Japan, explained.
Nippon Steel's Kimitsu Steel Works in Kimitsu, Chiba Prefecture, Japan (Soichiro Koriyama/Getty Images)
Australia can offer Japan what it desperately needs to realise its energy ambitions.
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Japan’s net zero bet needs an Australian hedgeJapan’s net zero bet needs an Australian hedge
In terms of global energy and climate politics, 2026 promises to be an unstable year.
Geopolitical shocks in Venezuela and Iran have roiled energy markets, and the United States’ plan to withdraw from the UN climate framework has cast further doubt on the durability of global institutions. Yet for all this disruption, the world’s march towards net zero continues.
Last year, investment in clean energy nearly doubled that in fossil fuels. More than 80% of the world economy is now covered by net zero commitments. And despite America’s pivot away from climate action, no other country has followed it to the exit.
Japan is among the countries pushing forward. As an economy profoundly dependent on fossil fuel imports, it plans to reach net zero by coupling natural gas with carbon capture and storage (CCS) while gradually scaling hydrogen and ammonia as fuels for power generation and industry.
The history of CCS is, in the words of the International Energy Agency, one of “underperformance” and “unmet expectations”.
This approach reflects reasonable concerns about energy security, industrial continuity, and political feasibility.
But it is also a high-risk bet.
As we show in a new Lowy Institute report, even if CCS and hydrogen or ammonia imports prove technically viable, evidence suggests they will remain expensive pathways for large-scale emissions reduction.
The history of CCS is, in the words of the International Energy Agency, one of “underperformance” and “unmet expectations”. Japan’s lack of suitable sequestration sites means captured carbon would need to be shipped overseas, multiplying costs and logistical complexity. Hydrogen and ammonia face similar constraints: converting renewable electricity into transportable fuels entails large energy losses, making them at minimum three to five times more costly than direct electrification.
Japan’s approach risks locking it into technologies that later prove uncompetitive. Failure to decarbonise cheaply would expose Japan to carbon border tariffs, higher energy prices, and declining competitiveness in steel and the many downstream industries that depend on it.
The way forward, we argue, is to acknowledge that no country today can know with confidence which technologies will ultimately deliver secure, affordable decarbonisation at scale, particularly in a world where costs, climate ambition, and geopolitics are all in flux.
Uncertainty therefore belongs at the centre of national energy strategy. It requires us to invest broadly, preserve flexibility, and be ready to scale up technologies that ultimately prove viable.
This logic applies not only to Japan but also to the Japan-Australia partnership. As deeply intertwined trade and strategic partners, the two countries should establish a process for managing uncertainty together: co-investing in early projects, sharing risk, and updating strategy as real-world performance becomes clear. Each can assist the other in testing preferred pathways, accelerating learning beyond what either could achieve alone.
Japan’s approach risks locking it into technologies that later prove uncompetitive.
Within this shared process, one option stands out as particularly consequential: reducing Japan’s energy demand and emissions by importing energy-intensive green commodities from Australia.
Australia is under growing domestic and international pressure to move beyond its role as the world’s third-largest fossil fuel exporter. It is pursuing an ambitious transformation into an exporter of green commodities — particularly green iron, produced using abundant renewable energy.
Australia cannot realise this vision alone. It will require large-scale investment, technology, and long-term demand. It has already begun exploring partnerships with other major Asian economies. For Japan, early participation would represent prudent diversification.
Offshoring inevitably raises concerns about jobs. Crucially, Japan would retain its sophisticated steel-making industry. Iron-making is by far the most energy-intensive step in steel production, yet it is not labour intensive, accounting for only a small fraction of employment. Importing green iron is therefore not a path to de-industrialisation but a way to secure industrial competitiveness across steel-making and all downstream industries.
The potential benefits are substantial. Offshoring iron-making to Australia could reduce Japan’s final energy consumption by around 1.1 exajoules, roughly 11% of projected 2040 demand. That saving exceeds Japan’s entire planned nuclear energy output in that year by 70%. Associated emissions reductions would cover roughly 40% of the cuts Japan must achieve between 2030 and 2040.
Just as important, importing green iron would sharply reduce Japan’s need for costly hydrogen and ammonia imports. Today, iron made using green ammonia would cost around five times as much as Australian green iron.
History offers a useful parallel. In the 1970s, Japan responded to the oil shocks by offshoring aluminium smelting to lower-cost energy producers, a move that strengthened its economy and reduced today’s decarbonisation burden.
Today’s challenge is larger and the uncertainty far greater. That is precisely why Japan and Australia should collaborate on an evidence-led approach to technology. Green iron represents the single largest hedge against failure in Japan’s current strategy — but it is not the only pathway worth testing. With the right model of collaboration, whichever technologies succeed, markets in both countries will be ready to scale them.
Australia and Japan have spent half a century building the fossil energy trade. By committing now to a joint process of collaboration, co-investment, and learning, they can secure their partnership — and their prosperity — for the net zero age.
About the authors
Ryan Neelam
Ryan Neelam was Director of the Public Opinion and Foreign Policy Program at the Lowy Institute. He led the flagship annual Lowy Institute Poll, was project director for the Global Diplomacy Index, and wrote about climate diplomacy and multilateral policy.
Reuben Finighan
Reuben Finighan is Research Lead in Economic Pathways at the Superpower Institute Reuben holds a PhD in Political Economy from the London School of Economics and a Masters of Public Policy from the Harvard Kennedy School, as a Fulbright, Frank Knox, John Monash, and Leverhulme scholar.
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