More than 130 countries have set or are considering setting a target of reducing their greenhouse gas (GHG) emissions to net-zero by 2050.1 Japan became one of those countries in October 2020 when Prime Minister Yoshihide Suga announced the government would adopt this objective during his first policy address to the National Diet.2
As an interim goal, Prime Minister Suga announced in April 2021 that by 2030 Japan would reduce emissions 46 percent relative to 2013 levels.3 This was a dramatic departure from the previous targets of reducing emissions 26 percent by 2030 and 80 percent by 2050 under the Paris Agreement. But it’s in step with other large GHG emitters, such as the European Union and Canada, that have also embraced more aggressive targets.
Japan is the sixth largest GHG emitter in the world after China, the United States, the European Union, India, and Russia.4 In 2017, it emitted a net 1,230 metric megatons of carbon dioxide equivalent (MtCO2e), most of which originated from five sectors: power (37 percent), industry (36 percent), transportation (17 percent), buildings (10 percent), and agriculture (4 percent).5
In the years ahead, Japan has many strengths to leverage on its path to net-zero. Compared with other industry-heavy countries such as Germany and the United States, Japan uses less energy to produce every $1,000 of GDP because of its higher overall energy efficiency. Its extensive railway infrastructure offers a viable alternative to cars. And the life cycle of Japanese buildings is much shorter than in regions like the European Union, making it easier to impose green regulations on new construction.
Because Japanese building owners often retrofit their properties to withstand frequent earthquakes, there are also more opportunities to install better insulation and more sustainable heating and cooking solutions. In addition, a large number of Japan’s urban office and residential buildings are owned by a handful of major real estate companies, making it easier to implement widespread change.
But Japan also has its challenges. The country’s power sector is more dependent on fossil fuels than other developed economies, making it more difficult to provide zero-carbon electricity to the sectors that will need it to decarbonize. This higher dependency on fossil fuels is due, in part, to Japan’s lower renewables capacity. For instance, its deep coastal waters make it difficult to install offshore wind turbines, and its mountainous terrain precludes open space for onshore wind and solar farms.
As the home to the world’s most populous city, Tokyo, and two other densely populated megacities—Osaka and Nagoya—Japan also faces spatial challenges in rolling out public and private charging stations and other infrastructure required for electric and hydrogen-fueled vehicles.
Prime Minister Suga’s announcement of Japan’s net-zero aspiration was globally celebrated, providing an opportunity to showcase how best to achieve these targets with a granular implementation plan. To help fill the gap, McKinsey has developed a pathway for Japan to decarbonize its major sectors based on what seems to be most feasible and affordable from technological and investment perspectives.
Developing Japan’s cost-optimal pathway
There are many paths Japan could take to reach the net-zero target. We modeled a pathway that from a central planner’s perspective would be considered “societally cost-optimal,” with a social discount rate6 of 4 percent for all investments. We optimized cost for the whole system, including every sector, and for the entire time horizon, from 2017 to 2050.
We ran a bottom-up analysis using two principal proprietary models:
- McKinsey Decarbonization Pathway Optimizer (DPO): A model with more than 600 technologies in 75 segments. Each technology is attached to a business case, including investment and operating-cost components, emissions impact, and energy consumption.
- McKinsey Power Model (MPM): A power-system model that simulates electricity supply and demand on an hourly basis to arrive at a cost-optimized power-generation technology mix.
Our pathway is not a prediction of what will happen under current policy, social, and technological conditions. Nor does it account for all the unique situations faced by each company and individual in Japan. Our intent is to help inform the planning efforts of policy makers and business leaders, demonstrate the technical feasibility of achieving Japan’s emissions-reduction targets, and explore the implications of the changes that would be required.
The cost-optimal pathway through 2030
For Japan to reach its 46 percent emissions-reduction target by 2030, it would need to eliminate about 500 MtCO2e. This could be done at an average cost savings of $34 per metric ton of carbon dioxide equivalent (tCO2e) over the next decade because the required technologies are already mature.
The buildings sector would be the fastest to decarbonize, reducing emissions 55 percent, at a cost savings of $57 per tCO2e, by installing better insulation and switching to electric heat pumps instead of fossil-fuel boilers (Exhibit 1).
