Japan: Enactment Of GX Promotion Act And Its Impact On Corporate Decarbonization

I. Introduction

On May 12, 2023, the Act Concerning the Promotion of a Smooth Transition to a Decarbonized Economic Structure (the "Act" or "GX Promotion Act") was enacted by the House of Representatives. This Act is designed to implement part of the necessary legal measures based on the "Basic Policy for the Realization of GX" (the "Roadmap") approved by the Cabinet on February 10, 2023¹.

The following is an overview of the GX Promotion Act and its impact on corporate decarbonization.

II. Background

Based on the Paris Agreement, the Japanese Government set a target of reducing greenhouse gas ("GHG") emissions, including carbon dioxide, by 46% from its FY 2013 levels by FY 2030 (the so-called "Nationally Determined Contribution"), and declared that it will achieve carbon neutrality by FY 2050².

This is also stated in the 6th Strategic Energy Plan³.

In addition to reducing GHG emissions as described above, the acceleration of "Green Transformation" ("GX"), where fossil-fuel-centered industrial and social structures are transitioned to those to be driven by clean energy, is now attracting attention as a trigger to return the Japanese economy to a growth track again and as a means to secure a stable supply of energy in Japan where resources are scarce, by taking advantage of the strength of decarbonization technologies possessed by Japanese companies. In order to consider measures for the realization of GX, the meetings for the implementation of GX were held since July 2022, and as described above, the Roadmap was formulated and approved by the Cabinet on February 10, 2023⁴.

In the Roadmap, the Government estimates that GX investment of more than 150 trillion yen will need to be realized over the next 10 years through cooperation between the public and private sectors in order to achieve international commitments, including carbon neutrality by FY 2050, and to simultaneously strengthen industrial competitiveness and achieve economic growth. To this end, it is necessary for the Government to present the outlook for support measures and regulatory and institutional measures over the long term and multiple fiscal years (so-called "comprehensive measures to promote investment by the integration of regulation and support") and to enhance predictability for private businesses. The Roadmap sets out measures that require legal action and matters to be specified in legislative bills, and the GX Promotion Act can be regarded as one of the key pieces of legislation for such matters.

Prior to the enactment of the GX Promotion Act, GX League⁵ was launched in April 2023 as a system to promote voluntary efforts by companies to decarbonize. GX League supports the decarbonization efforts of companies through carbon credit transactions as a type of carbon pricing, and the GX Promotion Act and GX League have the same objective of achieving the Japanese Government's goal of achieving carbon neutrality.

III. Formulation of GX Promotion Strategy by the Government

The measures described below are intended to encourage companies to make investments for decarbonization by providing various kinds of support from the Government for areas that cannot be covered solely by each company's own capital investment. Companies can consider investment for decarbonization, taking into account various government support.

1. Clarification of GX promotion measures by the Government

Under the GX Promotion Act, the Government is required to formulate a strategy for promoting structural transition based on decarbonization (the "GX Promotion Strategy") in order to comprehensively and systematically promote measures for GX (Article 6, Paragraph 1 of the Act). Matters to be determined in the GX Promotion Strategy include the goals of GX, basic direction, matters concerning business areas that are expected to have a high impact on GX policy and support measures, matters concerning each measure stipulated in the GX Promotion Act, and matters concerning the evaluation of the achievement status of the GX Promotion Strategy (Article 6, Paragraph 2 of the Act).

2. Description of business areas important for GX promotion and support measures

It should be noted that in practice, the GX Promotion Strategy includes determining the business areas that are expected to have a big political impact on GX and formulating support measures for GX. Measures such as the introduction of tax incentives and subsidies are expected to be implemented for certain businesses as described in the GX Promotion Strategy, which are extremely important for companies to consider and implement new businesses.

Specifically, it is expected that the business areas mentioned in the Roadmap⁶ will be designated as such. Since policies to promote such business areas are expected to be adopted in the future, it is necessary to pay attention to investment and financing for future businesses and the establishment and amendment of legal systems relating to such businesses.

IV. Issuance of GX Transition Bonds and Introduction of Fossil Fuel Levy and Specified Business Emissions Allowance System

The measures described in IV 1 below are intended to encourage companies to make investments for decarbonization by providing various kinds of support from the Government for areas that cannot be covered solely by each Company's own capital investment. On the other hand, the measures described in IV 2 below are intended to impose economic burdens such as levies on carbon emissions, and is a type of carbon pricing. Even if the Japanese economy aims to promote corporate activities that do not emit any GHG in the medium to long term, it is difficult to stop using fossil fuels in the course of that process. However, when considering the use of fossil fuels, it is necessary to consider the economic burdens such as the levies described below.

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Footnotes

1. https://www.meti.go.jp/press/2022/02/20230210002/20230210002_1.pdf (Japanese only)

2. Japan's Emission Reduction Targets (October 25, 2022 https://www.mofa.go.jp/mofaj/ic/ch/page1w_000121.html)

3. Strategic Energy Plan (October 2021) https://www.enecho.meti.go.jp/category/others/basic_plan/pdf/20211022_01.pdf

4. For a detailed explanation on the Roadmap, see "Cabinet Approval on the 'Basic Policy for the Realization of GX' (February 10, 2023)" by Kenji Miyagawa and Mai Kurano, Shojihomu Portal, February 28, 2023.

5. For details of the GX League and carbon credit transactions, see the following Newsletter. https://www.amt-law.com/asset/pdf/bulletins12_pdf/230221.pdf

6. Specifically, it includes (1) the conversion of the manufacturing industry (conversion of fuel and raw material), (2) the use of renewable energy as a main power source, (3) the utilization of nuclear power, (4) the promotion of the use of hydrogen and ammonia, (5) the storage battery industry, (6) GX in the transportation sector, (7) digital investment for decarbonization, (8) infrastructure (promotion of renewable energy using various infrastructures such as airports, roads, dams and sewerage systems, reduction of energy consumption, and promotion of urban and regional development that contributes to decarbonization), and (9) carbon recycle/CCS.

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