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This commentary is part of the Deepening U.S.-Japan Clean Energy Cooperation project, a CSIS initiative featuring analysis by leading Japanese and U.S. experts on the potential for enhanced coordination on energy strategy.
Innovation is needed to address climate change. Article 10.5 of the Paris Agreement emphasizes the need for innovation. For Japan, clean energy innovation means more than being clean. With no domestically available fossil fuel resources, carbon neutrality also contributes to Japan’s energy security by improving its self-sufficiency, naturally drawing strong policy interest.
For this reason, Japan has long been engaged in clean energy innovation. In the wake of the 1973 oil crisis, Japan launched the “Sunshine Plan” for the development of new energy technologies in 1974 and the “Moonlight Plan” for the development of energy-saving technologies in 1978. The New Energy and Industrial Technology Development Organization (NEDO), one of the several organizations promoting research and development in the field of energy, was founded in 1980 to boost the development and demonstration of environmental, energy, and industrial technologies. As Green Transformation (GX) has gained importance, NEDO’s role and budget have also grown. For instance, since 2020, the organization has been operating the GX Fund, supporting technology and investing in startups with venture capital.
In 2020, Japan declared its goal to achieve carbon neutrality by 2050 and has been ramping up efforts to accelerate green innovation. JPY 2 trillion (approximately USD 13.3 billion) has been set aside to establish the Green Innovation Fund in 2020. In addition, a strategy with ambitious goals that addresses the current challenges and future initiatives for the 14 priority industries with high future growth potential was developed. In it, the Japanese government states that it aims to “mobilize all policies, including budgetary subsidies, tax credits, regulatory reforms, standardization, and international cooperation.”
The Kishida administration (2021–2024) later accelerated this trend further by making GX its core policy. The government has secured JPY 20 trillion (approximately USD 133 billion) by issuing the GX Economic Transition Bonds to finance JPY 150 trillion (approximately USD 1 trillion) upfront public-private investments over the next 10 years and decided to introduce carbon pricing in the future as a source of funds to redeem the bonds.
Despite the U.S. withdrawal from the Paris Agreement under President Trump, Japan has remained committed to its leadership role. The reasons for this are as follows: Many people believe that climate change is an issue that the global community must urgently address; reducing the use of fossil fuels can greatly contribute to energy security; Japan’s industry has strengths in energy conservation, nuclear power, geothermal power, hydrogen and other technologies and believes that continuing to develop these technologies will ensure its competitiveness in the future.
However, GX is costly, and uneven cost burdens can negatively impact countries’ overall industrial competitiveness. Close attention should be paid to the carbon prices that other countries demand for their domestic industries, so that the total cost of energy of Japan’s industry does not greatly exceed that of other industrial nations.
Japan and the United States have a long-standing history of energy cooperation. Recent examples include the Japan-U.S. Strategic Energy Partnership, which was active between 2017–2020, as well as the U.S.-Japan Competitiveness and Resilience Partnership and the U.S.-Japan Climate Partnership, both of which were launched in April 2021. Subsequently, to support the ongoing dialogue, the Clean Energy and Energy Security Initiative and the U.S.-Japan Energy Security Dialogue were launched in 2022.
Names of energy collaborations often shift with changes in political or geopolitical context. While climate change was the primary concern for the global community until a few years ago, the focus has now shifted to energy security following the Ukraine crisis and subsequent energy price spikes. In February this year, the United States, Japan, and South Korea launched a trilateral scientific initiative involving 10 national laboratories. Aimed at strengthening economic security and preventing technological leakage to China and Russia, the initiative focuses on research and development of critical technologies, including hydrogen energy and climate and earthquake modeling. This collaboration reflects the evolving nexus of innovation, security, and geopolitics in the region.
Generally, a new technology that is the result of an invention is widely introduced through the efforts of first movers who want to use it. However, energy is a means to an end, not an end in itself, and is consumed without much thought. Especially in the case of electricity, consumers are indifferent about how it is generated as long as it is available and affordable to them. Energy technologies are not typically cutting-edge “zero-to-one” innovations. Instead, they are used to ensure the stability and affordability of energy to be socially viable. Given the characteristics of energy technologies, the following are some recommendations on how countries should address energy innovation challenges in the framework of bilateral and multilateral cooperation.
