[Commentary] Overview of Japan's GX strategy.
~Towards accelerated green transformation~.

Sep 12,2024

Held on 27 August 2024.12th GX (Green Transformation) Executive Conferencewas mainly a discussion on the future of the energy situation in Japan. In addition, from 3 September, the Cabinet Office was given the task of establishing aSpecialist working group on carbon pricing for GX realisationhas been opened and discussions on GX-ETS (emissions trading) have begun in earnest. The Japanese economy is currently undergoing a major transformation towards decarbonisation.

In February 2023, the Ministry of Economy, Trade and Industry (hereafter referred to as METI) announced that theBasic policy for GX realisation～In July of the same year, the Strategy for Promoting the Transition to a Decarbonised Growth-Oriented Economic Structure (GX promotion strategy). The reason for setting the said policy and strategy was to respond to the transformation of the global energy situation. The Ministry of Economy, Trade and Industry (METI) has positioned the Green Transformation (GX) as a major shift in industrial and energy policy in the post-war period, as it aims to transform the fossil energy-oriented industrial and social structure to a clean energy-oriented structure. In addition to the energy security perspective, the GX also includes the achievement of international commitments to reduce greenhouse gas emissions by 461 TP3T in 2030 and to be carbon neutral by 2050 (Ministry of the Environment).

Japan will actively cooperate with diverse institutions, including government, administration, business, finance and academia, to shift to the above-mentioned 'decarbonised growth-oriented economic structure' (Prime Minister's official residence).

This article describes an overview of the GX strategy in Japan and summarises the issues that corporate sustainability officers should be aware of.

Table of Contents
1. the GX promotion strategy and budget
2. current initiatives related to the GX promotion strategy
　2.1. overview of transition bonds
　2.1.2. overview of the GX League
　2.2. development of ESG information disclosure
　2.3. the MAFF decarbonisation strategy
3. what responses Japanese companies can consider from now on
4. summary.

1. the GX promotion strategy and budget

The GX Strategy is a combination of aspects of resolving the energy security challenges facing Japan and 'pursuing efforts to limit the average global temperature increase to 1.5°C' as dictated by the Paris Agreement (Ministry of Foreign Affairs), which is an aspect of the international commitment. In 2020, Japan declared its commitment to reduce emissions by 46% by 2030, based on 2013 emissions levels, and to be carbon neutral* in terms of 'emissions and absorption' by 2050.

*Carbon neutral means that greenhouse gas emissions and absorption are balanced.

With the aim of taking a more proactive approach towards carbon neutrality, the Government of Japan has introduced the Law on Promotion of Smooth Transition to a Decarbonised Growth-Oriented Economic Structure in 2023 (GX Promotion Act) and the 'Bill to amend the Electricity Utilities Act and other laws to establish an electricity supply system for a decarbonised society' (GX Decarbonisation Power Supply Act) was passed. After policy concretisation based on this law, the GX Promotion Strategy, approved by the Cabinet in July 2023, classified the main government initiatives into the following two categories.

i. GX initiatives based on the basic premise of securing a stable energy supply.:
In addition to thorough energy conservation, promote decarbonisation efforts towards GX, including a shift to decarbonised power sources that contribute to energy self-sufficiency, such as renewable energy and nuclear power.

ii. Realisation and implementation of 'growth-oriented carbon pricing concept', etc.:
Promoting carbon pricing markets, including bold upfront investment support through 'GX Economic Transition Bonds' and other instruments, upfront GX investment incentives through carbon pricing, and the use of new financial instruments.

In order to achieve the GX Promotion Strategy, the Government of Japan has approved a Cabinet decision to spend 603.6 billion yen in 2024 on GX promotion measures. This was initially estimated at 1,260.8 billion yen as of 2023, but was halved after discussions with the Ministry of Finance (Global and Human Environment Forum), published by the Ministry of Economy, Trade and Industry in February 2023.Basic policy for the realisation of GX (draft)In the GX, the Japanese Government's GX promotion strategy currently has a lower budgetary sense than expected, considering that the amount of government support over the next 10 years is approximately 20 trillion yen and the amount of public-private investment is expected to be 150 trillion yen (for the entire 10-year period).

