Published by
Climate Integrate
January 2024

What is Green Transformation?
グリーントランスフォーメーション(GX)とは？

Contents

Ⅰ.

What is GX?
01

Background

02 GX Promotion Act

・GX Promotion Strategy

・GX Economy Transition Bonds

・Growth-oriented Carbon Pricing

03 Sector-specific Investment Strategies
04 Tax credits in Strategic Sectors

Column: GX Implementation Council

Ⅱ.
III.

Key Issues about GX

Looking ahead

References

03

03
04
05
05
06

07
07

07

09

14
15

What isGreen Transformation (GX)?
The Japanese government started advancing “Green

Transformation” (GX) branded initiatives in 2022. In May 2023, theDiet passed the GX Promotion Act and the GX Decarbonization
Electricity Act (a bundle of amendments to several acts), andsubsequently adopted the GX Promotion Strategy. By the end of2023, the details of the funding and investment strategies for GX
promotion were finalized.

What is GX? This report is a summary of its history and details.

2

What is Green Transformation?

Ⅰ.

01

What is GX?

BackgroundThe government is promoting a “Green Transformation” (GX) as a strategy that will“transform our entire industrial and social structures centering around fossil energy
sources, long established since the Industrial Revolution, into ones based on clean
energy.”1, 2

The term “GX” began to attract attention after the Ministry of Economy, Trade andIndustry (METI) released the “GX League Basic Concept” in February 2022.3 The GX

League was established by the government to drive the transformation of social andeconomic systems and the creation of new markets, with the aim of achieving carbon
neutrality by 2050. At the time of writing, 568 companies were involved.4, 5

To promote GX, Prime Minister Fumio Kishida announced his plans of marshalling morethan 150 trillion yen ($1 trillion) of public and private investment including 20 trillion yen($130 billion) of government investment over the next ten years ($1=150 yen). Various

steps have been taken, including adoption of the GX Basic Policy, enactment of the GX
Promotion Act, adoption of the GX Promotion Strategy, formulation of the rules forphase one of an emissions trading system (GX-ETS), and adoption of frameworks for

sector-specific investment strategies and GX Economy Transition Bonds (“the Bonds”).
The government also created an online “GX dashboard” to share member companies’

information on their emissions targets, actual emission reductions, and participation inemissions trading.6

What is Green Transformation?

3

02 GX Promotion Act
In February 2023, the government adopted the “Basic Policy” for the realization of GX,

which sets out policies and a roadmap for the next ten years.7, 8 The Diet enacted the GX

Promotion Act in May 2023.9 The Basic Policy was amended to become the GX Promotion

Strategy, which was approved by the Cabinet in July 2023.10 In this way, GX promotion

has taken shape as a government initiative underpinned by legislation. The GX Promotion
Act stipulates the following:• Development and implementation of GX Promotion Strategy• Issuance of GX Economy Transition Bonds• Introduction of carbon pricing• Establishment of the GX Acceleration Agency• Progress assessment and revisions as required
Around the same time as the GX Promotion Act’s passage, the Diet also passed the GXGX Promotion Act(Act on the Promotion of a Smooth Transition
to a Decarbonized Growth-Oriented Economic Structure) enacted May ��, ����GX Promotion Strategy$

GX Economy
Transition Bonds• To be issued for �� years
from FY����

$

CO 2

To be
redeemed by����

Carbon Pricing• FY���� Fossil fuel levy
• FY���� Emissions trading

GX Acceleration Agency• Support for private sector (debtguarantees, etc.)• Emissions trading (collects levies)

Prepared by Climate Integrate

4What is Green Transformation?

Decarbonization Electricity Act, containing a bundle of amendments to several acts.11 The

legislation calls for grid improvements and additional renewable energy investments, andalso revises regulations on the allowed service life of nuclear power plants (set at 40 years
in principle, but can be extended to 60 years under certain conditions, and shutdowns
beyond the operator’s control are excluded from the time count).

