OECD Inventory of Support Measures for Fossil Fuels: Country Notes

Japan

Energy resources and market structure

Japan has negligible fossil-energy resources and relies almost entirely on imported fuels. It relies on imports for 99.7% of its crude oil, 97.7% of its liquefied natural gas (LNG), and 99.6% of its coal. Notably, the country depends on the Middle East for about 90% of its oil.1

The suspension in the operation of nearly all Japan’s nuclear power plants following the 2011 Great East Japan Earthquake resulted in a sharp decline in the share of nuclear power in Japan’s total energy supply (TES), from 15% in 2010 to a complete shutdown in 2014 and just a mere 4% from 2018 before rising slightly to around 8% in 2021. Japan is the fourth-largest oil consumer in the world — behind the United States, the People’s Republic of China, and India — the fifth-largest net importer of crude oil, and the largest net importer of liquefied natural gas (LNG). As of August 2023, there are six nuclear power plants (out of 17) with ten reactors back in operation and another seven that have been approved. Since the 2011 Fukushima disaster, the country decided to decommission a total of 27 reactors. In October 2021, the Cabinet approved the new Plan for Electricity Generation to 2030, which kept the nuclear target for 2030 of 20-22%, translating into a potential restart of another ten reactors. Russia’s war of aggression against Ukraine, which caused a major supply turmoil on the international natural gas market, also provided momentum to restart idled nuclear reactors, setting the stage for a major policy shift on nuclear energy a decade after the Fukushima nuclear accident.

Fossil fuels accounted for 72.4% of the total electricity generated in 2022, up from 71.7% the previous year. LNG accounted for 29.9%, down from 31.7% a year earlier, partly due to price hikes, while coal increased to 27.8% from 26.5% a year earlier. On the other hand, nuclear power accounted for 4.8%, down from 5.9% the previous year.2

 

Source: IEA (2022), "World energy statistics", IEA World Energy Statistics and Balances (database).

Japan’s energy sector is dominated by private domestic companies, with public-sector ownership largely limited to a few municipal gas and electricity utilities, most of which are small. Oil exploration and development abroad are supported by the Japan Oil, Gas and Metals National Corporation (JOGMEC) — a government agency set up in 2004. All of Japan’s oil refineries are privately owned along with the distribution of oil products, with increasing market penetration by foreign companies seen in recent years. The natural-gas industry is also largely in private hands with the majority of gas imported by Japan’s electricity companies for power generation. These utilities, and some large industrial users, purchase their gas independently from the city gas industry. The four major gas utilities — Tokyo Gas, Osaka Gas, Toho Gas, and Saibu Gas — supply about three-quarters of the total gas market. There are also about 1 400 small, community gas utilities. Although most pipelines in Japan are owned by gas utilities, some power utilities and domestic gas producers own pipelines as well. In June 2023, as a result of the global energy crisis and the need to diversify its supply, Japan will strengthen its cooperation with the European Union by establishing an EU-Japan energy security dialogue on global liquefied natural gas (LNG) architecture.3

Japan’s electricity sector is comprised of ten former General Electricity Utilities — e.g. Tokyo Electric Power Company (TEPCO) and Kansai Electric Power Company (KEPCO), which deal in generation, transmission, distribution, and retail sectors independently — numerous electricity generators, including J-Power, and various large and small retail electricity suppliers. The biggest electricity entity in both the generation and retail sector is TEPCO. In Japan, electricity and gas market reforms have been implemented gradually since the mid-1990s. In recent years, the Administration has implemented the Energy System Reform which fully liberalised the Japanese electricity retail market in 2016 and the gas retail market followed in 2017. However, these market reforms are considered to be at a slower pace when compared with most other OECD countries.

Energy prices and taxes

During normal pre-covid times, there are no price controls on oil products or coal in Japan. Gas tariffs in the non-liberalised sector and electricity tariffs in specific retail sectors are regulated, as are network charges which retail providers in the liberalised sector have to pay. All fuels and energy services are subject to the Consumption Tax at a flat rate of 10% (since October 2019; 8% prior to this period), as well as to excise and other taxes at varying rates according to the type of fuel. Petroleum and Coal Tax is levied on crude oil, imported oil products, natural gas and coal while gasoline, diesel fuel and LPG are subject to additional excise taxes. Tax for Climate Change Mitigation was introduced in 2012 with the petroleum and coal tax, with the rate set at JPY 289/tCO2 in 2016. The Tax for Climate Change Mitigation provides a stipulation that the revenue from this tax component is earmarked for financing energy conservation and efficiency measures and greenhouse gas emissions reduction initiatives. In February 2023, Japan’s Cabinet approved the Basic Plan for the “GX: Green Transformation Policy”, designed to help Japan reach its climate targets. The Basic Plan outlines initial arrangements to transition to a mandatory ETS from 2026. Separately, the government will impose a carbon levy on fossil fuel importers from 2028. The scope and coverage of the levy are yet to be decided but will be determined based on other existing policies, such as Japan’s carbon tax mentioned above.4

Aviation Fuel Tax is levied on domestic aviation fuel to finance airport infrastructure construction. Electricity supplied through general transmission and distribution companies’ network is subject to the Promotion of Power-Resources Development Tax to finance measures facilitating installation, operation, utilisation, and security of power plants and to ensure the smooth flow of power supply.

