COVER STORY • 1

ARoundtable with Teiko Kudo, Prof. Yukari Takamura, Tatsuya Terazawa, & Masakazu Toyoda

ssessment of COP26 & the
Challenges Ahead on Japan’sPath to Carbon Neutrality

By Japan SPOTLIGHT(Online Roundtable on Jan. 18, 2022)
Participants

Teiko Kudo

Prof. Yukari Takamura

Assessment of COP26
Toyoda (Chairman of JEF): Today, we bring together threeoutstanding opinion leaders to conduct an “Assessment of COP26
and the Challenges Ahead on Japan’s Path to Carbon Neutrality.”
From academia, Prof. Yukari Takamura from the University of Tokyo,
from finance, Teiko Kudo, a member of the Board of Directors at
Sumitomo Mitsui Banking Corporation, and from the intersection ofacademia and pragmatism, Tatsuya Terazawa, chairman and CEO of
the Institute of Energy Economics, Japan.
Let’s begin with the outcome of COP26. First, I’d like to have eachof you give an assessment of COP26. Was it a success or failure, andwhy? Prof. Takamura, could you go first?
Takamura: I have heard different evaluations of COP26 as a successor a failure. From my point of view, I would say that it was definitely
a success in terms of making significant progress in combatingclimate change. At COP26, countries have resolved to “pursue theefforts to limit the temperature increase to 1.5°C above pre-industrial
levels”, which has been stipulated as an aspirational goal under theParis Agreement, and I believe that the COP has made the 1.5°C goal
appear front and center on the international stage as a goal for theinternational community.
The damage caused by extreme weather events and disasters is on
the rise, which is considered to be caused by climate change. The
agreement to pursue efforts to achieve the 1.5°C goal is based on
the most recent scientific findings, such as the ones provided by the
https://www.jef.or.jp/journal/

Tatsuya Terazawa

Masakazu Toyoda

Intergovernmental Panel on Climate Change (IPCC), which indicatesthat it is necessary to limit temperature increase to a much lower
level so as to mitigate the risk of future climate change. It is also
commonly recognized that emission reductions over the next 10
years, up to around 2030, are critical to achieving the 1.5°C goal.
In the run-up to COP26, many countries, including Japan, set
carbon/climate neutrality goals. Major industrialized countries share
the goal of achieving climate neutrality by 2050, while China, Russia,
and Saudi Arabia, a major oil producing country, also aim to achievecarbon/climate neutrality by 2060, and India by 2070, at the latest. If
all of these goals are realized, it is expected that the temperature rise
would be limited to about 1.8°C. COP26 has made the international
community come the closest to the 1.5°C goal in a decade bybringing out many countries’ pledges.
The reason for being evaluated as a “failure” is that the level ofemission reductions in 2030 does not meet the level necessary toachieve the long-term goal, even though the long-term goal ofachieving climate neutrality by around 2050 has been firmly pledged
and confirmed by countries. I think this is the reason for attracting
the harsh criticism, especially from the younger generation.
Kudo: Some 121 countries had committed to carbon neutrality by
the end of COP25, but other than the EU countries, most were small,so the commitments added up to only 17.9% of total global CO2
emissions. But this time around, the lead-up to COP26 wascharacterized by growing enthusiasm for ambitious targets, withJapan, China, and the United States announcing national targets. By
Japan SPOTLIGHT • March / April 2022