GX Promotion Strategy

The GX Promotion Strategy states that GX “represents a major shift from postwar

industrial and energy policy.” Two key components of the Promotion Strategy are a“stable energy supply” and “growth-oriented carbon pricing.”

Core components of GX Promotion Strategy
Stable energy supply• Energy eﬃciency, renewables• Nuclear power• Others (hydrogen/ammonia/
LNG procurement/carbon
recycling to fuel, etc)

Growth-oriented carbon pricing• ��� tn yen ($� tn) in public-private investmentfor �� years, including �� tn yen ($��� bn)
upfront investment by the government• Carbon pricing measures• Asia Zero Emissions Community (AZEC)

Prepared by Climate Integrate

GX Economy Transition Bonds

The government will issue GX Economy Transition Bonds and make upfront investments
in priority sectors. In November 2023, the government announced plans to issue suchbonds as “Japan Climate Transition Bonds” based on the “Framework,”12 which provides

criteria for use of proceeds in accordance with the principles and guidelines of theInternational Capital Market Association (ICMA) and others. In the first issuance, thegovernment intends to invite bids totaling 1.6 trillion yen, consisting of 800 billion yen
in 10-year bonds (February 14, 2024) and 800 billion yen in 5-year bonds (February 27,2024).13

The Framework provides “eligibility criteria” based on energy supply and demand, and“eligible projects” for typical use of proceeds. It also specifies requirements for “impact
reporting” of CO2 emission reductions and project progress. The government hasreceived Second Party Opinions (SPO) from Norway’s DNV and the Japan Credit Rating

What is Green Transformation?

5

Agency (JCR) stating that the Framework meets the criteria set by ICMA and others.14 The
government aims to attract 130 trillion yen in private investment, using the issuance of
20 trillion yen of the Bonds over the next ten years as a catalyst.

Growth-oriented Carbon Pricing

The government’s plan is to introduce mechanisms to put a price on carbon emissions,referred to as “growth-oriented carbon pricing,” for the redemption of the Bonds. There

are two approaches to this carbon pricing. One is to collect a carbon levy (fossil fuel levy)
from fossil fuel importers starting in FY2028. The other is that power companies will

participate in auctions starting in FY2033 to procure emission allowances. This has all
been stipulated in legislation, including the years of introduction.

While not stipulated in the legislation, a voluntary emissions trading system (GX-ETS)

was established in FY2023. Under the rules for phase one (FY2023 to FY2025), it is up tocompanies to decide whether or not they wish to participate, and they can also set theirown targets.15 The government is considering mandatory participation as a condition

for receiving support through the Bonds,16 but it is expected that the system will remain
voluntary.

Framework of GX Economy Transition Bonds
and Carbon Pricing
GX Economy
Transition Bonds

Carbon Pricing• Starting FY����, the Bonds are to be issued, totaling

approx. �� tn yen for �� years, with aim of over ��� tn
yen in public and private investment.

Emissions trading system• Established in FY���� on voluntary basis, full-scale
operation in FY����• In FY����, introduce auctions for power generationcompanies.

Carbon levy
• In FY����, introduce as a levy for fossil fuel importers.

Prepared by Climate Integrate

6What is Green Transformation?

03

Sector-specific Investment Strategies

The government convenes the GX Implementation Council where policies are

determined by the relevant ministers and experts. Following the release of the“Sector-specific Investment Strategies”17 by the Council in December 2023, thegovernment plans to promote investment in technologies that will reduce emissions
in high-emission sectors, especially those that will be effective in strengthening

industrial competitiveness and economic growth. As of the end of 2023, the uses ofapproximately 13 trillion yen were indicated (see table on page 8).

04

Tax Credits in Strategic Sectors

The government is also considering introducing new tax credits based on production
volume, targeting electric vehicles, green steel, green chemicals, and sustainableaviation fuel (SAF).18 Under the plan, target sectors needing strategic attention would

be specified under the Act on Strengthening Industrial Competitiveness, and among

them, the plan would be for GX-related sectors to utilize financial resources procuredby the Bonds. Also being considered are corporate tax deductions of up to 40% for up

to ten years after approval of a business plan (plus a carry-forward of up to four years).

