Japan mulls issuing energy transition bonds

Japan is considering issuing energy transition bonds in line with its carbon pricing scheme, with a target to raise around ¥20 trillion ($151bn) over 10 years for investment into energy transition efforts.

The trade and industry ministry (Meti) earlier this month proposed an initial plan for the energy transition bonds to encourage the country's industrial sector to shift towards clean energy from conventional fossil fuel, alongside the country's carbon pricing scheme, which is mainly comprised of a carbon levy and a carbon emission trading system.

The carbon levy is planned to be imposed on fossil fuel importers, such as power firms, refiners, steel makers and trading firms from the April 2028-March 2029 fiscal year. Estimated CO2 emissions depending on the fossil fuel will be considered in the levy calculations.

It will be an additional burden for fossil fuel importers, that are already paying the country's existing petroleum and coal tax. But the total burden on consumers is expected to remain unchanged from current levels, as the petroleum and coal tax will be reduced before the implementation of the levy, Meti said. The levy will initially start off at a small amount, and gradually be raised.

The current petroleum and coal tax is ¥2,800/kilo litre ($3.40/bl) for crude oil and refined oil products, ¥1,860/t for LPG and LNG and ¥1,370/t for coal. The levy includes an environmental tax, which is aimed at curbing greenhouse gas emissions.

Japan is also mulling an auction system for emission allowances, similar to the EU's emissions trading system. The system is planned to be implemented among domestic power firms first, starting around the 2033-34 fiscal year, as the power sector already has commercialised power plants utilising renewable energy that can cut CO2 emissions, Meti added. Free emission allowances will initially be allocated to the power companies by the government, and will gradually be removed.

Before launching the auction, Meti will carry out simulated trading on the country's voluntary carbon credit market, which is targeted to be launched in the 2023-24 fiscal year. Meti will also formulate detailed policies, targets and regulations for the trading system.

Trading on the voluntary carbon credit market is likely to begin with credits generated by members of the Green Transformation (GX) league, an initiative by Meti to achieve both economic growth and emissions mitigation. GX members consist of around 600 companies from a wide range of industries that emit CO2 in Japan.

Japan is gearing up its energy transition efforts to achieve its net zero by 2050 goal. The country earlier this month also revealed its draft plan to subsidise hydrogen and ammonia producers to make their selling prices as competitive as that of LNG and coal.

By Maiko Nakashima