5the end of COP26, more than 150 countries including all G20
members had adopted carbon neutrality with fixed deadlines. This
was a very significant outcome. In all, 154 countries accounting for
88.2% of global CO2 emissions had announced targets of carbon
neutrality by no later than 2070.
In a world that is increasingly politically and economically divided
over ideology and human rights, the significance of adopting acommon global target cannot be overstated. At the same time, as
Prof. Takamura pointed out, so many countries acknowledged 1.5°C
as the target, but there is no clear roadmap to reach it, and muchdisagreement among them. That is a problem.
Given the energy-profile and other differences among countries,
timelines and the means to achieve targets require flexibility.
Otherwise, the economic impact will differ according to existing
circumstances, and some emerging economies could see theeconomic gap grow. The Paris Agreement takes a bottom-up
approach in contrast to the top-down approach under the Kyoto
Protocol, which is important.
Terazawa: Speaking as a former government official engaged formany years in international negotiations at the Ministry of Economy,
Trade and Industry, I think it was a huge success just to reach an
agreement among so many countries. It was hard enough when I
had a hand in forging a consensus among the 20 participating
countries at the G20 Summit in Osaka in 2019.
This being the case, a wide variety of countries from emerging
economies like India to energy producers such as Saudi Arabia madepledges on long-term targets. It was an epoch-making event where
so many countries beyond all expectations made pledges. But as
successful as it was, issues remain unresolved. In particular, the gap
between developed and developing countries in their positions andmindsets became evident, as could be seen in the dispute near theend over whether coal-fired thermal power should be subject to“phase out” or “phase down.”
In the end, the different perspectives of developed countries,
which want to achieve carbon neutrality as quickly as possible, andemerging economies that face urgent realities including the need for
economic development, became obvious.

also soared. Even the price of coal is rising. And electricity rates havebeen rising as well in some countries. Could the recent spike inenergy costs – crude oil (Brent oil) is now more than US$90 per
barrel – be connected to climate change? Given the timing,coinciding with COP26, how should we assess the causes of soaring
energy prices?
Terazawa: It is difficult to cover all the factors because there are somany of them, but I would broadly divide them into four categories.
First, the corona crisis is still with us, but I am certain that therecovery of economic activities in many countries has nonethelessbeen more robust than expected and has led to the growth in energy
demand that we have been seeing. And because this was
unexpected, demand has grown without the appropriate rails inplace, including inventory.
Second, I’m not sure if it can be attributed to climate change, but
the weather has certainly been a factor. Many countries have been
going through a colder winter than usual, causing greater energy
consumption, while others have seen milder winds, leading to lessrenewable energy being supplied.
Third is the effect of the debate and measures taken regarding
climate change. Many countries are adopting the conversion fromcoal to natural gas as a major element of their decarbonization
strategies. Demand for natural gas has grown enormously as aresult, causing gas prices, LNG prices, to jump.
Fourth is the negative impact on supply caused by the growing
reluctance over upstream investment in fossil fuels as part of thedecarbonization trend, particularly among Western players, who arevulnerable to market pressure. In the past, when prices went up, so
did supply. This time it is not happening as much, and it is my viewthat the debate over the global environment is affecting supply. In
that sense, we may be talking about 2050, but we are already being
affected now in various ways.

Causes of Soaring Energy Prices

Toyoda: Ms. Kudo, I’d like to put the same question to you. OPEC+
oil producers appear to be fulfilling their production quotas in theface of soaring prices, but I’m hearing that there is still not enoughproduction to meet demand. Meanwhile, developed countries,
particularly some consumer countries, are making releases fromtheir strategic reserves. What do you make of this situation?

Toyoda: The second issue on our agenda is the following. COP26
coincided with rising crude oil prices. Spot prices for natural gas had

Kudo: The OPEC+ countries are maintaining a higher productionlevel, but they are wary of further raising output because they want

6 Japan SPOTLIGHT • March / April 2022

to avoid excess supply causing prices to weaken in an eventual
economic downturn, while demand has been recovering more
quickly than OPEC+ had assumed. I think this is the explanation.
Some consumer countries have rolled out releases from theirstrategic reserves, but the amounts have been limited and have not
had much effect on prices.
In the past, I assume that there would have been businesses andgovernments beginning to make investments with an eye on the longterm even if it would result in oversupply in the near term. But now
they are very much afraid of ending up with “stranded assets”, so
are more likely to want to limit their exposure to future risks.
Accelerating decarbonization and stabilizing crude oil prices
simultaneously is a daunting task. It is very important in this respect
to consider how we are going to maintain the energy supply system
including the role of other fossil fuels and nuclear power as well as
the shift to hydrogen and ammonia. It is essential that we clearly
indicate how much fossil fuel we will need for the future and sustain
investment accordingly.

