In 2022, as Japan grappled with the COVID-19 pandemic and the fallout from the Ukraine war, the government rolled out subsidies for petroleum, gas and electricity as short-term measures. As 2024 enters its home stretch, those subsidies are still being renewed or extended — putting a drag on the country’s decarbonization push in the process.
On Friday, the Cabinet approved a ¥21.9 trillion ($141.6 billion) economic stimulus package that reinstates subsidies for electricity and gas bills from January to March and contains measures to mitigate fluctuations in oil prices. The package was able to progress after the ruling coalition won support for it from the Democratic Party for the People, whose votes the Liberal Democratic Party and Komeito now rely on after losing their Lower House majority. As part of that deal the coalition agreed to carry out discussions on temporarily cutting the gasoline tax.
While offering relief to low-income households — as well as far wealthier ones not in need of taxpayer support — such measures encourage the continued use of the fossil fuels driving climate change, which Japan is supposed to be moving away from, while doing nothing to address the fundamental reason for high energy prices. The subsidies also come at great cost — support for electricity, gas and gasoline bills since 2022 has exceeded ¥11 trillion.
“The electricity price is high because of the high dependence on imported fossil fuels, so these subsidies should be a temporary emergency measure and not effective support to reduce the long-term economic burden for both households and businesses,” says Michiyo Miyamoto, energy finance specialist at the Institute For Energy Economics And Financial Analysis.
Enormous cost
Japan’s financial support for fossil fuels encompasses not only more familiar subsidies designed to lower bills, but also measures aimed at supporting the exploration and extraction of resources and increasing government stockpiles. The country is also a rarity within the Group of 20 for its continued subsidies for coal, the dirtiest fossil fuel.
According to the OECD, these subsidies cost ¥3.9 trillion in 2022, when the energy crisis peaked, while a working paper for the International Monetary Fund put it far higher — $310 billion, or about ¥48 trillion at current exchange rates. Calculations of subsidies can vary based not just on their basic methodology but also whether they include “implicit” subsidies — the extent to which prices do not reflect negative side effects such as carbon emissions, air pollution and even congestion.
Such outlays come on top of the already high cost of importing fossil fuels, with this totaling ¥33.7 trillion and ¥27.3 trillion in 2022 and 2023, respectively.
In contrast, the government plans to issue ¥20 trillion in climate transition bonds in the decade from this year — less than double what has been spent on the support for energy and gasoline bills since 2022.
Still, Japan is far from alone in its financial support for fossil fuels: Globally, total subsidies in 2022 came in at $1.48 trillion according to the OECD and $7 trillion according to the IMF. In the Group of Seven, Japan ranked third according to the OECD, behind Italy and the U.K. in joint first place, and in second behind the U.S. according to the IMF.
The issue has been recognized in international forums, with Japan committing to removing at least some subsidies on several occasions over the years. At COP26 in 2021, the Glasgow Climate Pact saw countries party to the United Nations’ climate conference agree to phase down “inefficient” fossil fuel subsidies. In 2009, the G20 had already made a similar commitment over the “medium term,” a vow that was reaffirmed in 2012.
In June, Group of Seven leaders reiterated a commitment to eliminate inefficient subsidies by next year or sooner — an energy ministers meeting in April had clarified that such subsidies were those that do not “address energy poverty or just transitions.”
“Generally we see Japan not being the most active on this transition away from fossil fuels,” says Jonas Kuehl, a policy adviser in the energy program at the International Institute for Sustainable Development. “It was definitely not the driver of these commitments. It needed hard work to bring them on board, and even now ... they don't seem to be a supportive country of this agenda.”
Side effects
There are good reasons for wanting to wind down fossil fuel subsidies beyond the high financial cost.
The subsidies encourage the continued use of things that are volatile in terms of price, scarce in Japan, drive climate change, and cause air pollution and environmental damage, while doing nothing to account for those issues and and at least in part counteracting the goal of the country’s carbon tax, which brings in ¥262 billion in an average year.
On the carbon dioxide emissions front, Japan’s subsidies go to the country’s two biggest energy-related sources: electricity and heat production (48%) as well as transportation (19%). Pricing reform could lead to emissions reductions of between 20% and just under 40%, according to the IMF.
