Japan moves to fill Asia’s $40tn energy funding gap in China’s stead

Japan is ready to exploit a sharp decline in China’s overseas lending by helping Asia-Pacific countries address the $40tn cost of combating climate change.

Asia accounts for roughly half of global carbon emissions and is home to the world’s youngest generation of coal power plants. Rich nations have been accused of not providing enough financial support to help developing countries make a green energy transition.

Tokyo’s efforts to take the lead in rulemaking for green financing in Asia come amid a global debate about how quickly countries should shift to cleaner forms of energy in the wake of the war in Ukraine and the energy crisis.

Government officials in Japan and other parts of Asia have said that international standards such as the EU’s green taxonomy, a classification system aimed at helping investors judge industries on environmental sustainability, are too stringent, starving poorer countries of funding.

Beijing has long dominated development aid in Asia. But China has markedly reduced overseas loans for infrastructure projects recently.

“China needs to focus more on their internal market. So when I think about the next 10 years, China today may be the largest creditor to the developing world, but there are just going to be gaps,” said Ian Bremmer, president of Eurasia Group and Gzero Media. “So it’s clear that there is going to be space for the Japanese.”

Last week, some of the world’s largest financial institutions, led by Japan’s Mitsubishi UFJ Bank released guidelines for investors to finance projects and technologies to help Asian countries speed up the shift away from fossil fuels.

Analysts believe Japan’s push to lead “transition finance” efforts in Asia is in some ways self-serving. The country, which has increased its reliance on coal, natural gas and oil following the Fukushima Daiichi nuclear disaster in 2011, does not have a realistic plan to achieve net zero carbon emissions by 2050, and lags behind some of its regional peers in adopting solar and wind power.

With Prime Minister Fumio Kishida exploring government and private funding to reduce the country’s carbon footprint, it makes sense, analysts said, for Japan to drive standard-setting in the region for transition finance and carbon-reducing technologies, such as carbon capture.

“To attract transition financing from around the world, we envision working on large-scale projects in Asia such as power generation, hydrogen and grids, as well as creating common standards within the region,” Kishida told the New York Stock Exchange last month.

Last year, when Japan unveiled the concept for an Asian version of transition finance, it pledged $10bn to support the shift to renewables and other clean sources of energy. Tokyo estimates that Asia will need $40tn to achieve net zero emissions by 2050.

Some Asian leaders feel that western donor countries have been too strict and do not take into account differences in economic development and the region’s geographical conditions when it comes to climate aid.

“Every country has to prepare regulations in accordance with the capability they have,” Arifin Tasrif, Indonesia’ minister of energy and mineral resources, told the Financial Times.

“The international [community] should not push such kind of difficult regulations, which cannot be implemented in other countries and they have to be flexible.”

The war in Ukraine and the surging prices of coal and gas have added to the pressure on Asian countries to achieve energy security.

Developing countries are being outbid by richer European nations that are desperate to buy liquefied natural gas to replace Russian pipeline exports, prolonging the Asia-Pacific dependency on coal. But with prices for fossil fuels high, renewable sources of energy have become more attractive.

“The Ukraine war has made all fossil fuels very expensive. We are in this unique moment in time in which carbon neutrality is not only desirable, but it’s necessary because it is cheap,” said Khurram Dastgir Khan, Pakistan’s energy minister.

Pakistan, which has been devastated by floods linked to climate change, has received long-term financing under China’s Belt and Road Initiative as well as emergency loans from Beijing in recent years. It said it would welcome Japanese investment if it provided competitive pricing for its projects.

“This assumption that somehow China has taken over Pakistan is not correct,” Khan said. “The door for Japanese investment in the energy transition is open.”

“But the actual way in which it can be put on the ground is yet to be devised, so it’s just a concept at the moment,” he added.