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Japanese Fit-in Tariff Scheme for Renewable Energy

Fit-in tariff (FIT) programs’ main purpose is to offset the additional cost of using renewable energy compared to traditional fossil energy. Since renewables are not as efficient, it is more expensive to generate energy per capita compared to fossil fuels. Since the social externalities of fossil fuel usage is not apparent in economic analysis, many producers will hesitate in picking renewables compared to fossil fuels. Fit-in tariff programs designate the procurement and price for renewable energy and fuels, then oblige energy companies to use the said types of fuel over a long period of time. The additional cost of using renewable is then transferred to energy consumers. The purpose of fit-in tariff programs is to offset the initial cost of using renewable energy, until the technology in renewable energy production and material procurement is improved which allows renewables to compete with traditional fuels.

The Japanese FIT program was launched in 2012 with the support of the general public. The initial tariff set was 40 JPY/kWh (for plants larger than 10 kWh), with goals of decreasing the tariff by 3-4 JPY per year for the next 20 years. While the tariff decreases each year, the price at the signing of contracts will remain the same until contract maturity. The launch of the FIT program has pushed for enormous growth in the renewable energy production industry, with the percentage of renewable energy as part of total energy produced rose to 15% in 2016 compared to 9% in 2011.

Specifically in terms of biomass energy, the FIT schemes have pushed for massive strides in terms of development of technology and in turn, the demand for wood pellets for industrial use in Japan. The amount of energy generated from biomass fuel increased from 0.1 to 12.1 million kW from 2011 to 2016 , as well as the amount of certified/newly introduced power plants that run on biomass fuel. This drives the demand for biofuel up, especially the demands for wood pellets due to its environmentally friendly and energy efficient properties.

Source: Ichigo Green

The previous Carbon Tax system: Japan introduced a carbon tax policy called the Japanese Global Warming Tax in October 2012, as an add-on to the already existing Oil and Petroleum tax. The tax adds a fixed tax rate on every ton of carbon produced. The tax is phased out into 4 years, with the fixed rate increasing every year, starting at 250 JPY/ton to 760 JPY/ton from 2012 to 2017. Japan’s METI has no intention of raising the tax again after 2017.

While the carbon tax is a powerful tool in reducing greenhouse gas emission, Japan’s implementation of the policy was not harsh enough to produce a result, in order to avoid political backlash. The tax is simply too low to generate any meaningful change in investment behavior, but does contribute towards R&D for renewable energy.