[Column Series] Key Issues to Address in Japan's Strategic Energy Plan (No.11) Draghi Report Pushes for Faster Decarbonization to Make Europe More Competitive How ANRE’s Strategic Policy Committee Misinterpreted the Message

in Japanese

[Special Contents] Key Issues to Address in Japan's Strategic Energy Plan

(originally published in Japanese on 29 October 2024)

Is the EU Pivoting to a More “Pragmatic Decarbonization Policy”?

A report focused on enhancing the EU’s competitiveness (“Draghi Report”) released on 9 September by former European Central Bank (ECB) President Mario Draghi has provoked debate not just in Europe, but also in Japan. However, the discussion in Japan has been rather odd.

A meeting of the Strategic Policy Committee of the Agency for Natural Resources and Energy (ANRE) on 8 October opened with ANRE Commissioner Yoshifumi Murase claiming that the Draghi Report “signals a change of direction and shift toward a more realistic policy.” This was followed by the presentation of a report, “Overview of the Draghi Report,” by the secretariat, Ministry of Economy, Trade and Industry. Several committee members then followed up with comments: “Europe, too, is shifting from an ambitious, environment-focused energy policy to a more pragmatic one”; “Europe, which has been seen as a world leader in decarbonization, has started to recognize the negative impact of decarbonization on its industries, leading to a renewed emphasis on industrial competitiveness”; and “Europe, particularly Germany, has made a mistake.”

Furthermore, at the following Strategic Policy Committee meeting on 23 October, the “Summary of Discussion to Date” of the submitted document by the secretariat stated  that “Excessive decarbonization may damage supply stability and economic efficiency,” and that “It is significant that the EU, which has been a decarbonization pioneer, has forged a policy aimed at increasing industrial competitiveness after considering the negative impact of decarbonization on industry.”

As its official title, “The future of European competitiveness,” indicates, the Draghi Report analyzes the challenges for making Europe more competitive and presents recommendations. The report includes proposals for improving industrial competitiveness through decarbonization. However, there is no mention of “excessive decarbonization” anywhere in the Draghi Report, nor any suggestion of slowing the pace of decarbonization. Therefore, the Strategic Policy Committee’s interpretation of the Draghi Report is far from the actual message of the report.

What Points Does the Draghi Report Make?

As a new industrial strategy for Europe, the Draghi Report proposes to close the innovation gap in advanced technologies with the US and China. It also aims to improve geopolitical security as a precondition for sustainable growth, as well as to create a joint plan for decarbonization and competitiveness. Discussions around energy policy arise within this context in the Report. 

The first and biggest barrier to growth that is identified is the high cost of energy.

” The energy landscape has changed irreversibly with the Russian invasion of Ukraine and the resulting loss of pipeline natural gas. While energy prices have fallen considerably from their peaks, EU companies still face electricity prices that are 2-3 times those in the US and natural gas prices paid are 4-5 times higher.” 1

The question of how to lower energy costs is raised as a key issue for strengthening Europe’s competitiveness. It is crucial not to misunderstand that in order to lower costs, the Draghi Report unambiguously recommends reforms to enable European industries and households to enjoy the benefits of decarbonized energy, including cheap renewables, and to accelerate the decarbonization of the energy sector.

Decarbonization is not to be Blamed for Soaring Energy Prices

Describing the impact of high energy costs on industry, the METI document presented at the Strategic Policy Committee also states that “The Draghi Report points out that the high cost of energy in Europe is holding back the growth of European companies.” More important, however, are comments about a section of the Draghi Report titled “The root cause of high energy prices.”² There is absolutely no analysis to justify the claim (often made in Japan) that decarbonization drives up the cost of energy.

According to the Draghi Report, skyrocketing prices are “…primarily driven by Europe’s lack of natural resources, as well as by Europe’s limited collective bargaining power despite being the world’s largest buyer of natural gas.” On top of this, issues with gas derivative markets are also mentioned.

Another key point about decarbonization in the Draghi Report is the problem that the benefits of decarbonizing electric power generation are not reaching end users due to European market rules. The report states that “…market rules in the power sector do not fully decouple the price of renewable and nuclear energy from higher and more volatile fossil fuel prices, preventing end users from capturing the full benefits of clean energy in their bills.” As also observed in Japan, prices in the electricity market are determined by the level of generation costs of the power source with the highest marginal cost. The report mentions that in 2022, natural gas was the price-setter 63% of the time, despite accounting for only 20% of the EU’s electricity mix. The Draghi Report recommends the use of long-term contracts, such as PPAs, as one way to help end users enjoy the benefits of inexpensive renewable power sources.

To eliminate the causes of energy price hikes, the report calls for faster development of renewable energy sources and the power grids to support them, as well as for shortening the “uncertain permitting process.” The development of these renewable energy sources, and particularly the acceleration of grid development, are discussed in detail in the “Energy” chapter of the Draghi Report. ³

How the Draghi Report was Misinterpreted

So, why did the Strategic Policy Committee hold discussions based on apparent misinterpretations of the Draghi Report? One reason may be that reference documents presented by METI at meetings were misleading. Let’s look at this in more detail. The following description relating to decarbonization and energy was included under “Overview of the Draghi Report (Overall)” on page 3 of a METI reference document.