Since January 2022, Japan has also been announcing growing numbers in gasoline subsidies for oil distributors in the effort to stabilise rising fuel prices. As a temporary measure, the government has recently set subsidy amounts for retail gasoline, if the price exceeds the threshold of JPY 170. In January, the subsidy was JPY 3.4 per litre, early February ― JPY 3.7, later increasing to JPY 5. The latest increase announced in March was JPY 25 per litre. The government announced JPY 350 billion (USD 3.03 billion) from the current fiscal's emergency budget to fund the subsidy.

Figure 2. Total tax rebates and support for fossil fuels in Japan

 

 

1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports). Support measures for which such information is not available are excluded from the aggregate amount reported in this table. In addition, support measures in certain countries may not have been exhaustively identified.

2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.

3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.

4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.

Source: OECD Inventory of support measures for fossil fuels (2023).

Recent developments and trends in support

Japan is amongst the world leaders in energy research and development, with direct public spending on energy research as a percentage of its GDP being one of the largest amongst OECD countries. Recent boosts in research funding were seen after the 2011 Great East Japan Earthquake, particularly on developing technologies relating to the extraction of natural gas from frozen methane hydrate in Japan’s Nankai Trough. Besides scientific research, the government is also providing direct and indirect funding in support of Japanese companies participating in fossil-fuel exploration projects overseas particularly with natural gas, a fuel whose role has increasingly grown following the 2011 Fukushima nuclear accident. Furthermore, since 2011, the government has provided financing for investments aimed at increasing the efficiency of the oil refining and distribution segments.

For these reasons, almost the entirety of Japan’s tabulated support benefits the oil and gas production sector, mostly aimed on research and development funding for fossil-fuel exploration projects destined overseas.

During 2020, as part of METI’s broader support measures for companies concerning the impact of COVID-19, the government enacted an order for gas and electricity companies to implement a flexible grace period for the settlement of electricity and natural gas bills and for the temporary cessation of service disconnection to affected customers due to bill settlement difficulties during the COVID-19 State of Emergency. With the closure of nuclear plants, the bulk of Japan’s electricity mix now originates from fossil fuels, chiefly from natural gas fired power plants.

During FY 2021, Japan’s total support estimate significantly increased by 49% in comparison to 2020, as new consumer subsidy was implemented, and economies opened after the COVID-19 pandemic. The increases were driven by upsurges in support to:

• exploration activities to secure sustainable fossil fuel supply by supporting exploration projects conducted by Japanese companies in resource-rich countries overseas.

• support to government-operated petroleum stockpiling infrastructure to ensure oil supply security.

• a new non-targeted universal consumer support to petroleum products at the pump in response to spiking oil prices post-covid recovery exacerbated by the Ukrainian crisis. The subsidy, administered as a discount per litre, has continuously increased, starting at JPY 5/litre when the measure started in January 2022 to JPY 25/litre in April 2022, coinciding with the volatile weakening of the Japanese currency against the US dollar. The temporary measure has been extended three times and was expected to conclude in December 2022, however, in the Spring of 2023, it reached nearly JPY 32/litre and as of this writing is still in effect at just under JYP 20/litre The subsidy is currently expected to conclude in April 2024.

In 2022, to mitigate energy prices resulting from the global energy crisis the government introduced new measures, namely subsidies to mitigate fuel, gas, and electricity prices. For example, a subsidy provided for wholesale energy distributers to limit retail price increases of gasoline, diesel oil, kerosene, fuel oil and aircraft fuel was JPY 33 per litre (and half of the amount exceeding JPY 33) as of 30 January 2023. The support rate is planned to be gradually reduced.

The fiscal cost of support measures for fossil fuels in Japan was estimated at JPY 3907.20 billion in 2022 (Table 1). Zero per cent (0%) was directed at end user beneficiaries, as opposed to 100% directed to firms. Support was mainly given out in the form of direct transfers (JPY 3871.00 billion) accounting for 99% of the total fiscal cost of support measures. Tax expenditures amounted to JPY 36.20 billion.

The fiscal cost of support measures for fossil fuels has increased by 1197% since 2017. Since last year, tax expenditures have by 0%, from JPY 36.20 billion to JPY 36.20 billion and direct transfers increased by 1811%, from JPY 246.47 billion to JPY 3871.00 billion. All growth rate percentages above are expressed in terms of nominal national currency amounts.