ColumnGX Implementation Council

The government set up the GX

Implementation Council in July 2022.
This Council, chaired by the Prime

Minister, receives, approves and adopts
major proposals on GX basic policies
and strategies from the Minister of

Economy, Trade and Industry and otherministers. Public disclosure of details of

the discussions at the Council is limited.

What is Green Transformation?

7

Energy

Housing/ lifestyle

Transportation

Manufacturing

Table: Sector-specific Investment Strategies for GX Economy Transition Bonds

Steel
Chemicals
Pulp & paper
CementPublic +privateMajor proposed investments based on GX Economic Transition Bonds
investment(trillion yen)

>3
>3
>1
>1

Automotive>34

Batteries>7

Aircraft

>4

SAF

>1

Ships

>3

Housing/
lifestyle>14

Resource
recycling>2

Semiconductors>12

Hydrogen,
etc.

>7

Next
generation
renewableenergy

>31

CCS

>4

Nuclear

Cross-sectoral
measures>1• Support for capital investment to transform manufacturing processes(conversion to innovative electric furnaces, ammonia as a heat source forcracking furnaces, chemical recycling, bio-chemicals, CCUS, bio-refineries, etc.)••

Support for introduction of electric vehicles (passenger)
Support for introduction of electric vehicles (commercial)• Support for introduction of production facilities• Support for introduction of stationary storage batteries• Development of core technologies for next generation aircraft• Support for sustainable aviation fuel (SAF) manufacturing and supply
chain development• Support for introduction of production facilities for zero-emission vessels• Upgrading to insulated windows• Introducing energy-efficient water heating• Support for renovation of buildings (commercial/educational facilities, etc.)• Support for building recycling-oriented business models• Support for introduction of production facilities for power
semiconductors, etc.
• Support for technology development (AI semiconductors, photonicselectronics convergence, etc.)• Support focused on price differences between conventional and new fuelraw materials• Establishment of supply bases for hydrogen, etc.

• Support to establish supply chains for perovskite solar cells, floating
offshore wind power, electrolysis equipment. Support for introduction of
perovskite solar power• Development and construction of next-generation innovative nuclear reactors• Support to build CCS value chains (development of suitable sites, etc.)• Promotion of investment through energy-saving subsidies, including forsmall and medium-sized enterprises• Support to foster deep tech startups• R&D by GI Fund, etc.

• Financial support by GX Acceleration Agency for GX implementation• Regional decarbonization subsidies (independent microgrids, etc.)

Tax measures• Establishment of new tax credits based on production volumeof green steel, green chemicals, SAF, EVs, etc.

Source: Prepared by Climate Integrate based on METI Sector-specific Investment Strategies (p.11).

8

What is Green Transformation?

Ⅱ . Key Issues about GX
As described above, the GX promotion framework was formed over a short period of timewith the aim of securing large-scale investment and the financial resources to support
the investment. It is backed up by legislation, and is being actively promoted by thegovernment. Major initiatives are evident elsewhere, such as in the United States and theEuropean Union, to direct massive investments into decarbonization efforts. However,
GX is unique to Japan in terms of its mechanisms and details, and many issues withJapan’s approach have been raised.19, 20, 21 Below is a summary of some of those issues.

Doubts about alignment between GX
and carbon neutrality goals● The focus of GX is on industrial● Major sectors targeted to benefit fromhas provided domestic reduction

private investment include automotive,

promotion. While the government
targets for each sector for the next 10

years, it has given no clear indicationsof the expected climate benefits ofimplementing GX or prospects for
actually reducing greenhouse gas
emissions. For example, to what

extent will Japan’s GX initiatives be

consistent with the 1.5°C goal under
the Paris Agreement? Is GX alignedwith Japan’s 2030 targets or its goal ofcarbon neutrality by 2050? What aboutalignment with Japan’s G7 commitment
to decarbonize the power sector by
2035? None of this is clear, so it is
impossible to measure progress.

more than 150 trillion yen of public andstorage batteries, and renewable energy.
At the same time, however, funding is

also being targeted toward technologies
that are debatable in terms of suitability
including hydrogen and ammonia cofiring with coal- and LNG-fired power

generation, as well as so-called next-

generation nuclear power, and carbon

capture and storage technologies (CCS),
etc. Furthermore, no evidence has beenpresented that would help to objectively
evaluate the validity of each technology
in terms of alignment with the 1.5ºC

goal, or emission reductions, or costeffectiveness of each project.

