Comment Rethinking the Mass Balance Approach Promoted by Japan's Steel IndustryA Call for a Green Purchasing Act That Delivers Real Decarbonization Results

in Japanese

For the decarbonization of the steel industry, it is crucial to create a structure where increased demand for "low-carbon steel products" supports substantial investments in decarbonization. The government, through its GX (Green Transformation) Strategy, has positioned the creation of markets as a central pillar, alongside promoting investments and support measures for decarbonization in the steel sector. The proposed revision of the Basic Policy under the Green Purchasing Act aims to contribute to the formation of a green-lead market by encouraging public procurement of “green” steel products, as part of the GX Strategy. While this is an important and commendable direction, the specifics of the proposed revisions concerning steel products are inadequate to achieve this goal.

The draft revision proposes that when procuring goods involving steel, public entities should actively procure "Green Steel" that applies the "mass balance approach" as outlined in guidelines by The Japan Iron and Steel Federation (hereinafter referred to as "mass balance products"). However, at this stage, it remains unclear whether mass balance products have superior environmental performance. Furthermore, issues with the mass balance method itself persist. Without addressing these issues, setting mass balance products as the “Standard value 1”¹ for steel products under the Green Purchasing Act is premature.

Our key concerns are as follows.

1. Mass Balance Products Do Not Necessarily Indicate High Environmental Performance

The mass balance method involves aggregating greenhouse gas (GHG) reductions achieved through in-house GHG reduction projects and allocating these reductions to any products in arbitrary quantities via certificates issued by the company. While this mechanism is under discussion both domestically and internationally², it has unresolved issues, as highlighted below.

The draft revision positions mass balance products as "standard value 1," but only requires disclosure of a product’s carbon footprint (CFP) without setting a benchmark for the acceptable CFP levels of a product. Even if the scheme allows certificates to virtually reduced emissions attributed to the product, it remains unclear whether the resulting emission levels are lower than those of other products in the market. In other words, being a mass balance product does not necessarily equate to superior environmental performance.

Thus, defining mass balance products as "standard value 1" risks undermining the Green Purchasing Act’s goal of procuring products with high environmental performance.

2. Without Low-Carbon Standards Based on Actual Product Emissions (CFP), Environmental Performance Cannot Be Assessed

To advance the decarbonization of the steel industry, it is essential to:

1. Promote the widespread and rigorous disclosure of CFP (carbon footprint of products) for each product,
2. Establish criteria to evaluate and certify which products qualify as low-carbon,

3. Gradually raise these criteria over time.

This straightforward approach has not yet been adopted. Before taking a fall back option like a mass balance method, that virtually reduces emissions via certificates, a system to rank products based on actual GHG emissions should be introduced³. Such a system would incentivize the reduction of emissions across all steel products. Once this foundation is established, the appropriateness of using certificates should be discussed and determined.

Under Japan’s leadership, the global steel industry is currently engaged in an international effort to collect data on steel production and products⁴. This initiative has reached an intermediate stage, and discussions on what qualifies as a low-carbon product should proceed based on this real-world emissions data. Domestically, Japan must quickly expand the disclosure of actual emissions from steel products (e.g., through Environmental Product Declarations, or EPDs)⁵ and concurrently examine what level of emissions qualifies a product as low-carbon.

To meet the urgent demand for establishing public procurement standards, it is essential to establish emission standards that ensure the products have lower carbon emissions compared to conventional ones even on a provisional basis,. For instance, the U.S. federal government’s “Buy Clean Initiative” uses a provisional criterion for procurement that defines “significantly low-carbon” steel materials as those within the top 20% in terms of low GHG emissions compared to similar materials and products. Even with incomplete data collection, setting some form of standard is feasible and should be pursued.

3. The Rules for Mass Balance Products Require Examination and Discussion

The proposed revision defines mass balance products as “steel that is accompanied by certificates for reduction achievements, in accordance with the methodology outlined in the “Guidelines for Green Steel Applying the Mass Balance Method”, created by The Japan Iron and Steel Federation (JISF)” (hereinafter referred to as the ‘JISF Guidelines’). It is unusual for industry association guidelines to be directly referenced as a standard, but the content of these guidelines has notable issues. It is necessary to review and discuss the guidelines openly within a more public framework, involving experts and stakeholders from the demand side, also with considering international trends, before making decisions.

