Policy Design for Diffusing Hydrogen Economy

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This entry is adapted from the peer-reviewed paper 10.3390/en16217392

To achieve carbon neutrality in Japan by 2050, renewable energy needs to be used as the main energy source. Based on the constraints of various renewable energies, the importance of hydrogen cannot be ignored.

hydrogen carbon neutral Japanese economy

1. Background

Decarbonizing energy consumption is necessary to achieve carbon neutrality in Japan by 2050. The Japanese government’s 2050 energy plan calls for a complete decarbonization of the power sector, in which decarbonized electricity should be the focus, and the remainder should be hydrogen, methanation, and synthetic fuels ^[1].

To achieve Japan’s decarbonization goals, renewable energy should be promoted as the main energy source on a large scale. Using feed-in tariffs (FITs), Japan aims to promote the utilization of renewables, such as solar, wind, and bio-based power generation ^[2]. However, achieving energy decarbonization for the entire economy has its challenges, including geographical constraints, the high initial costs of low-carbon alternatives, and limited decarbonization options in some sectors. The Japanese Ministry of Economics, Trade, and Industry (METI) has identified that low-carbon hydrogen has a key role to play in decarbonizing the Japanese economy and achieving its Net-Zero target ^[3]. The advantage of hydrogen over other decarbonization measures is its versatility. However, the disadvantage is that for many applications low-cost low-carbon alternatives already exist. Currently, the price of low-carbon hydrogen is too high to be competitive with fossil fuel prices, as it is 9, 10, and 37 times more expensive than oil, natural gas, and coal, respectively ^[4]. Therefore, large-scale cost reductions are required to ensure low-carbon hydrogen is competitive with other energy carriers. To that end, METI has announced targets to decrease the cost of hydrogen due to economies of scale and incremental innovation while increasing low-carbon production capacity ^[5], and has announced its intention to make funding available for hydrogen-related research and development (R&D), deployment, and infrastructure.

2. Hydrogen Roadmap towards 2050

In Japan’s Roadmap to “Beyond-Zero” Carbon, the Japanese government intends to promote the use hydrogen in transportation, industry, and power generation, to achieve carbon neutrality by 2050. Additionally, the National Hydrogen Strategy ^[3] and Environment Innovation Strategy ^[6], which include hydrogen technology innovation, have been established for carbon neutrality. Hydrogen is a secondary energy source in the electricity, transportation, industrial, residential, commercial, and public services sectors. To improve the hydrogen ecosystem, hydrogen applications should be extended to ships, trains, trucks, and other transportation modes. Furthermore, industrial carbon capture and storage (CCS) is used to capture and store the carbon generated from methane and coal. However, 10–20% of carbon cannot be captured by blue hydrogen. Conversely, green hydrogen from renewable electricity via electrolysis does not generate carbon.

In 2020, Japan’s primary energy consumption was mostly fulfilled by fossil fuels. Oil, coal, and natural gas had a 38%, 27%, and 24% share of the total, respectively, followed by biomass and waste, nuclear, solar and wind, hydropower, and geothermal energy at 4%, 3%, 2%, 2%, and 1% shares, respectively ^[6]. By 2050, the share of fossil fuels in the primary energy consumption profile is required to decrease or its subsequent emissions must be sequestered or offset. This is why the Japanese government is looking at hydrogen with interest. In 2017, Japan became the first country in the world to formulate a national hydrogen strategy ^[3].

There are ongoing projects at the METI and NEDO (New Energy and Industrial Technology Development Organization), for example, on the international hydrogen supply chain and domestic power-to-gas. Household fuel cells have already entered the Japanese market ^[7] and fuel cells for business and industry use, such as MIRAI of Toyota, were launched in 2017 ^[8]. In addition, Japan has built a liquefied hydrogen carrier before the rest of the world. Japan is also a leader in hydrogen power generation technology ^[5]. However, the Renewable Energy Institute concluded that Japan is far behind the goals of its hydrogen strategy launched five years ago ^[9]. The uptake of stationary and mobile fuel cells has been limited and hydrogen refueling stations have seen little use.

The Basic Hydrogen Strategy published in 2017 ^[3] (updated in 2023 ^[10]) and the First Strategic Plan ^[11] (the 2030 Action Plan toward 2050 and the 2050 Vision toward the realization of a hydrogen society) highlight Japan’s focus on the hydrogen economy in its attempt to decarbonize its economy. The 2030 Action Plan toward 2050 entails the “development of international supply chains and development of domestic technology for producing hydrogen derived from renewable energy” ^[11]. Moreover, the 2050 vision toward realizing a hydrogen society requires the “Realization of CO₂-free hydrogen” ^[11]. The Basic Hydrogen Strategy ^[3] provides three phases to realizing a hydrogen society:

Phase 1: Fast expansion of hydrogen uses.