What is Green Transformation?

9

GX perpetuates Japan’s reliance on fossil fuels
and nuclear power● GX is based on the premise that Japan● In terms of renewable energy,

generation, and promotes what thedeveloping new technologies such as

will continue to rely on thermal power

government refers to as “zero-emission

thermal power” through the co-firing ofcoal or LNG with hydrogen or ammonia,
or hydrogen-only or ammonia-only

firing. In order to be consistent with the
1.5°C goal, it is necessary to achieve

net-zero in the power sector by 2035.
However, these technologies are still
unproven and extremely expensive,

and there is almost no likelihood thatthey would actually reduce emissions

by 2030. In addition, the likelihood of22

commercialization of these technologies
is difficult to predict, so promoting cofiring or 100% hydrogen- or ammoniafiring for power generation will likely

end up keeping thermal power plants
operating longer.

● Japan’s policy to reduce its relianceon nuclear which had been in place since
the Fukushima Daiichi Nuclear Power
Plant accident in 2011, was changed

dramatically in 2023 to enable nuclear
plants to operate for more than 60

years. The government also intends

to develop and build “next-generation

innovative reactors” under GX. However,no assessments have been provided tohelp verify the economic viability of newreactors or their potential contribution

while GX places some importance on

floating offshore wind and perovskite
solar power generation, it provides

almost no incentive to deploy solar
and wind power that uses existing

technologies, including commercialscale solar whose installations havebeen slowing down in recent years.23
The government plans to set targets

for floating offshore wind, and setting

ambitious targets could signal prospects
for expansion (note: Japan has theoffshore wind development target of 3045 GW by 2040, which does not specify
the breakdown of floating and fixedbottom offshore wind).24● Japan’s continued dependence

on fossil fuels and nuclear power will

perpetuate its national expenditures forimported energy resources such as coal,gas, and uranium and also encourage
further fossil fuel development andlock in fossil fuel infrastructure incountries in Asia and the Middle

East, as well as the United States,

Canada and Australia. Thus, Japan’s
GX could stymie decarbonization

efforts in other countries and divert

finite investment resources away fromrenewables.

of CO2 emission reductions to the 1.5°C

goal.

10

What is Green Transformation?

Adequacy and credibility of projects to be invested
by GX Economy Transition Bonds● While the Bonds may provide

the government has picked eligible

investment to promote decarbonizationbudget allocation).27 But of the 1.6

opportunities to attract private
in Japan, there is also a risk ofgreenwashing as described below:
25• Projects that are questionable
in terms of alignment with theParis Agreement’s 1.5°C goal withregards to CO2 emission reductions
and timelines are among thoseconsidered eligible for use ofproceeds (ammonia and hydrogenco-firing technology for thermal

power generation, carbon recycling,
CCS, etc.).

• The Bonds can be issued even before

use of proceeds (eligible projects) has
been decided, so there is a risk that26

investments may be made without

enabling investors to make accurate
evaluations. For the first issuance,

projects (mostly those in FY2022

trillion yen Bonds to be issued, about
360 billion yen, or 23% of the total,
has not been allocated to specificprojects.28• The information to be disclosed
in reporting can be either on an

individual project or eligibility criteria
basis,29 so reporting may not be

sufficient enough for stakeholders toevaluate the CO2 emission reductionsof different projects within the same
eligibility criteria.