Mass balance products lower their reported emissions by subtracting reductions achieved through “Reduction projects” from their actual emissions. However, the JISF Guidelines are inadequate in addressing key aspects such as:

• Whether the “reduction projects” generating emission reductions are appropriate,
• Whether the calculation methods for these reductions are appropriate,
• Whether the relationship of the reductions and the products, or the allocation methods for assigning reductions to products are appropriate,

While third-party certification is intended to verify the validity of mass balance products, such certification only ensures compliance with the underlying guidelines and does not address deficiencies within the guidelines themselves. Key issues include the following:

1) Issues Regarding the Requirements for “Reduction Projects”

The JISF Guidelines specify the following requirements for reduction projects:

1. They must be conducted within the organization.
2. They must demonstrate additionality.
3. The reduction achievements must be reasonably calculable.

a.) Conducted Within the Organization

The guidelines state that projects can include activities by subsidiaries or affiliated companies under certain conditions: “If the project is responsibly implemented under a consistent framework, activities of subsidiaries or affiliates over which the parent company has significant managerial control can be included.” However, unless the “reduction projects” conducted by these subsidiaries or affiliates are simultaneously included in the same emissions inventory calculation and disclosed with their breakdowns, the prevention of double counting cannot be ensured. Since cross-border activities are also foreseeable, measures to address this issue must be examined.

b.) Demonstrating Additionality

Additionality is an important concept explained in the guidelines as meaning that the project:

• Would not have been implemented without the objective of reducing GHG emissions, and
• Could not be realized without the benefits generated by the reductions.

However, without more detailed criteria, assessing whether a project truly meets these conditions becomes difficult. Furthermore, if the reduction project is not clearly positioned within the organization’s overall emissions reduction plan, it is uncertain whether the reductions will ultimately contribute to GHG reduction goals. For this reason, it is necessary to clarify and disclose the organization’s overall reduction measures and plans on a site-by-site basis.

c.) Calculation of Reduction Achievements

The calculation methodology for reductions, particularly the establishment of baselines, presents a significant challenge. The guidelines allow reduction projects to be counted retroactively going as far back as 2013⁶. Depending on the data used, the baseline chosen for the calculations, and how subsequent changes to the baseline are addressed, the results can vary significantly.

However, the JISF Guidelines do not specify how to calculate the comparisons before and after the project, including baseline setting. They state that such calculations will be verified and certified by third-party certification bodies, including methodologies. Without explicit guidelines on the primary methods, sufficient examination and discussion cannot be conducted. Furthermore, disclosure of the calculation methods and content is essential.

2) Issues Regarding the Allocation of Reduction Amounts

According to the JISF Guidelines, the reductions calculated from reduction projects are pooled within the organization and can be allocated in any amount to any product within the same organization. This scheme allows reductions, certified through certificates issued by the company, to be added to products that have no physical connection to the reduction project⁷.

How are reductions from various projects—each differing in timing and baseline—accumulated, managed, and allocated to individual products? It remains unclear whether sufficient traceability can be ensured in the end.

At a minimum, it is necessary to clearly specify, for each mass balance product, when the associated emission reductions were implemented, which reduction project they originated from, and the calculation methods used to determine the reduction amounts. Measures should be considered to ensure transparency in the accumulation and management of reduction amounts, including the establishment of systems for continuous monitoring and verification.

4. Conclusion

To promote investments for transitions toward decarbonization, it is an urgent priority to expand the demand for green products, especially through proactive public procurement. However, rushing to establish systems while leaving unresolved doubts and challenges risks hindering the path toward decarbonization. The following measures should be pursued for low-carbon steel products and their public procurement:

1. In the current revision proposal, the "common judgment criterion" is defined as "the use of steel accompanied by certificates for reduction achievements," with the footnote clarifying that this means "steel accompanied by certificates for reduction achievements in accordance with the Guidelines for Green Steel Applying the Mass Balance Method created by The Japan Iron and Steel Federation (JISF)." It is recommended to refrain from defining this as the judgment criterion at the current stage.
2. Begin developing evaluation criteria based on actual product emissions (CFP) to assess and rank low-carbon steel products. After thorough consideration, establish these criteria as the basis for judgment and designate products with higher rankings in terms of emissions as targets for public procurement.
3. If interim measures are necessary until CFP standards are established, set provisional benchmarks for reduction levels related to emissions (CFP) based on currently available data and knowledge.
4. When utilizing "mass balance products," involve public institutions in the review of guidelines and evaluation criteria, resolving the current challenges in the guidelines to build a robust system.

While the significance of public procurement driving the market for cutting-edge environmental products is substantial, it is essential to ensure that these products demonstrate environmental performance appropriate for public funding. "Mass balance products" must also meet such standards. In the long term, rather than relying on virtual reductions like those enabled by the mass balance method, efforts should be directed toward fostering a market dominated by products with genuinely low carbon emissions.