[Column Series] Reassessing Japan’s Long-Term Decarbonized Capacity Auctions (No.4) Auctioning Fossil Power with CCS That Does Not DeliverUnpacking the Technical and Institutional Gaps

in Japanese

Renewable energy costs keep falling rapidly, while CCS in the power sector has stalled. The gap makes CCS-equipped power an increasingly marginal and uneconomic option for decarbonization.

In its World Energy Outlook 2024, the International Energy Agency (IEA) revised down the projected installed capacity of CCS-equipped power plants under the Net Zero Scenario for 2050 from 394 GW (estimated in 2021) to 235 GW, a reduction of about 40%. In this scenario, CCS accounts for only 1% of global electricity generation, while renewables supply 88% of electricity¹. European policy also prioritizes CCS for hard-to-abate sectors such as cement, rather than for the power sector where renewables and storage technologies are already competitive. The application of CCS in electricity generation is considered secondary and less economically rational².

In contrast, Japan is taking a different course. The Strategic Energy Plan approved by the Cabinet in February 2025 and the energy supply-demand outlook for FY2040 foresee 60–120 MtCO₂ of annual capture. The CCS Long-Term Roadmap (2023) targets 120–240 MtCO₂ of annual storage by 2050³. While detailed sectoral breakdowns and prioritization have not been clearly defined, much of this is implicitly expected to come from the power sector.

This column focuses on the policy design issues surrounding CCS-equipped power plants, especially in light of additional support measures proposed in the third round (FY2025) of the Long-Term Decarbonized Capacity Auction.

1. Fundamental Issues with CCS-equipped Thermal Power

Before diving into the policy framework, it is important to revisit a key point: the technology of CCS-equipped thermal power itself faces multiple limitations. These challenges have been highlighted in previous reports by REI, so this section will serve as a brief recap⁴.

First, commercial deployment of CCS-equipped thermal power remains extremely limited. As of now, there are only two large-scale operational facilities worldwide⁵.

Second, the technology does not currently achieve complete decarbonization. While capture rates vary depending on the analysis, both the IEA and the IPCC’s Sixth Assessment Report make clear that 100% capture and storage is not feasible⁶. This means that achieving net zero would require additional technologies and costs to offset the remaining emissions.

Third, Japan has few suitable onshore storage sites, leaving only costly offshore or overseas options that require new infrastructure and regulation⁷. Offshore storage is significantly more expensive than onshore options, and overseas transport and storage would require substantial time and investment to build the necessary infrastructure and regulatory frameworks⁸. Given these constraints, CCS should be limited and storage prioritized for hard-to-abate industries, not the power sector.

Despite these fundamental challenges, the Japanese government has introduced several support schemes for CCS-equipped thermal power, with the Long-Term Decarbonized Capacity Auction being one of them. The following section will outline the auction scheme and examine its shortcomings.

2. Support for CCS-equipped Thermal Power in the Long-Term Decarbonized Capacity Auction: Content and Issues

Starting with the third round of the Long-Term Decarbonized Capacity Auction (FY2025), additional support measures for CCS-equipped thermal power plants have been proposed. These revisions are currently under public consultation as part of the “22nd Interim Summary (Draft)”⁹ compiled by the “Working Group on System Design.” However, the proposed support mechanisms raise a number of serious concerns.

(1) Low Emissions Reduction Threshold: Eligible for Long-Term Support Despite Only 14% Reduction

Perhaps the most problematic aspect is the proposed requirement for the minimum CO₂ capture rate to qualify for support, which has been set at just 20% (see figure). This figure is justified by aligning it with the minimum co-firing rates for hydrogen and ammonia, and due to “site constraints” related to retrofitting CCS equipment. For retrofitted facilities, especially, siting CCS components is a common challenge—not only for power plants but also for other sectors participating in “advanced CCS projects,” such as steel and cement production¹⁰. These constraints can affect cost, construction timeline, and even emissions reduction effectiveness.