● The challenge going forward will

be to ensure that investors can moreaccurately evaluate consistency with the

1.5°C goal, and ensure the adequacy andcredibility of projects to be invested by
the Bonds.

Carbon prices set too low, implementation too slow
● Carbon pricing is being introducedof other major countries and comparedof the Bonds. Based on the anticipated

15,000 yen per ton of CO2 and is not

as a source of funds for the redemption
scale of 20 trillion yen over ten years,

it is assumed that the carbon price will

be set at the rate of about 1,500 yen per

ton of CO2. This level is lower than that30with benchmarks such as EU ETS’ aroundsufficient to provide a price incentive.31● The first auctions are scheduled forabout ten years in the future, in FY2033,

What is Green Transformation?

11

evidence of a lack of a sense of urgency

importers will be subject to a carbon levy,

meantime, although stricter rules are

require the involvement of the Diet. Going

as a response to climate change. In the

being considered, the emissions trading
32

system is being left to voluntary efforts,
and it is unclear whether the system

will function adequately and achieve
emission reductions.

● Starting in FY2028, fossil fuelbut unlike a carbon tax, a levy does not

forward, the challenge is to ensure thatproper debates take place about the mostappropriate carbon pricing mechanisms(e.g., about the effectiveness of pricing/levies/taxes on emission reductions and how
carbon pricing revenues should be used).

Extensive powers given to METI● The system is designed to give METI

formulation process including details

making and implementation of GX. For

crucial policies tend to be decided by thesignificant influence over decision-

example, the GX Promotion Act gives
only METI the authority to formulate
the GX Promotion Strategy. METI is

also responsible for the establishment

government and ruling parties making it
often difficult for diverse opinions to bereflected.

and operation of the GX Acceleration● GX focuses mainly on corporate

and administrative powers have beenover determining which technologies

Agency. Extensive decision-making

concentrated in METI, resulting in asituation where checks and balances
cannot function properly.

● GX measures are discussed at the

GX Implementation Council, chairedby the Prime Minister with invited

experts also participating. METI is

effectively in charge of the process withits minister also serving as the Minister
for Green Transformation. The policy

12of deliberations is not transparent, and“subsidies,” and METI has great control
receive subsidies and on what scale.
The current approach emphasizes

the development of costly and novel

technologies, while largely overlooking
projects that would broadly benefit

the public interest, such as the greater
adoption of existing technologies like

low-cost photovoltaic power generation,
incentives for energy efficiency, or

support for a just transition throughindustrial transformation.

What is Green Transformation?

Aggressive rollout in Asia
● The government is also promoting

terms of their alignment with the Paris

Nations (ASEAN) countries through the

GX could also spread to other Asian

GX in the Association of Southeast Asian
Asian Zero Emission Community (AZEC),
which is being led by Japan. Throughthe promotion of technologies such as
co-firing with ammonia or hydrogenin thermal power plants and othertechnologies that are questionable inAgreement, the problems with Japan’scountries. GX could have other negative
impacts, such as unraveling efforts of

the Just Energy Transition Partnership,
which aims for a just transition awayfrom coal in countries such as Vietnam
and Indonesia.

What is Green Transformation?

13

Ⅲ . Looking ahead

As described above, Japan’s “Green Transformation” (GX) is being promoted jointly by

the government and private sectors as a made-in-Japan concept, with the government
as the flagbearer. It is a mechanism to enable new investment on a massive scale, butthere is no evidence or assurance that GX schemes will result in carbon neutrality forJapan. The promotion of unproven technologies and the lack of urgency in introducing
carbon pricing may fail to produce steady reductions in greenhouse gas emissions.

The direction of GX-related policy, strategy, investment and allocation of funds wasdetermined over a very short time frame. To ensure alignment with the Paris Agreement
and the 1.5°C goal, climate and energy policy going forward should not be solely basedon decisions made by the government and ruling parties. We need to see data-driven,objective deliberation and debate about the likely emission reductions and suitabilityof each measure and technology as well as the optimal design of carbon pricing. It isalso crucial to enable public participation while ensuring adequate debate with themeaningful participation of citizens in transparent processes.