Table 1. Fiscal cost of support measures for fossil fuels (in billions of national currency

	2017	2018	2019	2020	2021	2022
Tax expenditures	36.200	36.200	36.200	36.200	36.200	36.200
Direct transfers	264.945	206.929	223.852	200.094	246.475	3871.000
Total	301.145	243.129	260.052	236.294	282.675	3907.200

1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports). Support measures for which such information is not available are excluded from the aggregate amount reported in this table. In addition, support measures in certain countries may not have been exhaustively identified.

2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.

3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.

4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.

Source: OECD Inventory of support measures for fossil fuels (2023).

Table 2 highlights a selection of support measures associated with a large fiscal cost. A description of these measures is provided in Table 3.

Table 2. Selected support measures for fossil fuels with a large fiscal cost (in billions of national currency)

Measures associated with large fiscal cost in 2022		2022	2017	Variation since 2017
Tax expenditures
	Special Tax Reduction for Domestic Mining firms that Promote Exploration of Resources	36.200	36.200	0.000
Direct transfers
	Subsidies to mitigate fuel price increase	3542.857	(Started 2022)	3542.857
	Capital Contributions for Exploitation Rights and Assets Investment	108.113	38.002	70.111
	Project Expenses for the Measures to Increase Government Stockpiled Oil	74.270	58.222	16.048

1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports).

2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.

3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.

4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.

Source: OECD Inventory of support measures for fossil fuels (2023).

Table 3. Description of selected support measures for fossil fuels

Special Tax Reduction for Domestic Mining firms that Promote Exploration of Resources	Introduced in 1965, this measure supports domestic mining firms' exploration of resources, including oil and natural gas. Specifically, it allows firms to reserve certain amount of income for future expenses of exploration projects and include the reserves in deductible expenses, resulting in reduction of tax on the profits. Moreover, if a firm uses its reserve for exploration projects, the government reduces taxation on the income of the firm in the year.
Subsidies to mitigate fuel price increase	A subsidy is provided for wholesale energy distributers to limit retail price increases of gasoline, diesel oil, kerosene, fuel oil and aircraft fuel. As of 30 January 2023, the upper limit of the support rate is JPY 33 per litre and 1/2 of the amount exceeding JPY 33 is also supported. (The support rate is planned to be gradually reduced.)
Capital Contributions for Exploitation Rights and Assets Investment	Launched in 2005, this measure provides financial support for overseas oil and natural gas exploration and development projects conducted by Japanese companies, aiming to raise the oil self-sufficiency ratio and secure access to stable and reasonable oil and natural gas. Specifically, Japan Oil, Gas and Metals National Corporation (JOGMEC) administers the management and provides financial supports for risky projects conducted by Japanese companies.
Project Expenses for the Measures to Increase Government Stockpiled Oil	Introduced in 2003 based on the Oil Stockpiling Act, this programme aims to secure enough government-stockpiled oil that could be accessed in the event of a major supply disruption and ensure a sustainable oil supply for the country. Specifically, this measure intends to: (i) replenish stocks when a part of the government's oil stockpile is released; (ii) evaluate the type of finished petroleum products in the stockpile's portfolio to better meet the latest demand for oil at domestic refineries and thermal power stations; and, (iii) increase the amount of government-stockpiled oil products such as motor gasoline, kerosene and light oil to better respond to natural disasters of a major scale such as the Great East Japan Earthquake. In practice, METI concludes discretionary contracts with capable legal entities and request them to buy oil for replenishing or rearranging the government stockpiled oil.

Data sources

Country data in OECD.stat

OECD Fossil Fuel Support Portal

National data sources

Note on the Methodology

Aggregate numbers from the Inventory represent the fiscal cost of support measures for fossil fuels. They should not be interpreted as a level of support for fossil fuels, nor as an indicator of the extent to which the considered policies are favourable or unfavourable to climate mitigation.

The Inventory reports tax expenditures as estimates of revenue foregone due to measures that reduce or postpone tax payments relative to a jurisdiction’s benchmark tax systems to the benefit of fossil fuels producers or users. Tax expenditure estimates can thus increase over time due to either an increase in the offered concession (relative to benchmark tax systems) or an increase in the benchmark itself. Cross-country comparisons of tax expenditures can also be misleading due to differences in countries’ benchmark tax systems.

Notes

← 1.  Source: https://www.jbic.go.jp/en/information/today/today_202301/jtd_202301_sp3.html.

← 2.  See https://www.isep.or.jp/en/1436/ (preliminary report).

← 3.  See https://energy.ec.europa.eu/news/eu-and-japan-reinforce-energy-cooperation-through-dedicated-dialogue-global-lng-architecture-2023-07-18_en.

← 4.  See https://icapcarbonaction.com/en/news/japans-cabinet-approves-policy-roadmap-including-plans-national-ets#:~:text=Separately%2C%20the%20government%20will%20impose,USD%202.16)%20per%20tCO2 and https://www.enecho.meti.go.jp/en/category/whitepaper/pdf/2023_outline.pdf.