of solar and wind power inelectricity generation would require boosting the number and scale of these projects rapidly
each year.
Energy Innovation Reform Project’s work has described the considerable land use
requirements of solar and wind facilities and assessed some of the sources of local
opposition, which has both local and national components.
[https://www.innovationreform.org/wp-content/uploads/2020/10/1909-Energy-ReformLand-Use-Requirements_digital.pdf] Some states, such as New York, have sought greater
power to override local governments, though it remains to be seen how state officials will
use this authority and with what consequences. [https://www.innovationreform.org/wp2

content/uploads/2021/09/Ambitious-Mandates.pdf] Proposed federal permitting legislation
could ease permitting only on federal lands; Americans will thus decide much of thecountry’s clean energy policy in state and local permitting proceedings and ultimately inelections. Like national-level uncertainties, this will complicate companies’ investment
decisions, despite the IRA’s substantial financial incentives.
Opportunities
Notwithstanding America’s evolving domestic policy, the most immediate commercial
opportunities in U.S.-Japan energy relations derive from the massive Inflation Reduction Acttax credits for various forms of clean energy projects in the United States. The IRA includes
substantial production tax credits for clean hydrogen, nuclear energy, and renewable power,
as well as a clean electricity production tax credit that includes carbon capture, storage, andutilization (CCUS) projects. [https://www.energy.gov/sites/default/files/2022-10/IRA-EnergySummary_web.pdf] Notably, these credits include a so-called “direct pay” provision thatallows project developers to collect the full value of the credit even if it exceeds their tax
liability; the credit becomes a tax refund. This significantly increases their attractiveness todevelopers, who in the past sold their excess tax credits at a discount in tax equity markets.
[https://bipartisanpolicy.org/download/?file=/wp-content/uploads/2022/06/Energy-DirectPay-Infographic.pdf]
At the government-to-government level, and among universities, there are considerable
opportunities to expand joint energy technology research and development (R & D),
especially in clean energy. The United States and Japan have deep and lasting cooperation inenergy technology; Japan has been the leading international partner of the U.S. Departmentof Energy. The two countries are also among the world’s top spenders on energy R & D.
[https://www.innovationreform.org/wp-content/uploads/2021/04/Energy-Technology-in-anEra-of-Great-Power-Competition.pdf] As officials in Washington and Tokyo work to secure
critical mineral supply chains, technologies to locate, characterize, and sustainably extract
these minerals will only grow in importance, as will processing technologies that reduceenergy and water consumption and limit environmental impacts. Advanced manufacturing
and recycling technologies could similarly ease these efforts by reducing or shifting resource
requirements and by improving sustainability.
Internationally, the United States and Japan could secure both economic and strategic gains
by exploring a possible clean energy or green technology trade agreement, ideally within theIndo-Pacific Economic Framework or a similar multilateral format. Such an agreement could
further reduce barriers to trade in these key technologies and help to accelerate theirdeployment. While negotiations would likely be quite difficult—particularly if they
incorporate electric vehicles—a successful deal would be highly consequential. Washington
and Tokyo could also improve coordination between their development assistance efforts
with a view to facilitating joint clean energy project in select ASEAN member countries, such
as Indonesia, the Philippines, Thailand, and Vietnam. Joint projects in India could be similarly
advantageous, both commercially and geopolitically.
Conclusion
In pursuing the opportunities for closer U.S.-Japan energy cooperation, the most difficultchallenges for both governments and firms are likely to come from their economic
competition and domestic pressure for policies that promote manufacturing and sales of“made-at-home” products. This will not be easy to manage when publics want governments3

to deliver jobs and growth. That said, there are some approaches that can help to align theinterests of companies and, to a lesser extent, of governments.
One of the most straightforward, and most obvious, options for businesses in the twocountries is to develop strategic partnerships in various forms—from simple partnershipagreements to multinational consortia or mergers/acquisitions. This approach also has theadvantage of building the scale necessary to compete effectively with some of China’s hugestate-owned enterprises, though it may not be equally available in all industries.
A key task for governments is to ensure that competition among U.S., Japanese, and otherallied-nation firms remains within agreed and predictable systems. Firms are more likely toswallow their inevitable losses to others when they accept that the competition was fair. This
is not easy either—but it is a strength of political and economic systems based on the rule oflaw.

Paul J. Saunders is President of the Energy Innovation Reform Project (EIRP) and a thought
leader on energy, energy technology, climate policy, and geopolitics. He was previously
Executive Director of the Center for the National Interest (CFTNI) and remains a member of
the Center’s Board of Directors and a Senior Fellow in U.S. Foreign Policy at CFTNI..
Keizai Koho Center (Japan Institute for Social and Economic Affairs, KKC) has served
as a bridge for the Japanese business community to interact with its key stakeholders insideand outside Japan. With a wide range of its domestic and international programs, KKC hasdeveloped a worldwide network encompassing businesses leaders, lawmakers, government
officials, journalists, university scholars, and school teachers.
The KKC International Platform is a forum to discuss new developments,changes, and challenges of Japan and the international society.
The views expressed in the essays on the KKC International Platform are solely those of theauthors.

Keizai Koho Center
https://en.kkc.or.jp
Keidanren Kaikan, 1-3-2 Otemachi, Chiyoda-ku, Tokyo 100-0004 JAPANe-mail: platform@kkc.or.jp

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