On Wednesday, the Government of Japan debuted its climate transition bond, which marked a world-first. This financial initiative is part of Japan’s Green Transformation (GX) program. The launch concerned a JPY800 billion ($5.4 billion) bond, but the ultimate goal is to issue climate transition bonds worth JPY20 trillion ($135 billion) over a period of 10 years.
Although the overall GX program had drawn widespread criticism for not being ambitious enough and for including investments in nuclear, hydrogen, ammonia, and carbon capture and storage. However, proceeds of the climate transition bonds will definitely not go gas-fired power or ammonia co-firing, as per the bond’s pre-issuance verification report.
Proceeds will instead go towards technologies that help Japan to get on track with climate and export competitiveness. This includes next-generation renewables such as “perovskite solar cells and floating offshore wind”.
How do Japan’s Climate Transition Bonds Work?
The Climate Transition Bond is backed by the country’s emissions trading system (ETS) revenues. Japan’s ETS is a voluntary scheme in which more than 670 companies are participating, which jointly are responsible for over 40% of emissions in Japan. Under the ETS, participating companies are required to purchase carbon credits in order to offset their shortfall of their greenhouse gas emissions targets, if any.
Starting in 2033, the revenue generated from the ETS is used to repay the climate transition bonds. From 2028, Japan’s new fossil fuel import levy will also go toward repayment of the debt under the climate transition bonds.
Climate Bonds Standard & Certification Scheme
Japan’s climate transition bond is certified under the Climate Bonds Standard & Certification Scheme. Under this Certification Scheme, financial instruments are vetted for their consistency with the Paris Agreement objectives.
The Climate Bonds Initiative said it is “proud to announce that the Japan Climate Transition Bond has achieved Certification under its rigorous Climate Bonds Standard, marking a significant advancement not only in Japan’s transition finance landscape but also serving as a global exemplar of best practice”.
55% of the proceeds raised with the bonds will be dedicated to research and development needed for climate tech breakthroughs. A further 44.5% of the proceeds is earmarked to be dedicated to decarbonisation efforts, which include initiatives in transport, batteries, insulation, and more.
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