Moreover, the working group’s materials note that “even before retrofitting, some portions of generation capacity may already be decarbonized through hydrogen or ammonia co-firing, thus not emitting CO₂.” But if a plant applies for the auction with only CCS and no co-firing, up to 80% of CO₂ emissions could still be released into the atmosphere.

Even worse, while a “70% annual storage requirement” is set for captured CO₂, falling below this threshold does not disqualify a plant from receiving support under the scheme. Instead, a mere 10–20% penalty (reduction in payments) is imposed.

In effect, plants need capture only 14% of their emissions to qualify for long-term subsidies. Furthermore, the CO₂ used to generate steam for the separation process is excluded from the denominator in calculating the capture rate.

In contrast, international standards are far more stringent. For instance: In the U.S., under the Inflation Reduction Act (IRA), power sector CCS must meet at least a 75% capture rate to qualify for tax credits¹¹. In the UK, the “CCUS Cluster Sequencing Phase 2” in late 2021 required over 90% capture for power sector projects¹². By comparison, Japan’s proposal of “20% capture, 70% storage” is extraordinarily lenient and hardly qualifies as a decarbonization measure.

(2) Delayed Implementation and Prolonged Emissions: Fossil Fuel Use May Persist Beyond 2050

With such a low emissions threshold, supported CCS-equipped power plants are expected to operate for roughly 30 years, based on a 7–11 year construction lead time and a standard 20-year support period, operating well into 2050s. In fact, the system allows support to extend beyond 20 years¹³. As discussed earlier, 100% CO₂ capture and storage is unrealistic based on past evidence¹⁴.Therefore, such power plants cannot achieve full decarbonization. Furthermore, in the case of retrofits, emissions will continue during the period before CCS is fully implemented.

According to international scenarios aligned with the 1.5°C and well-below-2°C targets, deep and early reductions in power sector emissions are essential for reaching net zero by 2050. Under the current system, it's hard to argue that CCS-equipped thermal power genuinely contributes to the goal of decarbonized electricity.

(3) Unclear Costs: Preferential Pricing Despite High Cost and Uncertainty

CCS-equipped thermal power is granted exceptionally favorable treatment in terms of allowable costs. While the working group has proposed raising the general upper limit for other power sources from ¥100,000 to ¥200,000 per kW per year, CCS-equipped thermal power is exempt from this cap entirely.

Coal-fired power with CCS comes with a staggering reference price of ¥343,000 per kW per year — far above other power sources. This is justified by arguing CCS thermal power is still “an emerging energy technology” and thus requires “special consideration” for cost recovery and pricing caps.

Additionally, the proposed framework would allow variable costs, such as fuel expenses, to be included in bid prices under certain conditions. In a situation where cost uncertainty is high, committing to long-term support without knowing future cost ceilings poses significant financial risks, especially if technology development falters or fossil fuel prices rise.

(4) Lack of Clarity on Procurement Scale and Emissions Impact

This issue extends beyond CCS: while the auction process provides general capacity targets, the government has not clearly articulated how much of each type of power generation it intends to support, nor how these choices align with national emissions reduction targets.

The latest Basic Energy Plan projects average emissions factors for the thermal power sector in 2040 to be between 0.08–0.31 kg-CO₂/kWh, with scenarios assuming widespread CCS pegged at the lower end of 0.08 kg¹⁵.Yet current coal-fired power emits roughly 0.8 kg-CO₂/kWh¹⁶, meaning a 90% reduction must be achieved within the next 15 years. The proposed support criteria for CCS fall far short of this target.

As we've seen, the current system design supports a high-cost technology with minimal emissions reduction, which risks raising Japan’s marginal abatement cost and undermining the core goal of green transformation (GX)—to boost economic growth and competitiveness.

As discussed in the second installment of this series, while individual issues in the auction scheme can be improved, structural reform of the entire system is necessary to address its fundamentals.