GX policies over the next decade can be categorised into the following five categories (Financial Services AgencyReference p.1 cited in document p.1).

(i) Establishment of GX Economic Transition Bonds.
∙ Embodiment of the 'growth-oriented carbon pricing concept'.
∙ Advance government funding through 'GX Economic Transition Bonds'.

(ii) Regulatory and support-integrated investment promotion measures.
Maximising the effectiveness of fiscal stimulus through regulatory and institutional measures
Creation of a new institutional framework to increase the profitability of projects and the predictability of investments.

(iii) Phased development and utilisation of the GX League.
Promote voluntary emissions trading by piloting the GX League and implement trading, including the development of a carbon credit market.

(iv) Use of new financial instruments.
Combining green transition and innovation financing instruments to attract global ESG funding.
-Enhancing corporate disclosure and improving the credibility of ESG assessment bodies and the infrastructure for data distribution.

(v) International expansion strategy
Strengthen decarbonisation cooperation among Asian countries, e.g. by realising the Asian Zero Emissions Community concept.
∙ Promote innovation cooperation in the clean energy sector with the US and other developed countries

The Ministry of Economy, Trade and Industry has published a 'TheClimate Transition Bond Framework.According to the "Overall roadmap for the next 10 years" (Figure 1) in the "Roadmap for the next 10 years", the GX strategies are directed towards the awareness of developing the domestic Japanese market and ultimately the international market, mainly in a focused way through investment and financing. It can be confirmed that these strategies are by no means solely focused on 'decarbonisation', but are intended to promote overall societal change with a view to environmental, social and governance (ESG) aspects.

Figure 1: Overall roadmap for the next decade(in...)Ministry of Economy, Trade and Industry)

2. current initiatives related to the GX promotion strategy

After setting the strategy in 2023, the Japanese Government has focused on two measures to achieve the GX Plan.

a. Climate Transition Bond.Formulation of frameworks.
b. growth-orientedcarbon pricing conceptIntroduction of the GX League (pilot operation of the GX League).

The above policies are listed with the aim of creating a cyclical investment cycle for decarbonisation efforts (see Figure 2). Notably, the Government of Japan has focused on working with companies with a long-term perspective in decarbonisation. Simply wanting to reduce carbon emissions directly can lead to difficulties in economic activity, depending on the industrial form (particularly in the power and heavy industries). The Government of Japan aims to incentivise reductions across the economic market by actively promoting investment in 'investments in technology development that could reduce future emissions' and by introducing the term 'reduction contribution', which refers to the 'amount of carbon reduced by other companies through developed technology'.

Figure 2: Investment promotion packages under the growth-oriented carbon pricing concept(in...)cabinet documents)

The steps towards cyclical decarbonisation envisaged by the Government are as follows The projects that are reported to have started planning now arebold-typeNotation.

(i) Upfront investment support in the order of ¥ 20 trillion (total for 10 years) through the GX Economic Transition Bonds* *Redemption by 2050.
... the first in the world to be issued by a national body.transition bondStimulating private sector efforts to decarbonise through 'economic transition bonds' (ETCBs).

(ii) Incentives related to GX investment preemption through the introduction of carbon pricing (establishment of a carbon emissions market).
Timing of the expected introduction of carbon pricing.
　... [FY2023~] Federation of Voluntary Participating Enterprises.Pilot operation of the Carbon Trading Scheme (GX-ETS) within the GX-League.
　The emissions trading system will start in earnest in 2026, taking into account the situation of each company in high-emission industries, etc.
　Fossil fuel levy system imposed on importers, etc.
　[FY2033-] Phased introduction of a 'paid auction' system for power generation companies.

(iii) Use of 'transition finance' as a new financial method.
Transition finance is "a new financing method that aims to support companies in their medium- and long-term strategies to steadily reduce GHG emissions in order to achieve a decarbonised society" (Ministry of Economy, Trade and Industry).

In the following, Transition Bonds and the GX League are explained, followed by a concurrent explanation of the 'development of ESG information disclosure' and 'new developments in the Ministry of Agriculture, Forestry and Fisheries' in relation to the GX Strategy.

