IEEJ：August ©IEEJ 2024
Special Bulletin
A Japanese Perspective on the International Energy Landscape (702)August 15, 2024

Forecast and Backcast Future Energy Situation
Ken Koyama, PhD
Chief Economist, Senior Managing Director
The Institute of Energy Economics, Japan
There are various uncertainties in the real world around us, making it extremely difficult toaccurately predict how the situation will change in the future. As the international energy situation isplagued with many important uncertainties that affect the future, it is becoming increasingly necessary
to think about the future of energy under these uncertainties. Once the investment is made andembodied as infrastructure or equipment in the energy sector, as known well, such infrastructure orequipment will continue to be used over the long term. Moreover, it often takes a considerable amountof time from an investment decision to its implementation and embodiment. Investment with an eye
on the future of energy represents an effort to cope with a long-term future.
In Japan, discussions are underway for the formulation of the Seventh Strategic Energy Plan.
With the aim of achieving carbon neutrality by 2050, Japan must set greenhouse gas emission
reduction targets for 2035 or 2040 and consider how the energy mix should be to attain them. In
addition to promoting decarbonization, the new plan must respond to developments that could not betaken into account for the current Sixth Strategic Energy Plan (approved by the Cabinet in October2021), such as the emergence of energy security as a top priority following the Ukraine crisis, theincreasingly complex geopolitical situation, and the deepening division of the world. Based on thissituation, the government must consider the future vision of energy that Japan is aiming for and thepolicies to realize it.
The importance of such efforts is not limited to Japan. In Europe, America, and Asia, majorcountries must develop their respective future visions of energy they pursue and formulate andimplement policies to achieve them. An important basis for these efforts is how to envision the futureof energy for the world as a whole. It is also extremely important to strategically consider how thefuture of energy will be for the world as a whole and how each country needs to respond to the broad
direction. This is the reason why how to envision the future of energy for the world as a whole isattracting interest.
Efforts are being made in Japan and other countries and in the world as a whole to envision
the future of energy. These efforts can be roughly divided into two approaches based on differences inbasic ideas and ways of thinking about the future vision. The first approach defines an ideal picturethat should be pursued and depicts how the world should change to realize the ideal picture. Becauseof its characteristics, it is sometimes referred to as the top-down backcast approach. The reason why
it is described as “backcast” is that the goal is determined before considering how the world shouldchange from now to achieve the goal. The other approach focuses on the trend of changes based on
past trends and envisions the future by making various assumptions about the important factors thatlead to changes. This can be called a bottom-up forecast approach because it projects changes basedon assumptions in a bottom-up manner.

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Most frequently cited as representing the backcast approach is the “Net ZeroEmissions(NZE) Scenario” in the World Energy Outlook of the International Energy Agency. Thisscenario first appeared as a report titled “Net Zero by 2050: A Roadmap for the Global Energy Sector”
in May 2021 and has since been positioned as one of the three scenarios in the annual WEO known as
the IEA's flagship deliverable. Though being one of the three scenarios, the NZE scenario is
undoubtedly attracting the most attention and interest in the world. As suggested by the scenario name,it sets out the goal of net-zero GHG emissions for the entire world by 2050 and shows how the world
would have to change from now on in order to achieve the goal. Its vision for the future is that theworld would have to dramatically increase zero-emission energy sources such as renewables andrapidly and substantially reduce fossil fuel consumption in order to achieve the goal. In line with thisvision for the future, it has been pointed out that clean energy investment would have to bedramatically accelerated, implying that new oil and gas investment would no longer be required.
While there are various forecast approach reports, I would like to cite the “IEEJ Outlook”
of the Institute of Energy Economics, Japan, as one of the representative forecast approach reports
covering the world as a whole. The IEEJ Outlook depicts the future of energy in the world in twoscenarios: the “Reference Scenario,” where the current trends will continue, and the “AdvancedTechnologies Scenario,” where various energy technologies will be introduced to the maximum extent
possible to decarbonize the world and enhance energy security. Both scenarios represent the bottomup forecast approach, differing from the abovementioned NZE scenario fundamentally andconceptually. Therefore, even the Advanced Technologies Scenario indicates that the world wouldreduce CO2 emissions by nearly 60% from the present level while falling short of achieving a net-zeroemissions goal. So, energy demand projections in the Advanced Technologies Scenario differ far fromthose in the IEA NZE scenario.
What I would like to emphasize here is that both the backcast and forecast approaches arenecessary for considering how to respond to energy issues in an uncertain future and have theirrespective advantages and challenges. Rather, it is important to have an attitude and perspective on
how to utilize these approaches based on a good understanding of their advantages and challenges. An
advantage of the backcast approach is that it clearly shows what needs to be done to achieve an ideal
state. In a sense, it is a normative analysis that can explicitly show how far the reality is from whatneeds to be done and how much additional effort is needed to bridge the gap. On the flip side, achallenge of the backcast approach is that the gap between reality and what needs to be done is often
extremely large especially when the ideal state is extremely ambitious, causing problems. Regarding
the IEA NZE scenario, which depicts a world in which new investment in oil and gas would no longer
be necessary, it is naturally conceivable that demand for oil and gas would fail to decline as much as
depicted in this scenario. If a wrong interpretation of the scenario leads to the absence of new oil andgas investment that is originally required, a supply-demand mismatch may arise and trigger oil andgas price hikes to affect energy security.
In contrast, the forecast approach is attractive in that it does not depict an ideal futurenormatively but provides an analysis of the future relatively more based on reality. This means thatthe more ambitious the ideal state becomes, the more valuable the outlook based on reality is. However,the forecast approach has an essential challenge in that how to set important assumptions that affectchanges is the key question that needs to be asked. Another challenge of the forecast approach is that
it is difficult to reflect discontinuous changes caused by innovation. From this point of view, it can besaid that the future picture under the forecast approach may take on a conservative nature that isconnected closely to an extension of the present trend. I would like to reiterate that it is more important
than ever to fully understand the advantages and challenges of the two approaches for analyzing the2

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future of energy and considering relevant responses in the current situation where uncertainties aregrowing.

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