Extensive diffusion of stationary fuel cells and fuel cell electric vehicles (FCEV). Playing a leading role in the global market for hydrogen and fuel cells.
Phase 2: introducing hydrogen power generation/establishing a large-scale hydrogen supply system (in the late 2020s).
Phase 3: establishing a CO₂-free hydrogen supply system using renewable energy sources or CCS (in 2040).

The METI clarified Japan’s long-term strategy for different sectors ^[11]. The energy sector will realize a “Hydrogen Society” and promote CCS and CCUS/carbon recycling. The industry sector will use CO₂-free hydrogen to achieve “zero-carbon steel”. Additionally, the transport sector will achieve the highest level of the environmental performance of Japanese vehicles by 2050 to achieve “Well-to-Wheel Zero Emission”.

The Basic Hydrogen Strategy has goals on the use (mobility, power, and fuel cells) and supply sides (fossil fuel + CCS and green hydrogen) for the hydrogen economy. To achieve these goals, targets should be set up, such as increasing the efficiency of hydrogen-fired power generation from 26% to 27%. Furthermore, the METI has set a goal to decrease the cost of electrolysis systems from 200,000 JPY/kW (1.350 USD/kW) today to 50,000 JPY/kW (340 USD/kW) by 2030 through R&D and scaling up. The goal for conversion efficiency is 4.3 kWh/Nm³ in 2030 from 5 kWh/Nm³ today. To achieve these goals, the Japanese government seeks to roll out hydrogen-based applications in designated regions such as highlighted in the Hydrogen Town Plan of Namie-cho in Fukushima Prefecture ^[11].

The government of Japan’s focus on promoting the transition to a hydrogen economy has been criticized by the Renewable Energy Institute (REI). After the first formulation of the Basic Hydrogen Strategy in 2017, the REI argued that it was at odds with global hydrogen strategies and transition strategies ^[9]. After the revision of the Basic Hydrogen Strategy in 2023, the REI acknowledged that the strategy had caught up on some of the global trends with respect to hydrogen. However, the strategy still relied on low-priority applications (e.g., stationary fuel cells in domestic homes and private passenger fuel cell vehicles), had an overreliance on grey and blue hydrogen (produced from natural gas without and with CCS, respectively), and a delay in expanding green hydrogen production ^[12].

3. Proposed Hydrogen-Related Policies

The Japanese government provides robust funding for research, development, demonstration, and deployment, and keeps its technology options open ^[13]. In 2020, the funding for hydrogen research included JPY 26.4 billion (USD 179 million) for clean energy vehicles, JPY 4 billion (USD 27 million) for residential fuel cells and fuel cell innovation, JPY 5.25 billion (USD 35 million) for innovative fuel cell R&D, JPY 3 billion (USD 20 million) for hydrogen supply infrastructure R&D, JPY 12 billion (USD 81 million) for FCEV refueling stations, JPY 14.1 billion (USD 95 million) for the development of hydrogen supply chains, and JPY 1.5 billion (USD 10 million) for hydrogen production, storage, and usage technology development ^[13]. In the news published by the METI’s Tokyo “Beyond-Zero” Week 2021 Held ^[14], a Green Innovation Fund of JPY 2 trillion (USD 13.5 billion) has been established to encourage companies to conduct R&D and to facilitate the deployment of carbon neutrality by 2050.

To establish a hydrogen supply chain and green hydrogen, USD 2.7 billion and USD 700 million will be invested, respectively. Japan aims to expand the hydrogen market from 2 million tons annually to 3 million tons annually by 2030, to 12 million tons annually by 2040, and 20 million tons annually by 2050. Additionally, Japan plans to decrease hydrogen costs by one third in 2030 ^[13].

Furthermore, the subsidy’s upper limits for promoting the introduction of clean energy vehicles such as EVs, light EVs, plug-in hybrid electric vehicles (PHEVs), and FCEVs are JPY 650,000 (USD 4400), JPY 450,000 (USD 3000), JPY 450,000 (USD 3000), and JPY 2.3 million (USD 15,500), respectively ^[3].

The Japanese government will develop 1000 hydrogen refueling stations for FCEV ^[15]. From Japan’s Roadmap to “Beyond-Zero” Carbon ^[16], Japan must overcome several challenges to become a full-fledged hydrogen energy source. For example, Japan should broaden its hydrogen applications to ships, trains, and trucks and build a ubiquitous hydrogen ecosystem. Furthermore, hydrogen will become more affordable in Japan by establishing a global supply chain, building on-site storage facilities, and validating hydrogen production setups. Moreover, strengthening R&D is vital, including the strategic development of human resources. The New Energy and Industrial Technology Development Organization is searching for 500 researchers to oversee the Zero Emissions Creator 500 program ^[16].

