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Japan to spur carbon-cutting investment with tax breaks

Exclusive: Government hopes to establish fund to support green tech

Japan plans to grant tax incentives for corporations that invest in production equipment that makes wind turbines. (Photo courtesy of Tepco)

TOKYO -- The Japanese government has begun weighing the introduction of tax incentives for investments in products and equipment that reduce carbon emissions, Nikkei has learned, as it works toward its goal of zero greenhouse gas output by midcentury.

The central government, along with the ruling Liberal Democratic Party, will also explore setting up a fund that would support research and development toward such green investing.

Prime Minister Yoshihide Suga unveiled the net-zero emissions goal last month and instructed relevant government agencies to explore policy options. The tax incentives and the fund are set to be included in the tax revision outline for the next fiscal year, as well as in the third supplementary budget for the current fiscal year.

Japan used to be ahead of the curve in the 20th century when it came to energy efficiency and battery technology. But in this century, the nation has lagged behind setting environmental goals, and domestic corporations have lost competitive advantage.

Currently, the top three solar cell companies are based in China. Offshore wind farms are considered a growth industry, but the leading businesses for wind turbines are headquartered outside of Japan.

Japanese companies are expected to reform themselves in tune with the global trend toward environmental responsiveness. Suga has positioned the environment as a pillar for Japan's growth. Under that banner, he plans to encourage technological innovations and investments in renewable energy and similar domains and support the development of next-generation industries.

The main feature of the incentives are tax cuts for adding production equipment. If a company invests in equipment that manufactures wind turbines, for example, the business would be able to claim an exemption from the corporate tax at a certain percentage.

The government will determine how much the tax exemption will be and the qualifying targets by the end of the year. Policymakers are looking at three possible sectors.

In Europe, wind energy accounts for 15% of the electricity source, a ratio responsible for developing the wind power equipment industry on the continent. In Japan, wind makes up less than 1% of Japan's power source, and domestic companies have exited from producing windmills due to the lack of profitability in the pursuit.

Tokyo seeks to encourage a more robust manufacturing infrastructure for wind power that would expand the reach of the renewable energy in Japan and boost the competitive advantage of domestic enterprises.

The tax incentives are expected to apply also to next-generation lithium-ion batteries that power electric and hybrid vehicles. Lowering the cost of batteries has become key to having electric vehicles replace gasoline automobiles.

Further mass production of EV batteries would lead to lower price tags for electric vehicles. That innovation would also contribute to the wider automotive industry.

The incentives could extend to lithium-ion batteries used for power storage as well. The batteries can be employed by the power grid to smooth differences in electrical supply and demand.

Power supply from renewable energy sources are prone to wild fluctuation due to natural occurrences. For renewable energy to become widely accepted, advanced battery storage technology is an imperative.

In addition, policymakers are contemplating semiconductors used to regulate voltage. These components can lead to power conservation if they are installed in a wide range of control devices, industrial equipment and household appliances. Officials will debate whether to expand the tax policy to other sectors as well.

Companies are increasingly expected to incorporate an environmental focus in how they run business. The government plans to mitigate the tax burden of corporations that put together medium- to long-term investment policies that seek to reduce the carbon footprint. State approval of the investment plans will be a condition for receiving the tax relief.

One proposal would modify the corporate tax law governing the carry-over of losses for tax purposes. A government approval process of qualifying investment plans will be established by law.

These provisions are set to be included in a bill addressing the strengthening of industrial competitive advantage, due to be submitted in next year's regular parliamentary session.

On the budgetary front, the government will establish a fund that will support renewable energy and energy conservation research and development at corporations, universities and research institutions. The funding will go toward a wide spectrum of fields, such as hydrogen fuel, power storage, carbon recycling and offshore wind energy.

A proposal calls for the New Energy and Industrial Technology Development Organization, a public-sector body, to disburse funds over a number of years. Some people are pushing for 1 trillion yen ($9.5 billion) to be allocated in the next supplementary budget to this end.

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