sense of urgency about climate change, and therefore, in its words, it
may be necessary to give a certain role, at least during thetransitional phase, to nuclear power – which does not produce CO2
emissions in its operation – or gas-fired power, rather thancontinuing to use thermal power with high CO2 emissions.
In this sense, it can be said that this would reflect one of thedirections of the transition to an energy supply that can both solve
the problem of climate change and stabilize energy prices, as I
mentioned earlier, by trying to secure energy diversity in financing.
Of course, not all nuclear power is automatically considered as“green” in the taxonomy. As the European Commission document
also notes, it must satisfy the relevant standards for nuclear waste
and safety. And I understand that gas-fired plants must also satisfy amaximum emission intensity threshold. In all cases, I think this is atypical example that raises the question of how to manage thetransition to carbon neutrality and how to address the challenge ofclimate change while maintaining the stability of energy supply andprices.

Toyoda: Achieving a balance between economic stability anddecarbonization will test the capability of national governments. Prof.
Takamura, I have a question for you here. Featured prominently inthe debate on this point is the reevaluation of the role of nuclear
power, particularly in Europe. France had been cautious for years but
has now begun discussing the resumption of constructing new
nuclear power plants. The EU talks on taxonomy never seemed to be
far from reaching a conclusion, but there now seems to be more
willingness to include nuclear power and/or gas-fired thermal powerin environmentally sustainable economic activities during thetransitional phase.

Assessment of Japan’s Sixth Strategic
Energy Plan

Takamura: I think that the current surge in energy prices is a very
typical recent event that raises the question of how to manage thetransition to carbon neutrality and how to address the challenge ofclimate change while maintaining the stability of energy supply andprices. Given the global nature of the energy market, we need to
manage it well on an international level, but it goes without saying
this is much easier said than done since the international community
has no centralized global authority. I think this poses a really difficult
challenge as to how to do this.
Recent discussions on EU taxonomy yield a typical example of thereevaluation of nuclear power. If you look at the European
Commission’s proposal for the EU taxonomy, there is a very strong

Toyoda: Let’s turn our attention to Japan’s Sixth Strategic Energy
Plan. The plan has two milestone years, 2030 and 2050. We’ll begin
with the assessment of the challenges for Japan for 2030 with
COP26 as the backdrop. I’d like to take up coal-fired power first. This
year’s G7 summit will be hosted by Germany, which is a vocal
advocate of eliminating coal-fired power. But Japan will still be using
coal-fired power in 2030. How can Japan justify its position in theface of German demands? Or could it be that Japan’s 46% reductionof greenhouse gas emissions by 2030 is not enough? The EU
projects a 55% reduction over the same period, the US 50-52%.
Japan may be criticized for not doing enough. What are your viewson this, Ms. Kudo?
Kudo: It is our responsibility as a developed country to clearly
demonstrate how we will achieve our 2030 target. We may be
pushed to raise our target, but the 46% reduction itself will not beeasy for Japan. It is more important to demonstrate how we will
steadfastly work towards this objective.
As you are aware, the Japanese government has set the target for
renewable energy in the power supply composition for 2030 at
36-38%. However, even with the ambitious assumptions put
Japan SPOTLIGHT • March / April 20227

