Australia and Japan can make their own domestic energy transitions easier and cheaper by working together.

To decarbonise and reach net zero emissions by 2050, the energy relationship will look completely different from the past where Australia overwhelmingly shipped sources of energy to Japan.

Why does this need to happen and what does this mean for Australia?

This article outlines the opportunities and offers an idea to better position both nations to make the most of them.

The current state of play:

Australia is Japan’s largest energy supplier, accounting for 34 per cent of Japan’s total energy imports (in gigajoules) in 2022. With vast natural resources, Australia has been a reliable, stable and secure supplier of energy and strategic raw materials for Japan for well over half a century. Australia supplies close to two thirds of Japan’s resource imports such as iron ore and is by far its largest single source of strategic raw materials. Critical minerals is also a potential growth area.

Japan is one of Australia’s key investors.

Japan is the second or third largest source of direct foreign investment in Australia alongside the UK and just over one-third of that has been directed to the energy and resources sector. Japanese investment has been diversifying into financial services, insurance, food and beverage, infrastructure, technology and other sectors but the growth is likely to be dominated by new energy sources if the two nations cooperate.

Transition is a shared challenge.

Australia and Japan share key challenges. Both are seeking to rapidly decarbonising their economies. Both are seeking to benefit economically from the low carbon energy transition. And both are committed to achieving net zero greenhouse gas emissions by 2050. This is a more difficult transition Japan,  which is not endowed with natural resources But its capable government usually meets its targets and by 2030 Japan will likely reduce economy-wide emissions by 46 per cent relative to 2013.

With major economies including the United States, Europe, United Kingdom and South Korea committing to net zero emissions by 2050 and China by 2060, the global energy transition is well underway.

Where the opportunities are:

Hydrogen

In 2017, Japan released a national hydrogen strategy and has led debate on the development of a global market for hydrogen. Australia has the potential to be a hydrogen superpower and Japan could be one of its biggest importers.

The major challenge is the production and transport of hydrogen at scale. Establishing the infrastructure will require huge upfront investment and this presents risks and costs. With high risk and high cost, Australia would require a partner they trust. Australia’s best partner to develop this industry and export hydrogen, for this reason, is Japan.

Carbon credits

For Japan to work towards net zero emissions, it will need to offset the companies and industries that will continue to have gross positive emissions in a way that is efficient and cost-effective.

If Australia were to establish a bilateral agreement to facilitate the trade of carbon credits with Japan, it could do more to reach its Paris climate agreement targets and its own net zero emissions targets. As a bonus, the sale of carbon offset credits would accelerate investment and technology development in Australia.

Setting the new standards

There’s fierce competition for setting new energy, infrastructure, accounting and trade standards and protocols, and there are commercial, economic and strategic implications.

Australia and Japan already coordinate within several international standard setting bodies. But they could do more. If they introduced formal dialogues and structures between the two countries and involved industry, academia and government, the two countries could significantly increase their influence in setting regional and global standards.

How it could work:

Australia needs to get closer to Japan – not only to understand the changes there, but to jointly shape them. Japan is sensitive to changes in Australia and can’t afford to be surprised.

The Japan-Australia Energy and Resources Dialogue (JAERD) was established in 2019 and provides the right building blocks for Australia to engage directly with Japan and its energy transition.

Building on the work of the JAERD, the two governments could create a bilateral body – the Australia-Japan Energy Initiative (AJEI). This new body could:

• map out their respective energy transitions
• be modelled on the existing German-Japanese Energy Transition Council
• include specialist dialogues to reduce risks, navigate the challenges and help Australian experts, officials and industry to stay close to developments in Japan.

 

The benefits of a closer relationship with Japan and engaging with their energy transition are significant. Australia could deepen its most important relationship in the region, further its economic opportunities, identify future opportunities and develop its own capabilities.