Since the concept of the GX Policy was first announced in June 2022, a “GX Economic Transition Bond” was positioned as a key part of making the plan work. But details of this bond hadn’t yet been very clear until recently.
The Japanese Ministry of Finance (MOF) will issue the bond this month. It will now be called the “Japan Climate Transition Bond” (although the Japanese government and media still seem to prefer the original name). Since much of this information seems to be in Japanese only, I thought I’d summarize what I’ve seen so far.
What is the Japan Climate Transition Bond
Japan is trying to reduce greenhouse gas emissions by 46% by 2030, compared to 2013 levels. It’s also trying to achieve carbon neutrality by 2050.
The GX Policy is expected to do most of the heavy lifting in achieving these goals, so the stakes are high. The government characterizes the GX Policy as driving “the biggest shift in industrial and energy policies since World War II.”
The Climate Transition Bond is the key financial instrument to catalyze investments to make GX happen. It’s expected to raise a total of ¥20 trillion (US$ 134.7 billion) over the next 10 years, which would hopefully “crowd in” a total of ¥150 trillion (US$ 1 trillion) in public-private investments in the longer term.
The MOF will auction the bond in two phases this month:
On February 14: 10-year bonds
On February 27: 5-year bonds
The offering amount for both days will be around ¥800 billion (US$5.4 billion).
What will it be spent on?
What’s also become clear are the types of technologies and projects the government plans to spend the proceeds on. But here, as far as I can tell, different sources tell somewhat different stories.
First, let’s look at the most obvious source: the Framework document for the Climate Transition Bond. In it, the big categories for investment are “expansion of non-fossil energy,” “transformation of industrial structure and reinforcement of energy savings,” and “Resource recycling and carbon fixation technologies.” The timeframe for these investments is the next ten years.
Next, let’s turn to the Nikkei article from February 4 that reports on the allocation of the proceeds. The article doesn’t specify its source and I wasn’t able to find one after some searching. But here it is.
You can already see that there are some inconsistencies in the items. First of all, the Framework paper is much more vague than the Nikkei article. The Framework paper’s table doesn’t mention semiconductors or nuclear at all, although its text does discuss the need for both of these things (power semiconductors and AI semiconductors to increase energy efficiency in data centers, and nuclear as part of “non-fossil energy”). The Nikkei article, for its part, doesn’t mention recycling or carbon fixation.
I couldn’t quite reconcile these inconsistencies, so I turned to the “Sectoral Investment Strategy” document that the government’s Expert Workgroup for GX Implementation put out on December 22 last year to clarify how the proceeds from the Climate Transition Bonds will be used. Because this is the most detailed breakdown of the intended spending and the government put together this material mostly for its own subcommittee of experts, I tend to trust this the most.
In short, here’s a breakdown:
Putting aside some of the discrepancies, here is what I think we can conclude from these sources:
Low-emission technologies in the industrial sector (like steel and cement) will receive the largest funding.
New renewable technologies (METI material strongly suggests this means perovskite solar cells and floating offshore wind) will also receive a large portion of the proceeds.
Technologies for energy efficiency and reducing energy demand are also among the top priorities, although these appear in different guises. All three sources mention in detail the need for power semiconductors, AI semiconductors, and optoelectric devices that would make data storage and processing (which are notoriously energy-intensive) more energy efficient.
Scaling the production, transport, and use of hydrogen and ammonia are also big items. I’ve written elsewhere about my qualms with the government’s proposed use of hydrogen and ammonia in certain sectors, but their use in decarbonizing steel-making, aviation, and chemicals should be encouraged.
Also common among these sources is the notable absence of questionable technologies like ammonia co-firing. To be clear, the Framework paper does mention “zero-emission thermal power,” which is a code word for hydrogen/ammonia co-firing in power generation. But the use of proceeds for this is really downplayed.
Why the move away from hydrogen/ammonia co-firing?
On the whole, the priorities of the Climate Transition Bond look very different from the original GX policy. The GX has rightly been criticized for its focus on largely unproven, massively expensive, and frankly greenwashing technologies like hydrogen and ammonia co-firing in coal and gas power plants, as well as its focus on reviving Japan’s nuclear fleet.
The shopping list for the Climate Transition Bond, however, looks far more in line with the international consensus on clean energy technologies that actually work and will curb greenhouse gas emissions.
So why the shift?
It’s most likely because of the Japanese government’s concern that a continued focus on GX priorities will hurt the attractiveness of the bond for international investors.
The strongest impetus for the government to make this shift may have come from the Climate Bonds Initiative after it closely evaluated the bond’s planned use of proceeds. Politely but firmly, the CBI made 7 recommendations on how the government can design a credible transition bond:
Prioritize proven technologies like energy efficiencies, grid resilience, demand management, and renewable energy.
Set a timeline for phasing out unabated coal power plants.
Investments into gas and gas-related infrastructure need to consider life-cycle emissions, especially methane leaks.
Establish clear rules for hydrogen, ammonia, and their supply chain emissions.
Introduce sufficiently high carbon pricing
Set and enforce 1.5°C-aligned transition and disclosure requirements for private-sector companies
Ensure that Japan’s sovereign transition bond is in line with 1.5°C.
It seems that the government heeded some of these recommendations.
To be clear, the Japanese government’s support for the use of hydrogen and ammonia in power generation and investments in gas infrastructure hasn’t gone away. They will still be promoted through other mechanisms, like the Green Innovation Fund.
Regardless, I want to see the Climate Transition Bond succeed in the auctions. I want the government to pour its resources into promoting reliable and impactful technologies that will also give Japan a technological edge in the global shift toward decarbonization.
Let’s see if investors feel the same.