together by ministries and agencies added up, there remains a 37
billion kWh deficit, so the renewable energy plans through 2050
must be moved up. Here, there’s hope that there is room for
expanding solar and wind power. Offshore wind power has great
potential in Japan, but it will be difficult to secure a significant
amount by 2030, given all the necessary assessments and theconstruction period. So the extent to which the targets for the
installment of solar panels on new housing and other sites can be
met will be crucial.
But bridging the 37 billion kWh gap with solar power requires
30GW in capacity, which in turn requires a 76 trillion-yen investment.
There are hurdles ahead as we fulfill our responsibility as adeveloped country to achieve the 2030 target. I fear that even thiswill be difficult to achieve unless the public and private sectors work
closely together.
In response to possible demands that we phase out coal-fired
power, we face the same issue that all countries do. Specifically, it isnecessary to achieve the 2030 target while sustaining economic
growth, not to mention stable electricity supply. So we should
identify the conditions that would make a phaseout possible, thenfigure out how to satisfy those conditions.
Toyoda: Let me ask you, Mr. Terazawa. The International Energy
Agency (IEA) presents a rosy scenario in which the response to
climate change produces economic growth and there is a net benefit.
What are your views on this point?
Terazawa: The IEA’s analysis takes a simplified approach in which it
essentially makes assumptions on the amount of investment in solar
power, wind power, and the like to achieve carbon neutrality andapplies a multiplier to the amount to calculate the effect on GDP. This
is too simple in my view. Let me give three reasons.
First, rising energy prices are inevitable in the approach to carbon
neutrality, but the IEA’s analysis does not take into account the effectof the higher prices. This is a significant omission.
Second, money is not unlimited, so investment in renewables andthe like means that funds that would have been directed elsewhereare being diverted to that purpose. There’s a need to analyze the net
effect of the positive effects of the hypothetical investment thatwould have been made absent the investment in renewables and thepositive effect of the investment in renewables. It’s not there.
Third, the IEA analyses the global impact, so more renewables
mean more investment in solar panels, which is a positive for the
8 Japan SPOTLIGHT • March / April 2022

economy and employment. But think about where the solar panels
are being made. Countries that do not manufacture solar panels or
manufacture them but are seeing their shares decline, such as
Japan, will not see domestic production and employment grow justbecause domestic demand for solar panels grows. The economic
impact of carbon neutrality will be very different depending onwhether your national economy produces the necessary resources or
solar panels, or merely consumes them.
Unfortunately, Japan does not produce a wide variety of criticalminerals and imports a high proportion of its solar panels. The
impact of carbon neutrality on our country must be examined ingreater detail.
Toyoda: Prof. Takamura, what is your assessment of the overall 2030
energy mix? Renewables more or less represent a twofold increase,
while 27 nuclear reactors have to be operated at 80% capacity but
only 10 reactors are in operation now. Meanwhile, hydrogen andammonia have just been rolled out and only have a small share.
What is your assessment of the feasibility of the 2030 target?
Takamura: I also think that the IEA’s simulation analysis, as pointed
out by Mr. Terazawa, does indeed have some limitations. On theother hand, if we look at it another way, the challenge is how we canelaborate and implement climate policies to stimulate economic
growth and to create employment or at least to avoid a negative
effect on it.
I believe that none of the goals for the 2030 energy mix is easy toachieve. This time, in particular, Japan’s 2030 climate target and the2030 energy mix that supports it were decided so that they would beconsistent with the 2050 climate neutrality goal. This means that the2030 energy mix is a target towards which policies are to be
mobilized to enhance energy transition. In that sense, the nature andfunction of the energy mix may be different from the one in theprevious strategic energy plans.
As for renewable energy, I do think that it will not be easy toachieve. On the other hand, the 2030 renewable energy target in the2030 energy mix does not sufficiently reflect some assumptions
likely to be realized in the future. One is the cost reduction potentialof renewable energy. For example, the cost of offshore wind power
was not yet known on a commercial basis at the time, so thepotential for reducing the cost of offshore wind power generation
has been estimated rather conservatively.
The other thing is that the targets for renewable energy were