14

What is Green Transformation?

References1

C abinet Secretariat “Basic Policy for the2

A gency for Natural Resources and Energy

3
4
5
6
7
8
9
10

11
12

Realization of GX” February 10, 2023
website May 26, 2023 (in Japanese)

14
15
16
17
18
19

20

METI “GX League Basic Concept” February 1,

METI “GX League Basic Concept” (in Japanese)GX League “GX dashboard” (in Japanese)Cabinet Secretariat “Basic Policy for the

Realization of GX: Reference Document”
February 10, 2023

House of Councilors Legislation information
June 15, 2023 (in Japanese)

21

2023

Renewable Energy Institute “Comment: The GX
Basic Policy Falls Short in Proposing Strategies
for Overcoming the Current Crises” February

22
23

M
 ETI Press release July 28, 2023 (in Japanese)

28, 2023

Climate Integrate “Getting Lost on the Road
to Decarbonization: Japan’s Big Plans forAmmonia” May 2022 (updated June 2022)
Japan Photovoltaic Energy Association“Current Status of Solar Power Generation andChallenges toward Becoming IndependentHouse of Councilors Legislation information
June 7, 2023 (in Japanese)“Statement Regarding the Basic Plan for

Growth-Oriented Economic Structure” March 3,

Cabinet Secretariat “Basic Policy for the
Realization of GX” February 10, 2023

Japan Federation of Bar Associations

a Smooth Transition to the DecarbonizedG X League “List of participating companies”(accessed January 12, 2024) (in Japanese)

Society” March 3, 2023 (in Japanese)

the Realization of GX and the Bill Promoting

2022 (in Japanese)and Major Power Source” October 27, 2023 (inJapanese)Cabinet Secretariat, Financial Services Agency,

24

Trade and Industry, and Ministry of the25

Framework” November 2023

26

DNV “GX Economy Transition Bond Study

Bonds”

27

JCR “Climate Transition Bond Evaluation

Bonds”

28

Ministry of Finance, Ministry of Economy,

Environment “Japan Climate Transition Bond
13

System for the Realization of a DecarbonizedMinistry of Finance “Japan Climate Transition
Ministry of Finance “Japan Climate Transition
GX League “Emissions Trading Scheme” (inJapanese)Cabinet Secretariat “Toward the Realizationof Green Transformation” December 15, 2023
(p.29) (in Japanese)

29

METI “Vision for Offshore Wind Power Industry(1st)” December 15, 2020

PRI “Policy Briefing: Delivering Net Zero inJapan” December 2023 (p.10)



Session” December 27, 2023 (p.9) (in Japanese)
Results” February 27, 2024 (p.28-30)

JCR “Japan Climate Transition Bond

Framework Evaluation Summary” December
27, 2023 (p.13-14) (in Japanese)

DNV “Second Party Opinion: The Governmentof Japan, Climate Transition Bond Framework”
November 7, 2023 (p.77)

METI “Sector-specific Investment Strategies”

30

METI “Sector-specific Investment Strategies”

31

The World Bank “State and Trends of Carbon

Japan Federation of Bar Associations

32

Cabinet Secretariat “Toward the realization

December 22, 2023 (in Japanese)

December 22, 2023 (p. 12-13) (in Japanese)“Statement on the Bill for the Partial

Amendment of the Electricity Business Act,etc. for the Establishment of a Power SupplyCitizens’ Commission on Nuclear Energy

Documents March 20, 2023 (in Japanese)
Pricing 2023” May 2023 (p.21)

of Green Transformation” December 15, 2023
(p.29) (in Japanese)

Climate Integrate is an independent climate

Climate Integrate

approaches to connect scientific, political,

Written by: Kimiko Hirata,

policy think tank in Japan. Through integrated
and social dimensions, we support actions for
decarbonization by civil society, business andthe public sector.

January 2024

Chisaki Watanabe, Hiromi Mizota
Designed by: Yasuyuki Sasaki