Impact on the power mix and economy of Japan under a 2050 carbon-neutral scenario: Analysis using the E3ME macro-econometric model

ABSTRACT

This study uses the E3ME macro-econometric model to simulate what Japan’s macroeconomy would look like and how Japan's energy composition would change if the country were to achieve carbon neutrality by 2050. The results indicate that renewable energy will account for about 90% of the power supply configuration in 2050, assuming nuclear power plants are phased out by 2040. It is also predicted that GDP will increase by 4.0%–4.5% compared with the baseline scenario and that employment will improve by 1.5%–2.0%, resulting in simultaneous achievement of carbon neutrality and economic growth. The main reasons for these projected outcomes are that increased investment in renewable generation capacity in the power sector would be accompanied by increased investment in decarbonization technologies across individual economic sectors, increased private consumption resulting from increased employment and energy efficiency savings, and an improvement in the trade balance due to a substantial reduction in fossil fuel imports. In addition, the costs of energy due to policies to reduce or eliminate carbon would rise by 45%–55% point at most above the baseline scenario even in 2050; however, this would be of little burden on the economy, considering the substantial reduction in fossil fuel energy demand. Overall, it is estimated that energy bills would be 45% lower for consumers and 11% lower for industry in 2050 compared with the baseline.

Key policy insights

• The study shows that achieving climate neutrality does not require difficult trade-offs with economic growth. Instead, it can provide economic opportunities that arise from switching to renewables and decarbonization technologies.

• The rapid reduction in global renewable costs for wind and solar technologies means that the net zero transition does not have to rely on relatively more expensive nuclear power. The true costs of nuclear could be a lot higher when the costs of safety regulations are properly accounted for. Instead, investment in electricity storage should be prioritized.

• A well balanced decarbonization policy mix for each sector is required. Policy makers should not rely on carbon pricing instruments alone. Supporting policies such as R&D spending, renewable subsidies, regulations and energy demand reduction should also be considered.

KEYWORDS:

• 2050 carbon neutral
• E3ME
• macro-econometric model
• energy mix
• decarbonization technology
• Japanese economy

Notes

1 Refer to the E3ME manual for details of the E3ME model, including composition, scope of application, simulation procedures, and setting technical parameters such as cost and efficiency. E3ME Technical Manual v6.1 (original English edition, September 2019) https://www.e3me.com/wp-content/uploads/2019/09/E3ME-Technical-Manual-v6.1-onlineSML.pdf. For more details on E3ME, refer to www.e3me.com.

For a comparison between the CGE and E3ME models, refer to the reference materials for the second Study Group on the Greening of the Whole Tax System and Carbon Tax in Japan (https://www.env.go.jp/policy/tax/conf/conf01-11/ref01.pdf).

2 “Baseline scenario’ here refers to economic projections if the EU did not implement any additional measures to combat global warming.

3 The four FTT sub-models are FTT:Power (featuring 24 types of power technologies), FTT:Steel (seven types of steelmaking technologies), FTT:Transport (nine modes of transportation), and FTT:Heat (seven types of heating technology in the building sector), all of which are determined endogenously. For details on FTT sub-model mechanisms and simulations, refer to Lee et al. (2019).

4 This is modeled by removing choices to the investors (mainly industry sectors) in the simulation program.

5 IEEJ OUTLOOK is annual report on energy and economic long term forecasting (by 2050) of Asian countries issued by the Institute of Energy Economics, Japan (IEEJ). For IEEJ OUTLOOK 2022, refer to https://eneken.ieej.or.jp/data/10041.pdf

6 We were able to create policy scenarios by sectors and technologies in this study because of the four abovementioned FTT sub-models.

7 Refer to Lee et al. (2020) for details of the scenario setting methodology.

8 It is possible to create a regulation scenario for the power sector in the E3ME model’s FTT:Power sub-model. Under the coal-fired power phase-out scenario, of the 151 plants operating in Japan, subcritical (sub-C) plants operating for more than 40 years would be closed in FY2025 and the supercritical (SC) would be closed by FY2027. By FY2030, utilization would be one-third of current levels. Regarding new coal-fired power plants (USC/IGCC) currently under construction, operation would be limited to a maximum of 15 years and phased out by 2040. For details on these scenario settings, see Lee et al. (2020).

9 It is possible to stipulate the ban of sales of internal combustion engine vehicles in 2035, EV subsidies, and biofuel mandates in the E3ME FTT:Transport sub-model, which is being adapted to incorporate hydrogen fuel cell vehicles as a new technology. Future investigations will need to include new developments in hydrogen.

10 In 2018, Japan’s economy as a whole generated 1.244 billion tons of energy-related CO₂ emissions, including 396 million tons from the industrial sector and 158 million tons from the steel industry (Ministry of Environment, 2020). The E3ME model has only detailed technologies treatment for the steel sector: FTT:Steel among the industrial sector because of the difficulty in obtaining various technological data. Technological innovations in the industrial sector excluding steel are determined using a top-down methodology in the main E3ME model. In other industrial sectors such as cement and chemicals, CO₂ emissions tend to depend heavily on the characteristics of the raw materials used, and the benefits of using an FTT model that determines technologies in a bottom-up manner are still limited, so the use of an FTT model is a matter for future investigation.

11 FTT:Steel incorporates 25 technologies that are determined in a bottom-up manner, including hydrogen reduction, direct reduction, and electric furnaces, and it is possible to specify scenarios including economic measures such as subsidies as well as adjust the speed of technological innovation, but for the sake of simplicity, the study adopted a direct regulation scenario for blast furnaces. The creation of various bottom-up scenarios for steel technology is a matter for future investigation.

12 According to the Ministry of Environment (2020), land use, land-use change, and forestry accounted for 56 million tons of CO₂ absorption in 2018. This study assumes that improvements in afforestation technology result in 80 million tons of CO₂ absorption in 2050.

13 In the FTT:Power sub-model, if renewable energy increases substantially, oil plays a role in adjusting for output fluctuations despite a loss of competitiveness.

14 For example, Japan imported JPY 19.3 trillion worth of fossil fuels such as oil, LNG, and coal (roughly 20% of imports) in 2018 according to the Agency for Natural Resources and Energy (Ministry of Economy, Trade and Industry 2020c). A sharp decrease in imports would contribute to a substantially improved trade balance. It should be noted that hydrogen is assumed to be produced domestically. Even if Japan plans to import hydrogen, it will not offset the huge reduction in fossil fuel imports.

15 For example, despite higher electricity costs, there is a decline of 41% in household sector energy expenses compared with the baseline scenario by 2050 due to the lower demand for gas and oil.

16 Electro fuels or e-fuels (synthetic fuels) are an emerging class of drop-in replacement fuels that are made by storing energy from renewable sources in the chemical bonds of liquid or gas fuels. In contrast to conventional fuels, they do not release additional CO₂ but are climate-neutral.

17 For example, rather than learning curves based on history to date, new learning curves based on the latest data obtained through company interviews could be used in the FTT sub-models.

Additional information

Funding

This work was supported by Research Project on Renewable Energy Economics, Kyoto University.