elaborated based on the amount of renewable energy expected to be
introduced under government policies and subsidies, starting withthe feed-in tariff scheme. Meanwhile, business efforts to switch
energy use to renewables to achieve their own climate targets are
gaining momentum. Some of these businesses use the feed-in tariffs
or receive government subsidies, but others do not. It is difficult toquantitatively assess the prospects for expanding renewable energy
which companies do on their own without government support, and
I understand that it is not fully factored into the renewable target in
the energy mix.
In this sense, the renewable energy target is not easy to achieve,
but I believe that it has a good chance of being achieved. The
challenge is to reduce the cost of renewable energy, and I think it isimportant from the perspective of reducing the cost that the existing
power system and its relevant rules, including the power grid andpower market, should be transformed to make them compatible withthe power system that allows and enhances the shift to renewableenergy as the main power source.
In addition, expansion of renewable energy will only be possible
where it is accepted by local communities where it occurs, so I thinkthat how to introduce renewable energy through local initiatives andin symbiosis with local communities is a critical issue for renewableenergy policy.
In my view, it would be very difficult to achieve the target for
nuclear power. The reason for this is that policy alone would not beable to bring more reactors into operation since the consent of thelocal communities is required in addition to meeting safety
standards. The difficulty here is that rolling out policy measuresalone will not lead to immediate change because there aredeterminant factors other than policy in play.
Lastly, as for new energy sources such as hydrogen and ammonia,
they are included in the 2030 energy mix in order to provide supportand incentives for the expansion of these new energy sources. I think
the challenge for hydrogen and ammonia in 2030 will be how far wecan develop the infrastructure for their introduction, including the
supply chain, and at the same time to reduce their costs throughvarious measures.
Terazawa: Achieving the 2030 targets for renewable energy requires
the acceleration of the introduction of renewable energy beyond the
speed with which mainly solar power rapidly expanded over the last
five years under the feed-in tariff system.
Now, the feed-in tariffs are going to be replaced by a new systemof feed-in premiums, and this is creating uncertainty. And solar
power in particular is facing increasing friction with local
communities. Japan has a huge lead over the rest of the world in theratio of solar panels to level ground unit. Golf courses and otherunused land had made the going easy under the feed-in tariff regime.
But going forward, it will be necessary to install solar panels wheremore reconciliation with local communities is required. This musttake place while the system is transitioning from feed-in tariffs tofeed-in premiums, making the acceleration even more difficult.
Acceptance from local communities will be even more important for
renewable energy going forward.
The target for nuclear power will be very difficult to achieve if thecurrent speed of safety examinations prevails. Of the 27 reactors thatmust be in operation to achieve the 2030 target, 10 are currently inoperation and seven more have been approved, but the other 10 are
still under examination. Of these 10, applications were submitted forthree of them in 2013 and four in 2014, so their examinations havealready taken seven, eight years. There are nine more reactors thatare not being decommissioned that are waiting their turn to be
examined. All this means that unless the safety examination system
is reinforced and the examinations are conducted smoothly andoptimally while upholding safety as the absolute objective, it will be
extremely difficult to bring all 27 reactors back to operation by 2030.
As for hydrogen and ammonia, cost reduction is necessary, butthey will inevitably be more expensive than other fuels. How can the
more expensive hydrogen and ammonia be deployed? The
government is doing research and development including
demonstration tests, but the path to actual deployment is a task forthe future.
Kudo: I see the energy mix in the new plan as a milestone on theroad to carbon neutrality. A clear roadmap must be given to makesure that it is reached. Using hydrogen, ammonia, and other fuels
and how we integrate digital transformation are the keys here.
The Green Innovation Fund provides support up to thedemonstration test stage, but the subsequent commercialization
phase requires massive funds. There is an urgent need for
discussion on how the public and private sectors should work
together on this.
Where digital transformation is concerned, there is a need to takeup the challenge of creating new business models and energy
management systems by developing and deploying technologies for
improving power generation efficiency and power storage while
Japan SPOTLIGHT • March / April 20229

