A commitment by Japan to slash greenhouse gas emissions to net-zero by 2050 suggests the closing of another door for Australian coal exports and poses a warning sign for LNG, although fledgling efforts on hydrogen could be accelerated.

The pledge, announced by new Prime Minister Yoshihide Suga on Monday in his first policy speech in parliament, represents a major strengthening of Japan’s previous commitment to reduce emissions by 80 per cent by mid-century.

Most of Australia’s LNG customers have now committed to net-zero emissions. Woodside

It poses a risk to Australia’s huge exports of coal and LNG to Japan, which totalled $38 billion last year.

Together with China’s surprise commitment last month to reach net-zero by 2060 and the possibility the US could also join the 2050 club should Joe Biden win the upcoming election, the combined impact represents a “pivotal moment” for world energy, said Bernstein Research analyst Neil Beveridge.

The firm noted that would mean a staggering 60 per cent of the world as measured by energy consumption is committed to net carbon zero.

Japan is Australia’s largest customer for LNG and its biggest trading partner in coal. In 2019, Australia exported some $17 billion of coal to Japan, while LNG exports totalled $21 billion, according to industry department figures.

Erwin Jackson, policy director at the Investor Group on Climate Change, noted that with Japan’s announcement more than 60 per cent of Australia’s two-way trade is now with countries driving to net-zero by or shortly after 2050. That would increase to more than 70 per cent under a Biden presidency.

“This announcement will likely send further shockwaves through Australia’s coal export industry,” said Kobad Bhavnagri, Sydney-based global head of special projects at research firm BloombergNEF.

“With this announcement, the Japanese government has effectively served Australia’s fossil fuel industry with divorce papers.”

But Yancoal Australia chief executive David Moult said the announcement “is unlikely to herald the end of Australia’s export of high-quality coal to Japan anytime soon”.

“Japan’s energy policy has always been to maintain a diversified approach to electricity generation and its path to carbon neutrality by 2050 will include a range of initiatives,” Mr Moult said.

“These initiatives are likely to include the continued deployment of high efficiency low emission (HELE) generator technologies and the continued promotion of carbon capture use and storage – both activities that Japan has previously highlighted as critical, when combined with the supply of Australia’s high-quality coal, in its efforts to reduce future emissions.”

A Woodside spokeswoman said the Japanese government’s pledge to be carbon neutral by 2050 is consistent with its own aim to be net zero by that time. Woodside in April joined Japanese companies JERA, Marubeni and IHI Corporation to study options for large-scale exports of hydrogen as ammonia for use in decarbonising coal power in Japan.

Wood Mackenzie research director Prakash Sharma also said gas and coal would still play an important part in Japan’s transition, at least through to 2030, before new options such as co-firing fossil fuels with ammonia achieve scale.

“Japan’s LNG and coal imports have slowed in the past few years; a net zero goal will accelerate the decline post-2030,” Mr Sharma said.

“However, Australia would be less affected than other exporters to Japan due to its locational advantage, existing long-term contracts, right quality and competitive costs.”

Mr Beveridge’s team said that the 2050 target “will clearly be negative for oil and raise questions about the future of the LNG industry given the role Japan plays in providing over 20 per cent of global demand”.

Still, the significance of Japan’s announcement depends on the measures taken to implement it, and so far that detail is lacking.

“It will do nothing to help LNG-focused E&P [exploration and production] names such as Inpex, Woodside, Santos, Oil Search and some of the other LNG majors which target Japan as a major LNG market.”

The commitment at least makes clear that Japan needs to set a much bolder emissions reduction target for 2030, said Helen Mountford, vice-president for climate and economics at the World Resources Institute.

The last few weeks have already seen Japanese companies such as JERA, the world’s biggest LNG buyer, commit to “virtually zero” carbon emissions by 2050, in both its domestic and overseas operations.

JERA indicated it would achieve the goal by adopting more renewable power, deploying fossil fuel generation with low emissions, and using offsets for any remaining emissions, saying the goal was ”premised on advances in decarbonisation technology, economic rationality, and consistency with government policies”.

JERA told The Australian Financial Review that just over 50 gigawatts of its total 70.44 GW of generation capacity was fuelled by LNG. Another 10.32 GW is coal-fired, of which 8.92 GW uses the more efficient “ultra super critical” technology.

The venture between Chubu Electric and Tokyo Electric Power said by 2030 it would shut down all coal power plants that were not classified as ”ultra super critical”, suggesting about 14 per cent of its coal power capacity will close within a decade.

By 2035, it hopes ammonia can provide 20 per cent of combustion within its remaining coal fired plants. JERA also expects offsets to help achieve its 2050 goal.

Kenichi Ishida, co-chair of Japan Climate Leaders’ Partnership, a business coalition in Japan aiming to create a low-carbon society, said that after the Prime Minister’s pledge, there was no doubt that more companies would now commit to decarbonisation with detailed plans.

Japanese customers delivered 49 per cent of Whitehaven Coal’s revenue in fiscal 2020, but managing director Paul Flynn said earlier this month that net-zero targets did not necessarily mean those nations’ consumption of fossil fuels would fall to zero.

”They will look at other means by which they will offset those emissions through other mechanisms,” said Mr Flynn, when asked about China’s 2060 pledge on net-zero emissions, pointing to carbon capture and storage as well as new sources of energy.

Bernstein said it expects hydrogen and ammonia to play a key role in helping Japan meet its goal, replacing some coal and gas in the power generation mix, while hydrogen could also help decarbonise transport and space heating, as well as heavy industry.

The firm forecast that the Middle East and Australia, which account for most of the coal, oil and LNG currently shipped to Japan, will dominate the export of ammonia and hydrogen to Japan in the future, given their abundant renewable energy resources.

Extracted in full from: https://www.afr.com/companies/energy/serving-us-divorce-papers-japan-s-net-zero-pledge-20201027-p568wk