The power sector would be the second fastest to decarbonize, reducing emissions 42 percent by 2030. This could be achieved by replacing coal power plants with combined-cycle gas turbines (CCGT), restarting nuclear plants closed after the 2011 Fukushima accident, and expanding offshore wind and solar-power capacity—measures that would generate an average cost savings of $18 per tCO2e through 2030.
Industry remains a difficult sector to decarbonize because of its high-temperature processes and carbon-intensive feedstocks. But through demand reduction, switching from oil to gas in industrial boilers, and using heat pumps for low-temperature processes, industry emissions could be reduced 40 percent by 2030 at an average cost savings of $20 per tCO2e.
The transportation sector would see the smallest drop in emissions by 2030, at just 32 percent. Although the technology to decarbonize transportation is mature, it will take a while to ramp up battery electric vehicle (BEV) manufacturing, scale the charging infrastructure, and motivate passenger-car and light-commercial-truck owners to make the switch. Through 2030, the average abatement cost savings would be $49 per tCO2e.
The cost-optimal pathway from 2030 to 2050
Now comes the hard part. After most of the easier, more affordable decarbonization solutions have been implemented, Japan would have to resort to more expensive technologies to reduce its remaining emissions. In industry, for example, manufacturers would have to deploy carbon capture, utilization, and storage (CCUS) or switch to hydrogen for mid- to high-temperature processes, increasing the sector’s average abatement cost to $41 per tCO2e.
To provide green electricity after Japan has reached its renewables capacity, the power sector would also need to start using alternative fuels such as hydrogen and ammonia and apply CCUS to thermal-power assets. These alternative fuels would increase the sector’s average abatement cost to $81 per tCO2e.
In the buildings sector, owners would have to install hydrogen boilers in addition to better insulation and electrification, raising the average abatement costs to $6 per tCO2e. In transportation—the only sector that would see overall cost savings—Japan would have to supplement the electrification of passenger and light-duty vehicles by switching to fuel cell technology for long-haul trucks and hydrogen and biofuels for aircraft and ships. These changes would result in an average abatement cost savings of $62 per tCO2e.
As a result of these efforts, the average abatement cost for all sectors together would rise to $36 per tCO2e by 2050, a significant increase from the cost savings of $34 per tCO2e through 2030. During the transition, primary energy inputs and energy consumption would drop as activity reduced in line with Japan’s declining population and increased process and fuel efficiencies. Oil and coal consumption would disappear, while renewables and clean hydrogen and ammonia would become the primary energy supplies (Exhibit 2). However, natural gas would remain a part of the mix to supplement demand that could not entirely be fulfilled by renewables.
Highlights of required actions
The magnitude of achieving net-zero is illustrated by some of the actions that would need to be taken (Exhibit 3):
- Power: Solar and wind capacity would need to increase threefold, to 275 gigawatts (GW) by 2050. Unabated coal-fired power generation would be shut down by 2030.
- Industry: Because electrification can’t generate the heat for mid- to high-temperature manufacturing processes, this sector would need to rely on hydrogen to reduce 21 percent of its emissions and CCUS for an 18 percent reduction. Japan would have to establish a hydrogen supply chain and invest in expensive CCUS technology.
- Transportation: To meet the 2030 emissions-reduction target, 90 percent of new cars, trucks, and buses sold in Japan by 2030 would need to be BEVs. The auto industry would have to ramp up BEV production, and cities would need to install the necessary infrastructure.
- Buildings: Because better insulation and electrification of space heating and cooking can’t eliminate all building emissions, 10 percent of the total energy use would have to be hydrogen, reinforcing Japan’s need to establish a robust hydrogen supply chain.
To make these changes, Japan would need 22 million tons of hydrogen a year by 2050, up significantly from the less than two million tons required today. The power sector would consume 31 percent of that hydrogen for power generation. CCUS technology would need to capture 173 million tons of CO2 by 2050—more than four times today’s global carbon-capture volume. To make this possible, Japan would have to invest in CCUS technology and build a vast network of carbon storage sites that currently don’t exist.
Financing the transition
On our cost-optimal pathway, reaching net-zero would require a total investment of $10 trillion by 2050, or $330 billion annually. Of that investment, $8 trillion would come from redirecting funds that would have been invested in incumbent technologies. An additional $2 trillion—an average of $70 billion annually, or 1 to 2 percent of the country’s GDP—would be needed to cover the higher net cost of the decarbonizing technologies and infrastructures that are more expensive to implement, such as an expanded power grid, BEV charging stations, and pipelines for hydrogen and ammonia transmission. The government can utilize various levers to finance the transition, such as subsidies, carbon taxes, special investments, or private-sector funding.