Referring to the Draghi Report, the first bullet point in this section, which was also read out at a meeting as part of the METI Secretariat’s explanation states,

“The report points out that Europe’s ambitious decarbonisation targets are creating additional short-term costs and imposing a large burden on European industry. The European Green Deal was premised on the creation of new green jobs,  so its political sustainability could be endangered if decarbonisation leads instead to de-industrialisation in Europe”

Based solely on this statement, it is reasonable to conclude that the Draghi Report is calling into question Europe’s high decarbonization targets. However, this statement is actually pieced together from paragraphs that are two pages apart in the original text. The original report text from which this statement is constructed is explained below. ⁴

1.    The EU’s decarbonisation goals are also more ambitious than its competitors, creating additional short-term costs for European industry.

The report points out that whereas the EU’s reduction targets are binding on companies, the US has set non-binding targets, while China’s reduction targets are low. For this reason, the report predicts that there will be short-term costs in the EU, especially for energy-intensive and heavy industries.

2.    Decarbonisation offers an opportunity for Europe to lower energy prices and take the lead in clean technologies (“clean tech”), while also becoming more energy secure.

The report indicates that decarbonization will lead to the mass adoption of energy sources with low marginal generation costs, namely renewables and nuclear power; that there are regions of Europe with a wealth of renewable resources that are already deploying more renewable energy than the US and China; and that Europe is a leader in clean tech.

3.    However, it is not guaranteed that EU demand for clean tech will be met by EU supply given increasing Chinese capacity and scale.

The report points out that China is boosting competitiveness by investing four times more than other major economies in state subsidies for sectors such as solar power, wind power, and EVs. The growing flow of Chinese products into the European market is also noted.

4.    Europe must confront some fundamental choices about how to pursue its decarbonisation path while preserving the competitive position of its industry.

While the US is using high tariffs to try and keep out Chinese products, the report warns against a similar approach, stating, “Black-and-white solutions are unlikely to be successful in the European context. Emulating the US approach of systematically shutting out Chinese technology would likely set back the energy transition and therefore impose higher costs on the EU economy.” Further down in the same paragraph, the report also states, “…political sustainability could be endangered if decarbonization leads instead to de-industrialisation in Europe.”

Referring to the above arguments in the Draghi Report, the problems with the document “Overview of the Draghi Report (Overall)” created by METI become evident.

1. On the impact of decarbonization, none of the benefits described in point 2. above are mentioned; only the possibility of additional short-term costs from point 1. are strongly emphasized. The phrase “a large burden for European industry” is also different from the original.
2. The main arguments of points 3. and 4. above, relating to China’s highly competitive position and how the EU’s approach to Chinese competition differs to that of the US, are not mentioned at all. The only statement quoted from the original, which relates to dealing with China’s competitive power is, “…political sustainability could be endangered if decarbonization leads instead to de-industrialisation in Europe.”
3. By combing these two separate pieces of text from the report, the METI document misleadingly suggests that the Draghi Report is saying that the EU’s ambitious decarbonization targets will lead to Europe’s deindustrialization.

The method of extracting only convenient parts of a text without considering the whole development and context of the argument is called “cherry picking.” The document submitted to the recent ANRE Strategic Policy Committee meeting seems to be a clearcut example of this. It is unfortunate that such misleading information was presented at such a vital forum for discussing the energy policy that will shape Japan’s future.

What Should be Learnt in Japan

On 10 October, the International Energy Agency (IEA) invited Mario Draghi to participate in an open discussion focused on energy and European competitiveness. In response to the first question, “Can ambitious decarbonization targets be compatible with jobs, prosperity, and competitiveness?” Draghi made the following points in his answer.

• •    We must remain ambitious in our climate goals. The costs of climate change impacts are much greater than the costs of fighting climate change.
• •    If Europe continues to pay several times more for energy than the US or China, it cannot be competitive. Thus, one goal of decarbonization is to make Europe more competitive, to stimulate growth. The report states that decarbonization is a source of growth, a source of competitiveness.
• •    Europe is not blessed with natural resources, but it has strengths and an excellent track record in the field of renewables. It also boasts abundant solar and wind resources. Europe needs to capitalize on these strengths, but to do that, it needs to accelerate decarbonization.

Draghi went on to mention some of the problems with the electricity market mentioned above. A recording of the roundtable is publicly accessible for those interested in viewing it.⁵

The presented information and subsequent discussion at the Strategic Policy Committee meeting do not represent an accurate reflection of the contents of the Draghi Report.⁶  The energy transition needed to achieve the 1.5°C target and the process of decarbonizing without losing industrial competitiveness will obviously not be easy. Despite being a pioneer in decarbonization, Europe faces some difficult challenges. Essentially, the Draghi Report specifically addresses the question of what Europe needs to do to maintain its economic competitiveness while holding fast to its ambitious decarbonization targets.

Almost 50% of all electricity across Europe is now generated from renewable sources. The corresponding share in Japan is far lower, at just 20–25%. The UK has already phased out all its coal-fired power, the largest source of carbon dioxide, while many other European countries are on track to phase out coal by the 2030s. Meanwhile in Japan, there is no indication of when the use of coal-fired power will end.

A strategy is required for linking decarbonization to the competitiveness of Japan’s economy, while continuing to accelerate decarbonization. Serious debate and discussions are also needed, to accurately reflect on overseas experiences and findings, such as those in the Draghi Report.

[Special Contents] Key Issues to Address in Japan's Strategic Energy Plan