IEEJ：October © IEEJ 2022
Special Bulletin
A Japanese Perspective on the International Energy Landscape (607)

October 19, 2022

IEEJ Outlook 2023
Challenges for Achieving Both Energy Security and Carbon Neutrality
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanOn October 19, the Institute of Energy Economics, Japan, published the IEEJ Outlook 2023
at its 442nd meeting on research reports. The IEEJ Outlook projects global energy supply and demandthrough 2050, being positioned as the IEEJ’s flagship publication. The IEEJ releases the annual
outlook every October, providing a long-term energy supply and demand analysis in the form of anannual regular exercise and special analyses on up-to-date topics. In addition to a long-term analysis
based on the Reference Scenario and the Advanced Technologies Scenario for regular exercise, thelatest IEEJ Outlook features special analyses that focus on the Ukraine crisis and energy security
enhancement initiatives and considers how to achieve both energy security and carbon neutrality fromvarious perspectives. The following summarizes key points of the latest IEEJ Outlook.
The IEEJ outlook takes a forecast approach that projects global energy supply and demand
under various assumptions on future changes, based on changes to date. The forecast approachcontrasts with a backcasting approach in that the International Energy Agency has adopted for ananalysis on global carbon neutrality to consider how global energy supply and demand should change
for the achievement of the global carbon neutrality goal. It must be noted that both the forecast andbackcasting approaches are useful tools for future analysis and have their respective significance.
In the Reference Scenario in which current trends will be sustained, global primary energy
demand will steadily increase under sustained economic growth, posting about a 1.3-fold rise from2020 to 17.6 billion tons of oil equivalent in 2050. The increase will be driven by Emerging Marketand Developing Economies, including India and the Association of Southeast Asian Nations (ASEAN)
that will account for 56% of the global increase. In China that has led global energy demand growth,demand will decline due to falling population and decelerating economic growth. As natural gas andoil demand increases steadily, despite a decrease in coal demand, fossil fuels will continue to accountfor most of global energy supply, capturing 77% of global energy supply in 2050.
In the Advanced Technologies Scenario in which advanced energy technologies will spreadas much as possible to enhance climate change prevention and energy security measures, primaryenergy demand in 2050 will be 19% less than in the Reference Scenario due to powerful progress inenergy efficiency improvement. Demand will sharply grow for non-fossil energy sources such as
renewable energy and nuclear, while slackening for fossil fuels. Coal demand will decrease
substantially. Oil demand will peak in the 2030s and natural gas demand in the 2040s. Nevertheless,natural gas demand in 2050 will increase by 14% from 2020 and liquefied natural gas demand by 13%.
As a result, global energy-related CO2 emissions in 2050 will total 16.9 billion tons, 20.1 billion tons
or 46% less than 37 billion tons in the Reference Scenario. The emissions in 2050 are close to thosein the Announced Pledge Scenario (in which announced national emission reduction goals will beachieved) in the IEA World Energy Outlook 2021 released last year. In the Advanced Technologies
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Scenario, fossil fuels will still account for 59% of primary energy demand in 2050, keeping theirposition as an important energy source.
Special analyses in the latest IEEJ Outlook deal with four key topics. The first analysis points
out that the natural gas and LNG market is urgently required to be stabilized in response to the Ukraine
crisis. From the medium to long-term viewpoint, how to secure necessary, sufficient and appropriate
investment in natural gas and LNG is a key urgent challenge. The analysis also notes that a two-stage
energy transition for decarbonization to appropriately utilize natural gas/LNG will be effective in Asia,
given renewable energy potential, costs for the integration of massive renewables into the power grid,and stable electricity and critical minerals supply as described later. The analysis emphasizes that thestabilization of natural gas and other fossil fuels markets will be extremely important for expanding
the use of blue hydrogen and ammonia that are expected to play a key role in promoting globaldecarbonization.
The second special analysis concerns the significance of stable electricity supply. It is
globally recognized that a key decarbonization measure is the promotion of electrificationaccompanied by initiatives to eliminate emissions from electricity sources. In this respect, theimportance of electricity increases further, with stable electricity supply becoming a significant
challenge. In fact, however, electricity market deregulation and growing variable renewable energy
sources for electricity have led to electricity supply problems, including a decline in surplus power
supply capacity in many countries and a decrease in capacity to respond to heat and cold waves andother abnormal climate phenomena, as well as power supply disruptions. In this sense, how to secure
investment in the power sector is a key challenge for the future. Attracting attention in this respect is
the introduction of an investment recovery method under a total cost approach to be adopted in theUnited Kingdom for promoting nuclear energy. This analysis also emphasizes that it is important tosecure stable electricity supply regarding not only installed electricity generation capacity but also
actual power output and fuel procurement. As stable electricity supply becomes a key challenge,
initiatives to utilize nuclear energy have been seen globally, including new nuclear reactor constructionplans in Europe and the extension of service life for reactors. The analysis points out that Japan’s
initiative to promote the restart of nuclear power plants attracts attention as a contributor not only tostable electricity supply, decarbonization and power cost cuts in Japan but also to global naturalgas/LNG market stabilization.
The third special analysis concerns the significance of critical minerals. As the world
promotes renewable energy power generation and electrification, demand for rare earths and othercritical minerals will increase dramatically. The supply-demand balance will thus become extremely
tight for lithium, neodymium, dysprosium, etc. in the mid-2030s. For some minerals such as cobalt,
reserves are feared to fail to meet growing demand over a long term. As these minerals and capabilities
to process them are unevenly distributed, substantial growth in their demand is expected to lead to not
only a tighter supply-demand balance but also grave economic security issues. The analysis indicatesthat initiatives may have to be enhanced to develop relevant resources, diversify supply chains, recycle
critical minerals and develop alternative technologies to secure stable critical mineral supply that will
be indispensable for energy transition.
The fourth special analysis is related to the economic effects of green investment. While
green investment for decarbonization is expected to accelerate economic and employment growth, its
effects will differ depending on constraints on funds for investment, according to the analysis.
Additional green investment worth 14 trillion yen in the Advanced Technologies Scenario will boost
global gross domestic product by 0.4% per year until 2050 if no constraints exist on funds for2

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investment (investment increases by a net 14 trillion yen). If constraints exist to offset green
investment with falls in investment in other areas, the global economy will contract by 0.1% per year.
Green investment’s effects to squeeze economic growth may differ by region, resulting in economic
gaps among countries. The analysis points out that the world will have to overcome constraints onfunds for green investment and secure sufficient investment to realize green growth.
Long-term global energy outlooks entail great uncertainties. At present, particularly, thegeopolitical situation has become chaotic due to the destabilization of the international energy situationand global divides amid the Ukraine crisis, making it extremely difficult to depict a future picture ofthe world. Even in the face of such difficulties, however, it is important to take advantage of various
ideas to analyze future possibilities for the world. The IEEJ is determined to continuously contributeto solving energy problems in the world through analyses in the IEEJ Outlook.

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