Executive summary
What is the problem?
Australia and Japan both aim to reach net zero emissions by 2050 while growing their economies amid rapid technological change. Their trade relationship amplifies the risks, yet also offers opportunities to mitigate them — opportunities yet to be fully grasped.
Japan plans to decarbonise through coupling fossil gas with carbon capture and storage, and using hydrogen and ammonia as fuel. These technologies are uneconomic and likely to remain so. If they fail, Japan risks dependence on unmitigated fossil fuels, missed emissions targets, exposure to carbon tariffs, and loss of competitiveness in steelmaking and all downstream industries. Japan needs a way to mitigate these risks.
Australia, meanwhile, faces rising domestic and international pressure over its status as the world’s third-largest fossil fuel exporter. It is pursuing an alternative: harnessing abundant renewable energy to produce green export commodities under the Future Made in Australia plan, with green iron at its core. But Australia cannot do this alone — it will need investment at scale, technology, and demand to ensure these green industries get off the ground.
Australia and Japan are pursuing divergent energy transition strategies, which could position fossil fuels as a major fault line in the relationship. Both countries should hedge their risks and increase their flexibility by jointly testing multiple decarbonisation pathways. Investment and policy should then be adapted and coordinated around evidence of the most promising technologies as they evolve.
What is the solution?
Despite divergent visions of the energy transition, Japan and Australia have a shared interest in collaborating. Doing so would hedge against risks in their respective chosen pathways, and maximise their flexibility to adjust policy as technologies evolve. Carbon pricing is the core technology-neutral policy tool, but this paper focuses on targeted policies designed to address innovation failures in industries of national significance.
Japan and Australia should establish a process to cooperatively test multiple decarbonisation pathways, adapting and coordinating policies and investment as technological winners emerge.
This will likely favour Japan importing green iron made in Australia — the “Australia option” — enabling Japan to significantly reduce its industrial energy demand and emissions, while offsetting the expected decline in Australia’s fossil fuel export revenues. Jobs associated with ironmaking would shift to Australia, but in doing so, Japan would ensure the viability of its far more abundant, and higher-value, jobs in steelmaking.
Whatever the outcome, however, this process will leave both countries better prepared — and their partnership stronger.