Meanwhile, that air pollution comes at great human and economic cost. In 2021, 24,720 people in Japan died prematurely due to fossil fuel-linked air pollution, according to the Lancet Countdown report published in October, with this having an economic impact of $65.48 billion.
“What we actually need to do is to price carbon accordingly, to reflect all the externalities, like all the costs, the social costs, for the environment, for the climate, for the people in terms of the air pollution and health, but what fossil fuel subsidies actually do is reduce these prices for the energy companies and for the fossil fuel sector,” says Kuehl. “We see them as a kind of a negative carbon price.”
At the same time, the subsidies skew economic incentives and encourage inefficient investment, potentially denying consumers the increasingly cheap energy provided by renewables.
“The subsidies mask the true cost of the fossil fuels in the energy system for customers — imported fossil fuels are the most expensive source of power, compared with renewable energy,” says Miyamoto. “For suppliers, there is no incentive to provide cheaper electricity because the government is picking up the price over the cap price.”
Although consumer-focused subsidies have cut bills for households — by as much as ¥1,000 for electricity in September, according to Tokyo Electric Power Company Holdings — this support has been extended to all households whether they need the help or not, underlining a common criticism of fossil fuel subsidies: that they are not well targeted. Wealthy households also tend to use more energy — they are much more likely to own a car, for example.
“It is not usually a policy that achieves that objective (of addressing energy poverty), and there are usually better policies than just fossil fuel subsidies,” says Kuehl.
Direct transfers, more fine-tuned subsidies and support for improvements in home insulation and energy efficiency are some of the examples that experts cite.
Energy transition
Miyamoto outlines four things that the government could do to wean itself off fossil fuel subsidies: set out a clear energy policy; establish a clear plan and timeline for the removal of fossil fuel subsidies, with this step aligned with the first; increase investment in renewable energy and storage solutions; and ramp up investment in electric vehicle charging infrastructure. Such steps would give investors, businesses and consumers clarity on energy direction and allow them to plan accordingly.
“If we delay the switch to renewable energy sources, that is also going to be a burden for the consumers, both households and businesses, industries in the future for the long term, because now renewable energy’s cost is gradually decreasing globally,” says Miyamoto.
However, on the first point, Japan’s energy policy is currently in flux. The next Strategic Energy Plan is currently being formulated — it is expected to be presented to the Cabinet in early 2025 — and next year Japan will set out its 2035 emissions reduction target in its Nationally Determined Contribution under the U.N. climate change framework.
“The Strategic Energy Plan that we are currently discussing is so, so important as it will signal to the market a shift in the direction of the energy strategy,” says Yuri Okubo, senior climate engagement strategist at the Renewable Energy Institute.
Under that plan, the economy ministry is considering setting a goal of having renewables make up the country’s largest energy source by the fiscal year beginning April 2040, NHK has reported. In a contrasting signal of ambition and efforts to ditch reliance on fossil fuels, fellow G7 member the U.K. is targeting a fully decarbonized power sector by 2030.
As part of the shift away from fossil fuel subsidies, Kuehl stresses the need to have a comprehensive plan for public communications and consultations to build support and head off the kind of backlash that has led to subsidies being reinstated in some countries.
“Plan it and talk to people and inform them,” Kuehl says. “Usually what we see is governments avoid talking about subsidies, and then ... governments in fiscally very difficult situations, they need to act very quickly removing subsidies, and this is where the problem comes in, that it comes as a big surprise to consumers.
“Having a champion is helpful; having a bigger cause like the transition away (from fossil fuels), being more independent — things like this will definitely make a better case for reform,” he adds.
Ultimately, the issue of fossil fuel subsidies and their reduction dovetails with questions about Japan’s economic direction and the country’s long-running anxiety about access to resources, particularly in terms of its competitiveness in the energy transition and the capacity of renewables to allay those energy security concerns.
“That mindset that you need to be kind of prepared to secure these resources from other countries is still really, really deeply embedded in government officials or in this policy discussion,” says Okubo, who stresses the need for renewable energy development to boost self-sufficiency.
“What we really need to discuss — not only from the climate perspective, but also really in terms of energy security and the industry structure — is where we really want to be in the next 10 to 20 years.”
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