3. A System Design Dragged Down by an Unviable Technology

(1) The System, Not the Market, Is Choosing the Technology: Emissions Trading Scheme (GX-ETS) and CCS Support

Even with the special provisions and preferential treatment described above, CCS projects still involve significant risks. The associated costs should ideally be covered by the market value of emission reductions, that is, the carbon price. However, Japan’s "Growth-Oriented Carbon Pricing" policy, including the GX Emissions Trading Scheme (GX-ETS), adopts a phased approach starting from a low price point¹⁷. As a result, the carbon price is clearly not expected to reach a level that could support widespread CCS deployment. Multiple institutions estimate that the carbon price will remain around ¥1,500 per ton of CO₂¹⁸.

Within this context, the government is providing additional operational cost subsidies for CCS-equipped thermal power plants through the Long-Term Decarbonized Capacity Auction. There are also discussions about future compensation mechanisms based on GX-ETS prices. Although these mechanisms are formally independent, they effectively serve as supplementary schemes to compensate for the insufficient carbon price under GX-ETS¹⁹.

According to a cost analysis by the Research Institute of Innovative Technology for the Earth (RITE), the current cost of CCS in Japan, across both power and industrial sectors, ranges between ¥12,800 and ¥20,200 per ton of CO₂. This far exceeds the projected carbon price. Although the government has set a goal to reduce this cost by 60% by 2050²⁰, CCS remains far from being commercially viable today. Thus, it’s assumed from the outset that relying solely on market prices to drive CCS adoption is not feasible.

(2) A System That Offers Little Profit Even for Operators: More Subsidies, Further Market Detachment

With the cost of renewable energy technologies rapidly falling, especially in the power sector where they directly compete with CCS, the economic viability of CCS becomes increasingly questionable²¹. For power companies, investing in CCS, a costly and relatively immature technology, carries significant risk. Few would do it voluntarily without government support²².

Even when support is available, the current Long-Term Decarbonized Capacity Auction provides fixed payments based on installed capacity, while around 90% of revenue from electricity sales must be returned to the scheme. This leaves little room for profit, effectively turning CCS-equipped plants into unprofitable assets for operators. Calls for even more generous support would only deepen the system’s disconnect from market dynamics.

Before expanding public funding for a technology that survives only on subsidies, we must ask whether such support is justifiable. Unlike renewables, where early subsidies drove rapid cost declines, CCS shows little prospect of becoming competitive.

4. Time to Reevaluate the Use of Public Funds

The current system design appears to prioritize preserving large-scale thermal plants rather than advancing feasible, cost-effective decarbonization. This approach delivers little benefit to any stakeholder:

• Government: High administrative and fiscal cost, but limited emissions reduction and unclear contribution to supply stability.
• Operators: Some risks offset, but little profitability, leaving CCS plants unattractive even with support.
• Public: Rising financial burden with no guarantee of cost-effective decarbonization.

If the debate shifts toward further boosting operator profits, the costs will ultimately fall on consumers through higher electricity prices.

The Long-Term Decarbonized Capacity Auction was intended to secure flexible, reliable, low-emission power sources. In practice, however, it risks locking scarce resources into CCS — a technology that remains subsidy-dependent and delivers limited reductions. By contrast, renewables and storage are already cost-effective and scalable. Public funds would be far better directed there.

As for CCS, its rational role is in hard-to-abate sectors such as cement, where alternatives are limited and storage can be used strategically.

Two decades ago, CCS power was cast as either a “dream solution” or an “excuse for delay.” With renewables now delivering real decarbonization, it is clear: large-scale public support for CCS in the power sector is no longer warranted.

Column Series: Reassessing Japan’s Long-Term Decarbonized Capacity Auctions

No. 1  Overview: Questioning the Effectiveness of the Long-Term Decarbonized Capacity Auction (18 August 2025)
No. 2  Supporting Fossil Power Under the Label of “Decarbonization”: Where Does a 90% Reduction Without Phase-Out Lead?&(26 August 2025)
No. 3  Can Hydrogen and Ammonia-Fueled Power Realistically Serve as Decarbonized Energy Sources? (26 August 2025)