Japan seeks secure access to hydrogen; therefore, various hydrogen sources have been tested. Hydrogen supply chains are currently based on fossil fuels ^[13]. Moreover, Japan plans to establish a manufacturing technology base by 2030 to produce hydrogen from renewable domestic sources ^[13]. However, the METI ^[11] states that it is necessary to “supply at low-cost (the price equivalent to natural gas) and low-carbon hydrogen for production, transportation, and storage to expand industrial use”.

4. Modelling the Promotion of the Hydrogen Economy in Japan

Various studies have investigated how the hydrogen economy could develop in Japan. The multi-sectoral open-source Global Energy System Model (GENeSYS-MOD) and power system dispatch model are applied in Burandt ^[17] to analyze the necessity of importing hydrogen for Net-Zero emission in Japan. According to the analysis, Net-Zero emissions in 2050 can be achieved via a transition to hydrogen-based industry and transport. Importing hydrogen will also help develop the energy system. Consequently, the policy of focusing on green or blue hydrogen for global hydrogen markets is suggested.

A global and long-term intertemporal optimization energy model (GRAPE) is used in Ishimoto et al. ^[18] to analyze global hydrogen demand. They found that a large number of fossil fuels are substituted by other low-emission energies. Among them, the demand of global hydrogen will be 2.4 trillion Nm3 by 2050, and it will be mainly used by the transportation sector. On top this, hydrogen power plants will also be launched in Japan.

There are more studies, such as the AIST MARKAL model is used in Ozawa et al. ^[19] to analyze the role of hydrogen in the future energy systems of Japan for realizing environmentally sustainable economies. To achieve the 80% emission reduction target in 2050, the electricity sector must achieve almost zero emissions, and hydrogen power generation is crucial. Moreover, developing other low carbon technologies is required for establishing the hydrogen economy.

The energy system transition is the key to achieving an 80% reduction of emissions by 2050. The six energy–economic and integrated assessment models are applied for analyzing decarbonization in the energy system in the research of Sugiyama et al. ^[20]. The simulation result shows that marginal costs of emission reduction in Japan are high. Additionally, since the industry sector has a large final energy share, it is the most difficult sector in which to achieve emission reduction. Along with this result, importing of hydrogen and other carbon-free energy is a good choice for Japan.

Most economic models or integrated assessment models, like the ones mentioned above, build on the Neoclassical school of thought. Mercure et al. provide a detailed overview of various types of macro-economic models ^[21]. In brief, macro-economic models that build upon Neoclassical theory usually show the following features: central to the models lie a production function that is optimized; in accordance with Say’s Law, prices adjust to clear the market; the supply of money builds on the loanable funds theory; agents behave rationally; economies operate at equilibrium, at least in the long-term; and involuntary unemployment does not exist, among others. These features have implications on climate change policy. If economies operate at equilibrium and at full capacity, then any change will lead to a negative impact initially. Due to the optimizing nature of such models, they tend to shed light on how the economy ought to develop given the assumptions.

In E3ME-FTT, the flow of logic and assumptions are different. The model follows post-Keynesian school of thought and builds upon effective demand. Economic relationships are built on timeseries data. Prices and wages can be sticky, involuntary unemployment can exist, money can be created without leading to full-crowding out ^[22], and economies per se do not operate at equilibrium. Therefore, policies can be used to unlock underutilized capital or employment and may lead to positive economic outcomes. E3ME-FTT is better suited for investigating economic impacts due to policies focused on promoting decarbonization and the hydrogen economy, because it considers the likely outcome, and it does not rely on restrictive assumptions.

Researchers design a policy scenario in line with policies proposed by METI, and researchers evaluate its impacts on GDP, employment, technological diffusion, and emissions using the Energy-Economy-Environment Macro-econometric (E3ME)-Future Technology Transformations (FTT) model. The suite of FTT models allows us to investigate the diffusion of hydrogen-demanding technologies under the influence of the policy settings, and it covers power generation (FTT:PG), passenger road transport (FTT:PRT), freight road transport (FTT:FTR), residential heating (FTT:Heat), and the iron and steel (FTT:Steel) sectors. Hydrogen supply is represented through a set of projections and informed assumptions. Through connection with the E3ME model, researchers can investigate the macro-economic impacts of realizing carbon neutrality by 2050 in Japan.

References

METI 2050 Carbon Neutral Growth Strategy. Available online: https://www.meti.go.jp/press/2021/06/20210618005/20210618005-3.pdf (accessed on 5 October 2022).
Enerdata Japan Sets Feed-In Tariff Levels for Renewable Projects in 2022–2023. Available online: https://www.enerdata.net/publications/daily-energy-news/japan-sets-feed-tariff-levels-renewable-projects-2022-2023.html#:~:text=The%20Japanese%20Ministry%20of%20Economy,April%202022%2DMarch%202023).&text=In%20addition%2C%20FiTs%20for%20offshore,US%2431c%2FkWh) (accessed on 15 July 2023).
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