Chairman’s Message

Prime Minister Fumio Kishida announced that he will not seek his reelection. He will leave behind a significant legacy in the energy sector. His successor will need to address several important remaining issues.

<Main Points>

1. PM Kishida’s departure

　After three years in position as the Prime Minister of Japan, Fumio Kishida announced on August 14 that he will not seek reelection for the Presidency of the Liberal Democratic Party (LPD) at the party’s election scheduled for September 27. As the LDP is the current ruling party, this means that he will leave his position as the PM by early October.
　Until then, there isn’t a clear picture about who the successor might be. Currently, as many as 12 LDP Diet members are aiming to run for the Presidency. The race is wide open.
　It is therefore a good timing for me to look back and reflect on PM Kishida’s accomplishments.

2. Legacy in the energy sector with historical significance

　While the late Shinzo Abe was more widely known in the world than PM Kishida, the latter will be leaving behind a more significant legacy in the energy sector. I believe that his policies stand out in significance, surpassing any other individual prime minister in recent history, including the late Shinzo Abe.
　In October 2020, the former Prime Minister Yoshihide Suga declared that Japan will be aiming at carbon neutrality by 2050. This announcement marked a dramatic shift from the previous Japanese governments reluctant to commit to net zero emissions. But as his tenure lasted less than one year after the statement, PM Suga provided limited substantive policies (other than the GI Fund) to realize the new goal. With a budget of two trillion yen, or about 14 billion USD, the GI Fund, or Green Innovation Fund, aims to support R&D required to achieve carbon neutrality.
　I believe that PM Kishida deserves full credit for introducing various additional policies to help Japan in its journey towards carbon neutrality. He will be leaving behind a wide range of bold policies to transform Japan’s energy sector as well as its industries. PM Kishida will be remembered as the leader who set the concrete foundation for Japan’s energy transition.

3. GX Strategy: Bold, Massive, Comprehensive, Innovative and Long term

　The Kishida Cabinet decided on the Basic Direction of the GX Strategy in February 2023. (GX stands for Green Transformation). The objective of the GX Strategy is to accelerate the energy transition while ensuring economic growth. The Strategy set out the goal that 150 trillion yen, or more than 1 trillion USD, would be invested by the public as well as the private sector in the next ten years to realize the energy transition. The Government pledged to provide 20 trillion yen (140 billion USD) during the next 10 years to support the energy transition. The scale of the budget support and the 10-year long commitment are both unprecedented in Japan.
　GX transition bonds will be issued to finance the government support and they will be paid back by 2050 through the revenue generated by the new carbon pricing system. This design is expected to help maintain a fiscal discipline. The carbon pricing system will have two pillars. Emissions trading system will be started in 2026 and fossil fuel charges, a de facto carbon tax, will be introduced in 2028. The revenue from these two pillars of carbon pricing will be used to pay back the GX transition bonds.
　The carbon pricing system is designed to ensure that the burden of these two mechanisms on the industry will be kept within the level of the expected burden on the industry through FIT (Feed-in-Tariff) /FIP (Feed-in-Premium) and the Oil and Coal Tax. This design is expected to ensure the competitiveness of the Japanese industries.
　These innovative designs to ensure fiscal discipline and industrial competitiveness could be a model for countries facing the dilemmas between climate change policy, fiscal soundness and industrial competitiveness.
　Out of the 20 trillion yen of fiscal support, three trillion yen has been ear marked for hydrogen/ammonia. Through the Diet, the Japanese Government has already legislated that a mechanism will be provided to offset the cost differential between hydrogen/ammonia and conventional energies and to help develop the necessary infrastructure to receive hydrogen/ammonia. To complement such fiscal support, carbon pricing and other regulatory reforms will also be introduced to promote hydrogen/ammonia. The set of policies to promote hydrogen/ammonia is arguably the strongest in the world today.
　A new government affiliated organization named the GX Acceleration Agency has been established to provide loan guarantees and equity to help the financing of energy transition projects.
　In addition to hydrogen/ammonia, energy efficiency, next generation fuels and CCUS will be the major sectors to be supported. Strengthening the manufacturing of batteries, electrolyzers and the next generation solar PVs are also part of the GX Strategy.
　As you can see, the GX Strategy is quite comprehensive in its scope and range of policy measures.