2.1. overview of transition bonds

In working towards the transition to carbon neutrality, METI stresses the importance of designing carbon pricing that ensures predictability, and of making the appropriate social transition through discussions with industry (Ministry of Economy, Trade and Industry). In particular, it has taken a proactive stance on carbon pricing.

The primary concept of the Transition Bonds (GX Economic Transition Bonds) is to "support companies and others that are taking on the challenge of a rapid decarbonisation transition using the carbon pricing that will come into effect in the future as a source of redemption".

In addition, one of the objectives is to promote transition finance by private sector financial institutions by encouraging investment in decarbonisation by private operators through the inclusion of projects that contribute to the transition towards decarbonisation in the use of funds.

Finally, it is also suggested that GX Economic Transition Bonds could be issued as individual issues (Climate Transition Bonds) and that regular reporting arrangements, such as those promoting dialogue between investors and the market, could be put in place to encourage a steady decarbonisation transformation across society.

In this way, METI aims to develop the Climate Transition Bond as a means to raise the necessary funds for the promotion of GX in Japan (Ministry of Economy, Trade and Industry). The Government will implement upfront investment support to the tune of JPY 20 trillion in the future, while promoting a public-private partnership GX.

2.1.2. overview of the GX League

As stated in the concept of the GX Economic Transition Bonds, the Japanese Government is currently actively working on the development of a Japanese version of the carbon pricing market: for the 2050 carbon neutrality pursued under the GX Promotion Act, the Ministry of Economy, Trade and Industry will publish the GX League Basic Concept in 2022 and from 2023GX LeagueThe GX League is a federation formed through the voluntary participation of companies and establishes a system of cooperation between the public, private and academic sectors to realise carbon neutral policies through links between participating companies. The total amount of greenhouse gases emitted by Japanese companies participating in the GX League will account for around 40% of Japan's total emissions.

The GX-League's core activity is the pilot operation to set up the aforementioned 'Carbon Pricing Market', which is called the GX-ETS (Emissions Trading Scheme) and currently (as of 2024) allows trading on the experimental market of emissions in excess of or in reductions from the first phase (2023-2025) of the emission reduction target. The experimental market allows for the trading of emission surpluses or emission reductions in relation to the emission reduction targets of the first phase (2023-2025). Participating companies are required to set and report their [1] 2030 emission reduction targets, [2] 2025 emission reduction targets and [3] emission reduction targets for the first phase (2023-2025). At present, trading is limited to 'direct domestic emissions' only, but the Japanese Government, which is considering a full-fledged launch of an emissions trading scheme from FY2026, is expected to expand the scope of trading through the GX League.

2.2. development of ESG information disclosure

METIcites "promotion of sustainable finance" as a future response to the GX Strategy. Citing Japan's TCFD (Task Force on Climate-related Financial Disclosure) as having the highest number of endorsing companies in the world, METI states that it is important to further promote practical information disclosure on the part of companies. Therefore, it is expected that 'ESG market expansion' will further develop in the future.

An important aspect of ESG market expansion is 'companies disclosing non-financial information on sustainability'. In recent years, standards and regulations for ESG information disclosure have been developed and evolved in many countries around the world, with Europe leading the way. Japan has followed other regions in making changes, such as making it mandatory to include 'sustainability' items in securities reports.

With ESG (Environmental, Social and Governance) in its crown, these developments are by no means limited to the environment. It is also important to draw attention to the 'human rights, employment and labour practices' of companies, and the development of a transparent environment throughout the supply chain. In the annual report, a new section on 'corporate governance', for example, has likewise been established. It can be confirmed that, globally, companies are building a system to report on the social and governance aspects of their operations.

Reference:aiESG "[Commentary] The importance of social and human capital in annual reports".

Although the GX strategy has the goal of becoming 'carbon neutral by 2050', Japanese companies will be forced to set and pursue an 'ESG strategy' in parallel in the process of aiming for decarbonisation. This means that they will be required to address environmental, social and governance issues with an awareness of the entire supply chain.