1. Establishing the Appropriate Market
The creation of the appropriate market for green products that come out of energy innovation is first and foremost essential. Then what does the appropriate market look like?
Firstly, the market has to be one in which consumers choose and buy green products. For this, measures such as introducing regulations mandating the use of green products and carbon pricing, aiming to close price gaps between conventional and green products, may be needed. For instance, green steel costs about one and a half times more than conventional steel. Without any clear outlook that they can sell their greener product despite the price gap, steel makers cannot justify investment in green steel manufacturing. Long-term carbon price projections are essential to enable such decisions.
Secondly, fair competition must be upheld. While tariffs or sanctions may yield short-term gains, they ultimately undermine the imposing country’s global competitiveness. The Huawei case underscores the complex effects of sanctions imposed by the United States. While Huawei’s smartphone sales plummeted after the second quarter of 2020, and it dropped out of the global top five by the first quarter of 2021, the company has since rebounded. By 2024, Huawei regained the top position, supported by consistent R&D investment totaling JPY 22.2 trillion (approximately USD 148 billion) over the past decade. Flagship products like trifold smartphones have gained popularity, particularly in the Global South. In contrast, Apple’s iPhone 16 faced sluggish sales. Ironically, the U.S. sanctions may have accelerated Huawei’s transformation into an even more formidable competitor. In Germany and Japan, on the other hand, while the feed-in tariff schemes led to widespread solar adoption, the absence of comprehensive policies to support the growth of the local solar power generation industry resulted in the decline of domestic manufacturers and a surge in Chinese dominance. Competitive markets accelerate new ideas, and isolationist measures do not benefit domestic consumers or help business growth. There is no silver bullet, but what is clear is that geopolitical isolation is a barrier to innovation.
Thirdly, expanding the market size is critical. As Japan and other advanced economies face population decline, long-term energy demand is uncertain. For private companies, it is difficult to make decisions about investing in energy technologies in a shrinking society. In such contexts, interstate cooperation through standard harmonization, coordinated carbon pricing, and a commitment to free trade can help maintain investment incentives. Allies such as the G7 need to increase market access to each other.
2. Building Complementary Bilateral Innovation Models
The key to deepening cooperation is to build mutually beneficial relationships rather than unilateral dependence. A sense of role-sharing based on the strengths of each country’s industry is needed. One promising green energy technology is next-generation geothermal power generation. Unlike solar power and wind power, this technology has stable operating rates and is expected to enable a green and stable supply of electricity while keeping integration costs low. Implementation of this technology requires both deep drilling technology to access high-temperature underground resources and power generation technology to efficiently convert the extracted thermal energy into electricity. This is an area in which Japan and the United States have complementary strengths. The United States is extremely skilled in deep drilling technology, which it has cultivated through shale oil and gas development and can apply this expertise to geothermal energy. In addition, extended geothermal systems (EGS) require the artificial formation of fractures in the subsurface bedrock to allow fluid circulation. The United States is the world leader in fracking technology for shale development and has an important technological advantage in implementing EGS.
Japan, on the other hand, has a long track record of technological development in geothermal power generation, and three Japanese companies together hold nearly 70 percent of the global market share for geothermal turbines. The Japanese government is aiming to triple the current amount of geothermal power generation by 2030. To boost the expansion of geothermal power generation, the Ministry of Economy, Trade and Industry and the Japan Oil, Gas and Metals National Corporation are conducting a total of 82 surface surveys and drilling studies nationwide from FY 2020–2023.
Eavor Erdwärme Geretsried GmbH, in which Chubu Electric Power Co., Inc., of Japan has an equity stake, operates the world’s first commercial geothermal heat and power generation project using a closed-loop geothermal technology in Bavaria, Germany. The project involves drilling and installing a closed loop approximately 5,000 meters underground, circulating water inside the loop to efficiently extract underground heat for power generation and district heat supply above ground. The Japan Bank for International Cooperation, which supports Japanese companies to expand their businesses overseas, is also financing the project.