While developing our cost-optimal pathway, we looked at a few other ways that Japan could reach net-zero because so many variables are in play.
In the first alternative pathway, Japan would push for renewables to constitute almost 80 percent of its power generation rather than 60 percent. Achieving this would require addressing geological and social constraints, such as confronting “not in my backyard” (NIMBY) resistance to onshore wind installation, managing fishing rights to open more waters to offshore wind generation, and introducing solar sharing to agricultural land. More renewables would reduce the need for higher-cost technologies such as hydrogen and CCUS, decreasing the average abatement cost of the system by one-third, to $24 per tCO2e.
In addition to the model using a higher renewables share, we modeled a power-generation mix using a larger contribution of nuclear power. Bringing reactors back online and building an additional 13 GW of capacity (including small modular reactors), in tandem with making renewables a higher percentage of the mix, could reduce the average abatement cost 70 percent to $11 per tCO2e. The energy self-sufficiency rate of Japan would increase to 88 percent in this scenario, a huge achievement for a country that has always been dependent on fuel imports from abroad. However, relying more heavily on nuclear power is complicated because of the risk of disasters such as Fukushima.
In the second alternative pathway, Japan would outsource low-value-adding, energy-intensive parts of manufacturing. For example, it could import crude steel from countries with low hydrogen costs and produce the finished steel domestically. To do so would take pressure off Japan’s renewables constraints and lower the average cost of abatement for industry from $41 per tCO2e to $34 per tCO2e.
However, because this approach would affect only industry, it would reduce total abatement costs by only 8 percent, to $33 per tCO2e compared with $36 per tCO2e, in the central pathway. Implementing this industrial reconfiguration would also require assurances that the outsourced parts of production are fully decarbonized in the producing countries.
Achieving carbon neutrality by 2050 will require a joint effort from Japan’s policy makers, regulators, companies, and individuals. To meet the interim 2030 reduction targets and lay the groundwork for 2050 would necessitate the following immediate actions:
Deploy four decarbonization levers. In the next few years, Japan needs to accelerate BEV deployment, improve the energy efficiency of buildings, change the power-generation mix, and reinforce its electrical grid (Exhibit 4). Getting 30 percent of cars on the road and 90 percent of new car sales to battery electric power by 2030 will require the government to set aggressive targets and incentives. Battery manufacturers would also need to shift production to meet the new demand, which would increase eightfold in the next decade.
Adding renewables to the power mix by 2030 would require allowing more auctions for wind capacity in designated areas, mandating rooftop solar panels on new and retrofitted buildings, and establishing a phase-out schedule for coal with corresponding incentives. Supply chains would also need to scale up production of products such as wind turbines.
Finally, annual investments in the electrical grid would need to more than triple, from $7 billion today to $23 billion through 2030. The government would need to directly invest in capacity expansion and clarify the cost split among power companies, renewables developers, and consumers.
- Make strategic choices. The decline in overall abatement costs will require policy makers to decide the percentages of renewables and nuclear power that will make up the power mix and how to enable that capacity. For example, they could enact regulations to expand offshore- and solar-power generation to achieve a higher proportion of renewables in the mix.
- Scale long-term technologies. To reach the 2050 net-zero goal, developing the infrastructure for CCUS and hydrogen must begin immediately because Japan is starting from scratch. To lay the groundwork, the government would have to finalize the research and selection of carbon storage sites, commit funds to long-term infrastructure and technology developments, and provide incentives for private investment, such as tax credits and carbon trading. Corporations such as equipment manufacturers, utilities, and oil and gas companies should start forming consortiums to collaborate with the government on developing these technologies. Companies will also need to invest in overseas resources to ramp up CCUS and blue and green hydrogen and ammonia production.
- Maintain industry competitiveness. Japan will also need to refocus its economy on industries and processes with lower energy demands. For example, automakers could outsource batteries and inverters, import them, and assemble the BEVs domestically.
A greener future
Decarbonizing Japan will take significant investment, the reconfiguration of trade, and a reconception of industry focus. But swift action could set the country up to become a global leader in green technologies such as hydrogen gas turbines, offshore floating wind and solar technology, BEV manufacturing, and more. These could open the door to new business opportunities for countless companies and individuals while enabling Japan to do its part in combating climate change.