2.3. the MAFF decarbonisation strategy

Although not within the framework of the GX Promotion Strategy, the Ministry of Agriculture, Forestry and Fisheries (MAFF) has also been actively addressing sustainability from the perspective of environmental protection in recent years. From April 2024, the Ministry of Agriculture, Forestry and Fisheries (MAFF) has made a decision to require all projects to 'reduce environmental impact' as a condition for subsidy projects (Nikkei ESG). The response aims to make it mandatory to reduce environmental impact in all eligible projects with a total value of 2.27 trillion yen, thus balancing the environment and productivity.

This strategy aims to achieve both increased productivity and connectivity in the food, agriculture, forestry and fisheries industries through innovation.Green food system strategy.It was established in the wake of the 'Green Food System Strategy' (formulated in 2021). The Green Food System Strategy sets targets for decarbonisation in primary and other industries and reduction of food loss, with the aim of completing carbon neutrality by 2050.

In addition to stricter conditions for subsidy projects, the Ministry of Agriculture, Forestry and Fisheries (MAFF) is also conducting a demonstration test of a 'greenhouse gas reduction degree index' from 2022, with the aim of promoting 'visualisation' to consumers. 'The.be seenThe initiative has been named "The Environmental Impact Reduction Programme" and is designed to enable sustainable initiatives throughout the entire cycle from production to consumption by visualising the environmental impact reduction response of specific domestic crops.

It is expected that the GX Strategy and others will eventually grant conditions through subsidies to Japanese companies in selected industries, and it can be said that the Government's efforts towards carbon neutrality in 2050 are progressing, albeit gradually.

3. what responses Japanese companies can consider from now on

As the GX strategy develops in the future, it will become increasingly important for Japanese companies to manage their businesses with decarbonisation, and thus sustainability, in mind. In particular, the full launch of the carbon market will be considered, requiring companies to actively calculate and report on their emissions. In addition, Japanese companies will have to respond to the sustainability reporting standards regulations that are currently being developed globally, as well as promote GX strategies.

The following initiatives are expected to help Japanese companies adapt to the GX strategy at the present time.

1. emissions and setting reduction targets.: With the pilot operation of the GX League, companies will need to accurately assess their own greenhouse gas emissions and set clear reduction targets. At the time of the first phase, only the direct domestic emissions of the company are eligible for trading, but the scope may be expanded after the full-scale launch (assumed to be in 2026). Importantly, trading in the carbon market and the associated incentives can be effectively utilised by monitoring and managing progress in emissions reductions from an early stage.

2. Compliance with sustainability reporting standards.: Compliance with internationally required sustainability reporting standards (CSRD/ESRS, SASB, TCFD/ TNFD, etc.) is also important in the promotion of carbon neutrality. In particular, 'transparent' reporting of emissions reduction initiatives and reductions in environmental impact will help to gain the trust of investors and consumers at home and abroad. Compliance with these standards also leads to an examination of the long-term management risks within the company, which enables a clear roadmap for achieving carbon neutrality to be drawn up.

3. Building a sustainable supply chain.: companies need to decarbonise not only themselves, but also their entire supply chain. From raw material sourcing, manufacturing and distribution, through to consumption and disposal, it is important to develop and implement strategies to minimise environmental impact, in cooperation with partners.

Environmental aspects are not the only important aspect of GX strategies. Japanese companies will need to become more aware of their entire supply chain, as indicated by sustainability reporting standards, and to analyse and disclose quantitative data on human rights and governance.

4. summary.

Japan's GX Strategy takes a major step towards achieving carbon neutrality by strengthening its commitment to energy security and greenhouse gas reduction. The strategy aims to promote a shift to clean energy and introduce carbon pricing and transition finance, bringing business and government together to achieve a decarbonised society.

For Japanese companies, it is important to understand their own greenhouse gas emissions and set reduction targets in order to adapt to this strategy. They are also required to comply with sustainability reporting standards, and their future management strategies need to take a long-term view of decarbonisation. By starting these initiatives early, companies can become more competitive in the carbon market and achieve sustainable economic growth.

aiESG provides a comprehensive analysis of all ESG topics, making a significant contribution to understanding and addressing the supply chain as a whole. The results can be used to If your company's long-term sustainability plan requires these indicators, please contact aiESG.

Enquiry:
https://aiesg.co.jp/contact/

Return to Report list

Report

[Commentary] Overview of Japan's GX strategy. ~Towards accelerated green transformation~.