Both the United States and Japan are rich in geothermal power resources, ranking first and third in the world, respectively. The two countries have the motivation to work on the innovation of this technology and have different areas of expertise in the technology supply chain, which makes for an effective complementary relationship. In addition, the existence of countries along the Pacific rim of volcanoes with abundant geothermal power resources makes it easy to cooperate with neighboring countries. It would be reasonable for Japan and the United States to work together in next-generation geothermal power generation innovation, and it is important to intensively deepen collaboration and achieve results in areas of technical cooperation where such a relationship can be established.
3. Overcoming Systemic Barriers to Technological Deployment
The current business model for the energy sector is the one that requires enormous construction costs that need to be recovered over a long period of time. In the case of nuclear power generation, light water reactors, in particular, which are currently the mainstream type of nuclear reactor, are a typical example. In countries like Japan and the United States, the uncertainty caused by various factors such as demand growth stagnation and deregulations in the electricity market has posed a barrier to investment recovery.
To address this challenge, the development of advanced reactor technologies, such as small modular reactors (SMRs) and high-temperature gas-cooled reactors (HTGRs), which are expected to reduce costs through stronger supply chains and continuous construction, is being actively promoted. While some new nuclear projects are struggling due to the rising construction costs caused by inflation, companies that employ these new technologies are faring well. NuScale Power has already obtained design certification. X-energy, with its fourth-generation high-temperature gas-cooled reactor technology, is also planning to build a reactor on the Dow Chemical site, which will provide not only electricity but also heat starting in 2030.
While major Western countries have withdrawn from the development of fast breeder reactors, only to leave players like Russia and China to take over the leadership role in this area, Japan is the only country in the world with a high-temperature engineering test reactor, which can extract heat at 950 degrees Celsius. Technology yields high heat that can also be used to produce hydrogen, which would be greatly beneficial to the steel and chemical sectors, in which carbon dioxide emissions are difficult to reduce.
With regard to nuclear fuels, there is the issue of Russia’s dominance in uranium enrichment. Nuclear fuel production requires this technology, which is permitted only to a limited number of companies in certain countries, including Russia's state-owned company Rosatom, the world’s leading uranium processor. Additionally, highly-assay low-enriched uranium (HALEU), a fuel for next-generation reactors, requires more complex processing, which means Rosatom will continue to dominate the market. In order to diversify suppliers, the United States, Europe, Japan, and other countries are investing in strengthening their uranium enrichment and conversion capabilities. For example, the United States, Japan, the United Kingdom, France, and Canada announced a joint statement at COP28 in 2023 to invest at least USD 4.2 billion over the next three years in order to strengthen the uranium supply market.
Finally, and most importantly, alongside technological development, multilateral cooperation is indispensable in strengthening international standards in nuclear accident compensation schemes, supply chain establishment, as well as safety and security regulations, to create efficient and reliable social systems that allow investments in nuclear power plants.
The figure below is taken from the Organisation for Economic Co-operation and Development (OECD) and Nuclear Energy Agency (NEA) report on SMRs published in 2023. It shows that those “enabling conditions” are extremely important, and the idea that it takes a long time for these conditions to be in place is not only applicable to nuclear power but also to all energy technologies. Since the largest obstacle to social implementation of next-generation nuclear technology is the size of the initial investment, lowering the hurdle through streamlined safety screening and market collaboration will be effective in implementing the technology.
Innovation in clean energy is not only about being clean, but also about energy security and economic growth opportunities. There are three reasons why cooperation between Japan and the United States is beneficial in promoting innovation in clean energy. First, the supply chain for clean energy is more complex than that for fossil fuels, and it is difficult to meet all of the needs for clean energy within a single country. Complementing each county’s supply chains will speed up innovation. Second, to promote the spread of clean energy, it is necessary to reduce the cost to a level equivalent to that of fossil fuels. Lowering market barriers in both Japan and the United States will make it easier to take advantage of economies of scale, and this will contribute to lowering the costs. Third, much of the infrastructure in both Japan and the United States was built in the late 1960s and 1970s. Now that it is aging and in need of renewal, this is an opportune time for clean energy innovation. The importance of the cooperative relationship between Japan and the United States is greater than ever.
Sumiko Takeuchi is a senior fellow with the International Environment and Economy Institute.