pursuing optimization and controlling demand using sensors andartificial intelligence. If we do this, we should be able to achieve the2030 target.
Toyoda: The Sixth Strategic Energy Plan also addresses 2050. Whatis your assessment of the fact that it presents multiple scenarios forthe 2050 target?
Kudo: The results of the multi-scenario simulation including cost
structures for 2050 yielded many useful insights. If decarbonization
aimed at carbon neutrality is pursued without securing social andeconomic buy-in, there will be an inevitable backlash, making theefforts unsustainable. That is why a virtuous circle between theenvironment and the economy and strategies to achieve thiscompatibility are essential.
Climate change policy is a constraint that raises costs, so the key
is the balance between cost and growth: specifically, how do wesecure economic growth while absorbing those costs? It is also
necessary to consider securing the public’s consent to introduce
measures such as the waiver of levies on industries, like Germany
does, and the priority distribution of environmental values toexporters.
On top of this, it is essential to secure wide acceptance ofJapanese technologies that contribute to decarbonizing heat,chemicals, and transportation such as hydrogen and carbon capture,
usage, and storage, the so-called CCUS. The technology race isalready under way. Support from our government on rulemaking isessential.
In this area, it is necessary to find ways to facilitate the flow offunds to innovation. As a financial institution, we are prepared to beaggressive in assuming risk, and the private sector can provide thefunds for the introduction and deployment of establishedtechnologies such as renewables. But massive funds will benecessary in the initial stages for R&D and social implementation,
while banks are under the obligation to protect depositors, so there’s
a limit to the extent to which we can satisfy the need here. We wantto consider a combination of public- and private-sector funds where
public institutions provide some risk capital that can be leveraged tomobilize massive private-sector funds.
Takamura: This was probably the first time that we did a thoroughstudy of 2050 based on multiple scenarios. The insights obtained
from this are significant. In this sense, multiple-scenario studies
10 Japan SPOTLIGHT • March / April 2022

should continue to be necessary in the future as well. This time, the2050 energy/power mix was introduced as one of the reference
scenarios for scenario analysis, and the composition of powersources and energy sources in the scenario does not necessarilyreflect the outlook for costs. If the outlook for costs changes, the2050 energy mix considered as economically rational will alsochange. It is important to continue analysis based on multiple
scenarios with this understanding of the current scenario analysis
firmly in mind.
On the other hand, what was commonly recognized as important
through the scenario analysis is that we need to take a proactive
approach to the challenge of how to reduce the system integration
cost when renewables take up a larger share of the power supply, forinstance, induced by its declining costs due to further progress intechnologies. I think this is a point that everyone thought was very
important through this scenario analysis. In order to reduce systemcosts, it is necessary to consider measures on the demand side,
such as use of distributed energy resources including EVs andmeasures to induce energy consuming companies to locations withrich renewable energies, as well as maintenance and expansion of
the grid. This was a very important study in the sense that it clearly
identified these issues.
Terazawa: Broadly speaking, it was very useful to discuss multiple
scenarios for 2050. I’m being told that the discussions focused on a
choice between renewable energy and nuclear energy with the resultthat many other important issues were not sufficiently discussed.
Specifically, electrification led by renewables is expected to top out
at about half of the total energy consumption. So what about theother half? Hydrogen appears to hold the most promise, but what
are we going to do for decarbonization of the non-electricity sector?
Since that is actually where the strength of Japan’s industries isconcentrated, it’s very unfortunate that there was not much debate
on what accounts for half of Japan’s decarbonization needs and will
determine the future of Japanese industry. If you care about
economic growth in the future, this is where we should focus.
Second, other countries are putting a lot of effort into negativeemissions. China, the US, and European countries all include
significant amounts of negative emissions. It’s very unfortunate that
there is very little debate in Japan on this point.
Japan is blessed with an abundance of forests. Japan issurrounded by the ocean. But this is not being featured at all in thediscussions; the argument is as if we are giving up on setting up

