IEEJ：November ©IEEJ 2023
Special Bulletin
A Japanese Perspective on the International Energy Landscape (664)November 24, 2023

Innovation as Key to Energy Transition and Its Challenges
Ken Koyama, PhD
Chief Economist, Senior Managing Director
The Institute of Energy Economics, Japan
In light of the enormous impact of the Ukraine crisis, energy security has emerged as themost important global challenge. At the same time, however, the world is required to continue
promoting carbon neutrality and other deep decarbonization initiatives. Therefore, how to strike abalance between the two important challenges has become a key energy issue for the presentworld. European initiatives such as the REPowerEU Plan, which was announced promptly after theoutbreak of the Ukraine crisis, represent efforts to promote energy efficiency, renewable energy,
nuclear energy, hydrogen, electrification, and the utilization of U.S. liquefied natural gas, and othermeasures to enhance energy security through the phaseout of dependence on Russian energy resourcesand decarbonization. Not only in Europe, but also in Japan, the United States, and other majorcountries, similar efforts are being pursued, although specific measures differ depending on nationalconditions and circumstances.
In reality, however, the pursuit of the simultaneous achievement of the two important
challenges is extremely difficult. First, the current energy market indicates that no country is in aposition to easily accept rising energy costs and prices under difficult economic conditions. It is
doubtful whether the market and consumers can willingly accept energy costs and price hikes throughthe promotion of an energy transition to achieve both energy security and decarbonization. Given thatenergy price spikes have led to energy subsidies even in developed countries and tended to affectdeveloping and emerging economies with lower income more seriously, the world is now very
sensitive to rising energy costs. The recent delay in bans on sales of internal combustion engine
vehicles and on the installation of new petroleum-based boilers in Europe indicates that our society is
becoming more cautious about the cost of promoting the energy transition.
Second, even if indispensable technologies for promoting the energy transition are
introduced, it will not be easy to dramatically transform the energy supply and demand structure andreduce CO2 emissions. This point is reflected in the "Advanced Technologies Scenario" in our IEEJ
Outlook 2024, which assumes that technologies for the energy transition will spread to the maximum
extent possible. Even in the scenario, energy-related CO2 emissions will fail to be cut to zero by 2050,
even though plunging from 33.6 billion tons in 2021 to 14.7 billion tons in 2050. This is because it
will not be easy for the non-power sector, including heat demand, and for developing and emerging
economies to reduce CO2 emissions.
In this case, we have no choice but to hope that advanced technologies and innovations thathave not been commercialized or widely diffused in the market at present will make great progress
towards the energy transition to realize carbon neutrality in the world. This means that it is difficult toenvision a carbon-neutral future without the benefits and effects of innovations.

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There are various innovations that are considered indispensable for promoting the energy
transition. A representative one among such innovations is clean hydrogen, such as green hydrogen
derived from renewable energy and blue hydrogen made from fossil fuels with CO2 emissions captured
and stored. Other innovative fuel technologies expected to support carbon neutrality in the future
include ammonia, synthetic fuels, and e-methane. Other technologies subject to growing interest
include CCS and CCUS to capture, store, and utilize CO2 emissions, as well as negative emission
technologies to reduce the CO2 density in the atmosphere. It is difficult to achieve carbon neutrality
without contributions from these innovative technologies.
However, there is still a great deal of uncertainty about when, where, and how theseinnovations will actually be introduced. Behind the fact that they have not yet been commercialized
are serious challenges such as far higher costs for these innovations than for competing energy
technologies, the lack of social and supply infrastructure required for their dissemination, and theabsence of institutions for the certification of effects of new technologies and the identification ofcontributors to greenhouse gas emission cuts.
As a matter of course, it is true that various actors around the world are strengthening theirefforts to overcome these challenges. This is because innovations are absolutely required for theenergy transition. This is also because it is impossible to achieve both energy security anddecarbonization without overcoming these challenges. No matter how difficult it is to overcome thechallenges, actors that lead the development and wide diffusion of innovative technologies will
establish their positions as contributors to a successful energy transition and gain an international
competitive advantage if they successfully overcome these challenges to allow their innovations tobloom. Whether or not any actors will become winners in the energy transition depends on whether
they can realize innovations. This will have extremely important implications for both nations andbusinesses.
For this reason, various companies around the world are now beginning to fiercely compete
to realize innovations. In fact, many companies are enhancing efforts to develop supply chains forclean hydrogen and ammonia. However, what is most noteworthy to me is that national governments
or strategies are moving to take leadership in achieving successful innovations. The move takes theform of industrial policy, as indicated by the U.S. Inflation Reduction Act (IRA). Industrial policy toprovide government subsidies or support to foster underdeveloped and immature technologies andindustries or strengthen their international cooperation was regarded as having supported Japan’s
postwar economic growth and development until around the 1980s. Such industrial policy came underfire as the “Japan Inc.” policy by the United States and some other countries that gave priority torejecting government intervention in markets and industries, utilizing market principles, andemphasizing free trade and competition. As the division of the world has deepened with the passageof time, however, there is now a growing recognition in the United States that a national strategy
should come to the fore in order to achieve both energy security and decarbonization. The IRA
represents government support and subsidies for promoting clean energy investment and realizing
innovations, indicating the strong will of the United States to tackle innovations to serve its nationalinterests.
As competition intensifies between nations and between companies around the world toachieve successful innovations, priority is given to how to cut technology costs. In this respect, it isnecessary to consider and develop a system to cover gaps between costs for new and existing
technologies or energy sources on the user side. This kind of ingenuity is important for the supply anddemand sides to keep in step with each other in promoting innovations. However, it is necessary to2

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fully understand that the introduction of new technologies will lead to an increase in the cost burden
on society as a whole, as long as the cost gaps exist. It will become increasingly important for oursociety as a whole to ensure a common understanding and recognition that some additional costs arerequired for achieving both energy security and decarbonization.

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