Chairman and CEO
The Institute of Energy Economics, Japan
-What is “GX”?-
Message for January 2023
The Japanese Government recently launched a comprehensive policy package that will lead the energy/industry transformation for the next 10 years. It is called the GX (Green Transformation) Roadmap.
<Key elements of the GX Roadmap>
1. Comprehensiveness of the GX Roadmap
On December 22, the Japanese Government announced its GX Roadmap which stands for “Green Transformation”, following the example of DX, i.e. digital transformation. This is an English word developed in Japan which is currently relatively little-known outside of Japan. But, I believe, that it is worth remembering.
Just like DX meant “digital transformation from end to end, from operations to infrastructure, meshing together technology, processes and people”, the GX roadmap is also very comprehensive. Its aim is not just energy transition but includes transformation of the industry and the society as well. It involves the introduction of a wide range of policies and measures including regulations, carbon pricing, subsidies, disclosures, and financing. It also covers various forms and aspects of energy including renewables, nuclear, LNG, and energy efficiency. It describes a path for Japan’s policies for the next ten years.
2. 150 trillion yen investment with 20 trillion government backing
The GX Roadmap envisions that, over the next ten years, a total investment of 150 trillion yen will be needed to support the energy/industry transformation. To attract private sector investments, 20 trillion yen of that amount is expected to be provided by the Government. To put these figures in context, 150 trillion yen is approximately 30% of Japan’s current annual GDP.
3. Issuing GX transition bonds
To finance the 20 trillion government investment, GX transition bonds will be issued over the next ten years. It is the Government’s intention to obtain certification that the GX transition bonds are consistent with international standards.
The GX transition bonds will be paid back in full by 2050. Revenues from carbon pricing will be used to repay the GX transition bonds.
4. Carbon Pricing
The introduction of carbon pricing has been officially endorsed by the government for the first time. The GX Roadmap first envisions the introduction of emission trading for industries with high CO2 emissions. It will first call for industry voluntary participation with companies setting ambitious reduction targets based on their situation. Emission trading will be fully implemented during the fiscal year 2026. As for the power sector, it will first be subject to an allocation of free emissions caps. From fiscal year 2033, however, the free allocation will be gradually turned into an allocation of caps, through auctions.
In fiscal year 2028, after 5 years of implementation of the GX, other activities will be broadly covered by the introduction of a charge against carbon.
As you can see, the GX Roadmap is envisioning a hybrid system of having both an emission trading system and a charge against carbon to be applied based on the characteristics of the emission source.
5. Promotion of hydrogen and ammonia
Promotion of hydrogen and ammonia is one of the major policy areas of the transition. The GX Roadmap incorporates a set of measures to promote the use of hydrogen and ammonia. The measures include support to enhance the business planning predictability, taking into account the higher costs of hydrogen and ammonia vis a vis conventional fuels. The measures also support the development of the needed infrastructure as well as the introduction of the necessary regulations.
6. Long-distance transmission lines
While Japan, as a whole, has limitations in its capacity to introduce renewable energies, there are regions within the country with substantial potential. For example, Hokkaido, the northern most island of Japan has great potential for wind power generation. The problem is that the power generated in Hokkaido cannot be transmitted in a sufficient manner to Tokyo, the area with the largest demand. As the current bottleneck is the weakness of the transmission lines connecting Hokkaido and Tokyo, the GX Roadmap envisions the development of long-distance transmission lines. Such transmission lines would help expand the development of renewable energies in Japan.
The GX Roadmap recognizes the huge funding necessary for such a development so that it calls for the establishment of a mechanism to finance the construction.
7. Utilizing nuclear power
After the nuclear accident in Fukushima in 2011, the Japanese Government’s official position has been that no new nuclear plants would be considered for construction.
The historical significance of the GX Roadmap is that it states, for the first time since the accident, the Government’s intention to replace some of the existing nuclear reactors that have been retired. While it is limited to the replacement of existing nuclear reactors, this will open a way for the development and construction of next-generation reactors, incorporating safety mechanisms.
The GX Roadmap also opens a new frontier by extending the life of existing nuclear reactors. The current rule is of 40 years in principle, with a one-time extension of 20 years. The GX Roadmap allows for an additional extension of the operating life by the period during which the nuclear reactors were stopped. As many nuclear reactors have been stopped since the nuclear accident in 2011, this would enable a life extension of nearly 12 years.
8. Remaining challenges
While the GX Roadmap is comprehensive, many elements still need to be materialized. This is probably one of the reasons why “Roadmap” is an appropriate expression of the policy package.
For example: the substance of the carbon pricing needs to be worked out; the framework to promote hydrogen and ammonia needs to be developed; the financing mechanism for the construction of long-distance transmission lines remains unclear.
In particular, the extension of the operating lives of nuclear reactors requires legislative changes which will have to go through the Diet. For the readers of this Message, the GX Roadmap should give reasons to be hopeful for changes in Japan. Even most difficult issues such as nuclear have been addressed. The absence of details leaves some uncertainties but also should open opportunities to provide inputs to various measures to make them effective.
These are the reasons why I believe that you should remember “GX” and keep an eye on its developments.