much more solar power because level ground is limited here. Making
effective use of our forests and ocean to generate more negativeemissions should figure more prominently in the overall debate.
As for nuclear power, extending the operation life span of nuclear
power plants will grow in importance as a challenge with the passingof time. It should be extended from the initial 40 years to 60. But thisapproach has its limitations. The number of nuclear power plants will
decline in a business-as-usual scenario even with the extension to 60
years. A conclusion was unable to be reached on the role of nuclear
power on this occasion. There is a serious need for debate in depthon this issue.
Here, I am particularly concerned about hydrogen. Hydrogen is
given a major role in the industrial sector, but where is the massive
amount of hydrogen necessary going to come from? Importedhydrogen will be very expensive because the transportation costs
will be high. Hydrogen produced domestically from renewableenergy will also be expensive. A third option is to produce it with
nuclear power, which is what France is working on. In fact, this is amajor reason for France’s turnaround on nuclear power policy.
Protecting Japanese industries and jobs requires inexpensive andabundant hydrogen, but hydrogen that is imported or produced fromdomestic renewables is expensive. We can’t help losing out in theinternational competition in that case. If businesses cannot secure
cheap, abundant hydrogen, they will locate elsewhere. The debate on
nuclear power should be conducted more reasonably, including thematter of how we will produce the hydrogen to protect our industries
and employment.

Assessment of Carbon Pricing & Border Tax
Adjustment
Toyoda: I would like to go back to the global stage for our final major
issue. Carbon pricing is one of the two systems being promoted asmeasures necessary to achieve carbon neutrality. There is an
ongoing debate in Japan around two options for this – carbon tax
and emissions trading – and consensus is hard to come by.
The other is border tax adjustment, where the issue is the carbon
leakage from developed countries as a result of factories fleeing todeveloping countries. I would like to hear the views of our panelists
on these two systems.
Terazawa: We should reduce costs drastically in order to deploy
technologies that contribute to decarbonization, be they forhydrogen, ammonia, or whatever. As a practical matter, it is very
likely that they will remain expensive. Since it is unlikely that more
expensive technologies will be adopted as a matter of course,intervention through policy measures is inevitable. But carbon
pricing is one of many means of policy intervention, which include
regulation, subsidies, and price differential compensation. Carbon
pricing should be considered as one option among a range of policy
interventions. Given the pros and cons of each measure, selecting
the optimal options for the respective circumstances will be crucial.
The other point is to encourage the switch from environmentally
undesirable technologies to desirable technologies through carbon
pricing. This is predicated on the existence of desirable options.
That’s when carbon pricing could promote the switch from one to theother. Many decarbonization technologies are not actually available
yet. Carbon pricing should be considered as one among a variety ofoptions for policy engagement, keeping in mind the timeline for the
more desirable technologies becoming available as practical options.
Businesses look to the future. It is essential for the government toprovide predictability by showing how such policies and systems aregoing to take shape in the future instead of suddenly bringing themup at a future date for discussion.
As for border tax adjustment, I do have sympathy for the notionthat assuming an extra burden, regardless of what others are doing,puts your industries at a disadvantage in international competition.
But if you adopt this approach across the board, you might end up
advocating the extreme position of making border adjustments for allimported products that give rise to CO2 emissions.
The international trade regime under GATT and the WTO has beena key driver of economic growth since World War II. The reduction oftariffs under free trade agreements also helps the global economy.
There is a risk that this successful set of policies could be seriously
undermined depending on how aggressively border tax management
is pursued. I have sympathy for the desire to introduce border tax
adjustment. But if it is to be adopted, it must be limited to extreme
cases as a last resort. Otherwise, it will cause great harm to theglobal economy, so the system must be designed with the utmost
care.
Takamura: I think we need to seriously consider some kind ofcarbon pricing to make the value of carbon reduction, or in otherwords, the cost of emitting carbon, more visible, while the choice
between carbon tax and emissions trading depends on the design or
nature of the scheme.
Japan SPOTLIGHT • March / April 2022