4. Nuclear power is back

　Since the Fukushima nuclear accident in March 2011, no Prime Minister in Japan has pushed for the restart of nuclear plants with the exception of PM Yoshihiko Noda who pushed for the restart of two nuclear power reactors to deal with the shortage of power during the summer of 2012. It had been considered too politically damaging for the PM to put their political capital behind the restart. Even the late Shinzo Abe, in spite of his high approval rate, did not push for the restart during the time he was in office.
　Following Russia’s invasion of Ukraine and the subsequent energy crisis, PM Kishida made it clear that he would push for the restart of 17 nuclear power plants subject to the safety approval by the independent Nuclear Regulation Authority. He also succeeded in passing the legislation to enable the extension of the operating lifetime of existing nuclear reactors.
　 PM Kishida even mentioned the need to replace older nuclear reactors with the next generation nuclear reactors which are designed to be much safer. The replacement implies construction of new nuclear reactors, which had been a political taboo in Japan ever since the Fukushima accident.

5. AZEC: Solutions for Asia and the Voice of Asia

PM Kishida announced his vision about AZEC, the Asia Zero Emission Community, in January 2022. His idea was to develop a mechanism, eventually leading to a community to help facilitate the energy transition in Asia. With the support of ASEAN countries and Australia, the first Ministerial meeting was held in March 2023 followed by the first Leaders’ meeting in December 2023. The second Ministerial meeting was held in Jakarta last month.
　A meeting of the Advocacy Group, of which I have the honor to be one of the members, was held the day before the Ministerial meeting in Jakarta. Through the discussions at the meeting, I was impressed of the high expectations for AZEC expressed by the Asian participants. A common understanding of the significance of AZEC is developing.
　The emerging consensus at the Advocacy meeting was that Asia is different from Europe or the US, in the sense that strong economic growth and rising living standards are the typical characteristics of Asia. Asia also faces different challenges that require different solutions than those adopted elsewhere. While the policies and rules have been basically decided by Europe and the US, Asia must have a voice in the global rule making process, including matters of financing and cross border carbon management measures. But no single country in Asia can provide the necessary solutions alone. No single country in Asia can have a strong enough voice to influence the global rule making. Asian countries must act together and must speak out together. AZEC can be the platform to enable these.
　At the Ministerial meeting, the following day, a statement was adopted which emphasized that there should be various pathways to realize our common goal. The statement also highlighted the need to breakthrough the triple challenges of sustainability, economic growth and energy security. Three areas were identified as priority areas, i.e. decarbonization of the power sector, the transportation sector and the industrial sector. The need for “Transition Finance” during the transition was also stressed. Asia Zero Emission Center has been established to support such activities at ERIA, the Economic Research Institute for ASEAN and East Asia.
　On the margin of the Ministerial meetings, 70 MOUs were announced. Japanese companies are actively engaged in energy transition projects with their Asian partners. AZEC is now moving forward. The vision of PM Kishida is now turning into actions. For the energy transition to succeed worldwide, it must succeed in Asia known as the growth center of the world. AZEC can help make this happen. This is the ultimate significance of AZEC.
　

6. Issues to be addressed by his successor

At this moment, the successor to PM Kishida is undecided. But it is clear that the successor will be expected to build upon his legacy while addressing the remaining issues.
　 The successor will be responsible to complete the 7th Strategic Energy Plan. One of the major points to watch will be whether the replacement of nuclear power plants will be stipulated in the Plan. If so, various measures to develop a business environment more conducive to investment in nuclear power must be incorporated as well.
　The GX Strategy will have to be pushed forward. As such, the carbon pricing systems must be formalized, the introduction of renewable energies must be accelerated, the support measures for CCS must be developed, the demand side measures must be strengthened and finally, the power grid must be strengthened.
　AZEC must start developing solutions for Asia. AZEC must start speaking out. AZEC must be seen as essential for Asia’s energy transition by a larger group of industry and people in Asia.
　Whoever wins the LDP Presidency election on September 27, will become the successor to PM Kishida and inherit a “To Do List” filled with energy-related issues to be addressed.