Why Japan matters for global decarbonization
A report by Solutions For Our Climate
Very soon, Japan will have a new prime minister. He or she, I’m sure, will change policies in a number of key issue areas.
But among the things that’s not likely to change in the short term is Japan’s role in the global energy transition.
How should we characterize that role? To put it bluntly, Japan obstructs, delays, distracts, and misleads the international community’s attempt at a rapid clean energy transition. I arrive at this conclusion time and again with each additional piece of evidence. And I’m disheartened about it.
One such piece of evidence that came on my radar is a new report by the Korea-based think tank Solutions For Our Climate that takes a detailed look at Japan’s international financing of oil and gas (O&G) projects. It’s a report filled with both qualitative contexts of the political economy of the global energy landscape and quantitative analysis breaking down Japan’s fossil fuel financing.
In this post, I’d like to briefly touch on the report’s main points. Needless to say, I’m by no means doing justice to this rich report. If you’re interested, it’s freely available on the Solutions for Our Climate website.
Takeaways: $93 billion. Upstream. Gas. Asia-Pacific
Among the report’s many findings, here are four that paints the overall picture:
$93 billion in O&G projects: Between March 2013 - April 2023, Japan’s state-backed financial institutions spent a total of ~$93 billion on O&G projects across the world. That was five times more than their investments into clean energy infrastructure.
Russia-Ukraine war & GX policy triggered more O&G spending: Thankfully, Japan’s O&G financing has been on a downward trend in recent years. But it spiked upward again in the fiscal year 2023 at $5 billion. That’s because the disruption in the global energy supply triggered by Russia’s invasion of Ukraine gave Japan a justification to invest in gas development in line with its “energy security” narrative. The Green Transformation (GX) policy, formalized in 2023, also encourages gas infrastructure investment.
Upstream gas received the most Japanese financing: The report disaggregates the data by fuel and supply chain stages. It shows that the largest portion of Japan’s overseas fossil fuel financing went to gas projects ($56 billion), followed by oil projects ($26 billion), coal projects ($26 billion), and combined O&G projects ($11 billion). Projects in the upstream segment of the gas supply chain — exploration, drilling, extraction, and production — received the largest portion at 45%.
Asia-Pacific region got most of that O&G finance: A breakdown of the regional distribution of Japan’s O&G investments reveals that the Asia-Pacific region was the top leading recipient ($22.4 billion, or 24% of the total), followed by Middle East ($22 billion or 24%), Eastern Europe and Central Asia ($14 billion, 15%), North Africa ($13.8 billion, 15%), and so on. Japan’s fossil fuel financing truly reaches all corners of the globe.
But O&G financing is becoming risky
The reasons for Japan to become and continue to be a big O&G financier are its worries over energy security and to promote its corporate interests in overseas markets. But the foundations of this strategy are beginning to crumble.
Most seriously for Japanese entities is that we’re in for a global over-supply of gas, which threatens the profitability of Japanese energy companies who are already over-contracted. The IEA is forecasting a fall in gas demand by up to 33% by 2035 and up to 78% by 2050. Oil demand will also fall as countries electrify.
Japanese investments in the O&G supply chain also exposes the countries receiving those investments to both financial and geopolitical risks. The cost of renewable energy is falling in the Asia-Pacific while the costs of new fossil fuel power projects are rising. That means the extra cost of fossil fuel-based electricity will eventually need be shouldered by either the project operators — including Japanese firms — or the receiving countries’ electricity consumers. These countries were also mired in destabilizing fuel price spikes after the Russian invasion of Ukraine. Japanese investments are helping them jump out of the pan (coal) just to land in the fire (gas).
So then, what’s to be done?
With its detailed analysis (to which I’m far from doing justice), SFOC’s report lists three policy recommendations. I wish this report elaborated on these recommendations more, but there are enough details to summarize here:
The Japanese government should announce restrictions on all global O&G financing, including for projects set to use dubious and not-yet-scaled technologies like CCS, hydrogen, and ammonia. Instead, financing by public financial institutions should be redirected to renewable energy projects.
Enforce transparent disclosure of energy-related financing by public institutions to ensure accountability.
Japan should participate in and lead diplomatic efforts to establish a joint commitment among governments on ending O&G export finance.