11

If the value of new decarbonization technologies is not madevisible in the long term, there will be no corporate action to invest in
their development and to commit resources to it. In addition to new
decarbonization technologies, carbon pricing is also necessary as asignal from the policy side that will help companies respond to a
decarbonizing market and society by shifting their businessportfolios.
Of course, a carbon tax could be part of the debate as means tosecure revenue for supporting the transition to a decarbonizedsociety, and how the scheme should be designed will have
implications on allocation of costs. From these perspectives, it isvery important to consider carbon pricing. However, the mostimportant is how to give a clear signal about predictability that thevalue of emissions reduction will definitely increase in the future.
My second point is that under the Japanese system, businesses
make a variety of payments on and around energy, but it is difficult
to see from the outside that they are paying the cost of carbon
emissions. There are many policies and measures existing in parallel,with the result that the overall system is not designed to makebusinesses pay in proportion to their carbon emissions. In thissense, it is inevitable to re-examine the existing system when
discussing carbon pricing.
Finally, my view on border tax adjustment. Now, not only EU but
also Democratic members of the US Congress have also introduced
a proposal on border tax adjustment. This is what we must keep an
eye on. The effectiveness of climate policy is one of the strongest
reasons behind this. We, especially developed countries, import a lotof goods to run our economy and society, so we need to reduce ouremissions not only within our jurisdiction but also on a consumption
basis. There is also an ethical basis behind the call for border tax
adjustment. From the business perspective, it is important forbusinesses to firmly grasp and reduce the life-cycle emissions of
their products and services so that they will be well-prepared if andwhen border tax adjustment is introduced.
Kudo: In principle, I support the use of carbon pricing to reduce
emissions, in as much as it is intended to internalize an externality;
in practice, there are issues. We cannot achieve an optimal solution
unless safety, energy security, and other externalities are internalized,
not just emissions reduction.
It is necessary to maintain basic industries in Japan from anational security perspective. We should not discard an industry
solely for its CO2 emission factor. It is my understanding that our
12 Japan SPOTLIGHT • March / April 2022

government also believes that we should first consider voluntarymechanisms such as the “GX League” and aggressively promotetechnology innovation to reduce CO2 emission factors while
maintaining vital industries and employment.
As for emission rights, if we leave the matter to market forces, toomuch supply will diminish the policy effect, while soaring prices will
reduce economic growth. There’s also the possibility thatunsustainable technologies may be used, so the system must be
designed with care. Businesses also pay a variety of taxes that are
not linked to emissions. Automobiles, for example, are charged witha variety of taxes that add up to a very heavy burden. The time hascome to reconsider the overall tax system, its justifications, and how
the revenue is spent.
Meanwhile, in response to border tax adjustment as well as
national commitments and regulations, businesses are beginning to
identify the volume of their own emissions in order to maintaininternational competitiveness. Looking to the future, as emissions
are tracked with greater precision under a life-cycle assessment
approach, more policy options should become available. But first,
the important thing is to consider helping businesses identify thevolume of their respective emissions and providing incentives toreduce those emissions.
As a financial institution, we are often asked if we could provide
financing with carbon credits as a revenue source for repayment. It isdifficult to provide support for carbon credits unless there issufficient predictability in their volume and price. In addition tomeasures to invigorate the market, it would be easier to consider
providing finance if there were a system for their purchase by ourgovernment, like other countries are doing. The Japanese
government should not hesitate to express its views on border tax
adjustment. At the same time, it must be resolute in making sure that
our export industries are duly protected.
Toyoda: I think we have a consensus here that some form of carbon
pricing is necessary but that existing regimes need to be revisited.
As for border tax adjustment, it must be approached with caution
since we worry that it could link up with protectionism in developed
countries and generate a new North-South problem.
Thank you very much. This has been a great discussion.

Written by Naoyuki Haraoka, editor-in-chief of Japan SPOTLIGHT, with theassistance of TapeRewrite Corporation.