Australia and Japan must recast their energy relationship

For more than a decade, Australia was a global laggard on climate action. But since the Australian Labor Party's 2022 election victory, Canberra's tone has shifted from reticence, and at times even denial, to ambition.

Upon assuming office, the government of Prime Minister Anthony Albanese substantially raised Australia's 2030 emissions reduction target, setting its sights on bringing greenhouse gas releases down 43% from 2005 levels against a previous target of between 26% and 28%.

This past March, the government tightened emission curbs on fossil fuel projects through what is known as the Safeguard Mechanism -- a system that has been in place since 2016 to set baseline emission levels for large industrial facilities.

The government has set its sights on turning Australia into a "renewable energy superpower" that exports zero-carbon goods to the world. In addition, it is pursuing a joint bid with Pacific island nations to host the annual U.N. Climate Change Conference in 2026.

Australia's step change in climate policy has been broadly welcomed both at home and among the country's low-lying Pacific island neighbors.

But the honeymoon is over. Now, Australia must confront tensions between its current status as one of the world's largest fossil fuel exporters and its ambitions to become a renewable energy superpower.

Delivering on its transformative vision is going to be politically and economically challenging, as Australia faces cost-of-living pressures at home, an economy heavily geared toward resource exports with permits for more coal and gas mines still winning approval, and inertia from strategic partners.

Tensions are beginning to come to the fore. Far from applauding Australia's newfound ambition on climate action, recent policies have been met with unease in Japan, one of Australia's closest regional partners.

Japan, which sees energy as an issue of national security, imports almost 90% of its energy, mostly in the form of fossil fuels. Australia's role is critical, as it supplies around 70% of Japan's coal needs and about 40% of its liquified natural gas.

In March, unease boiled over as Parliament tightened the Safeguard Mechanism to impose more stringent emission rules for new and existing large fossil fuel projects, significantly altering the economics of these investments.

Senior Japanese officials and investors reacted with uncharacteristic bluntness, saying Australia appeared to be "quiet quitting" the LNG business and that it was putting at risk its reputation as a reliable energy supplier.

These comments provoked a swift response from Australia. Japan is Australia's second-largest trading partner and fourth-largest source of investment. The government is also sensitive to attacks from an opposition that has previously weaponized the costs of climate action.

Diplomats swung into action as the upgraded Safeguard Mechanism went into effect. Australian Climate Change and Energy Minister Chris Bowen traveled to Tokyo in July to reassure Japanese investors of Australia's commitment to providing stable energy supplies.

While the disquiet has been eased, the underlying question has not been resolved: Can Japan maintain energy security as Australia rapidly repositions itself as a climate leader?

The short answer is yes, but this will not be possible without rethinking the long-term economic relationship between Australia and Japan.

Japan will also need to significantly change how it is approaching its own energy transition. The first step is for Tokyo to recognize that its current decarbonization trajectory will deliver neither the energy security it seeks nor a clear pathway to achieve its goal of net zero by 2050.

The two are closely related. Modeling by research service BloombergNEF shows Japan must significantly accelerate domestic production of renewable energy to meet its 2030 and 2050 emission targets. The company suggested a number of reforms to help clear hurdles for renewable energy developers. Doing so in turn would reduce Japan's reliance on imported energy, which is vulnerable to geopolitical shocks and policy shifts beyond the country's control.

Australia, meanwhile, is facing growing pressure to phase out the emissions it exports in the form of fossil fuels. Based on current plans, these will dwarf what Australia will achieve through domestic emissions cuts.

If it is to become a renewables superpower, Australia must recognize it cannot rely on the same energy export model of previous decades, simply switching out fossil fuels for renewables. A key reason is that transporting renewable energy over vast distances and at scale is unlikely to be cost effective, especially in comparison with local renewables generation.

Instead, as they confront the quickening decline of fossil fuels, Australia and Japan should seek to restructure their economic relationship to focus on new industries. Three opportunities stand out.

First, green metals. Australia has a unique opportunity to use its abundant renewable energy resources to move from exporting raw materials to producing value-added materials such as zero-carbon steel. With jobs at stake, Australia and Japan must engage closely to ensure the reconfiguration of supply chains is politically and economically palatable for both countries.

Second, critical minerals. Australia is endowed with large reserves of the resources needed to produce a range of clean energy technologies, including batteries and solar panels. Significant investments from Japan and other sources will be needed to ensure these projects get off the ground.

Geopolitical competition with China has further added to incentives for strategically aligned countries such as Australia, Japan and the U.S. to work together to build clean energy supply chains. Efforts in this area have already begun.

Third, clean energy services. Substantial demand for Australian expertise in electricity grid decarbonization can be expected as other economies across Asia, including Japan, move through energy transitions. Australian businesses with practical experience in operating renewable-focused grids will be well placed to help Japan manage its transition.

As Japan and Australia have already discovered, their pathways to net zero are deeply entwined. Careful diplomacy will be essential in moving the economic partnership into a new phase, one that focuses on clean energy industries and meets both countries' climate, energy and economic goals.

This is possible. But it has to begin with accepting the current model will not be able to achieve those ends.