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July 2024
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Analysis: Japan sells climate transition bonds

By Paul Mackintosh   
February 28, 2024

Japan recently issued the first tranche of its US$11 billion Climate Transition Bond, the first sovereign issuance in the world to be certified under the Climate Bonds Standard. It’s intended to help mobilise some $1 trillion over the next decade to support Japan’s green transition. It will also be the first sovereign issuance to be backed by emissions trading system revenues as well as levies on fuel imports.

The bond proceeds are substantially slanted towards research and development, with some 55% earmarked for technological innovation, including 18% for utilisation of hydrogen and decarbonisation of current processes in steelmaking. The other 44.5% is allocated to broad decarbonisation objectives, including subsidies for low-carbon batteries and transport, home insulation and clean vehicles, among other things.

The largest portion of this tranche of the bond is directed to the clean energy value chain, including electricity transmission and distribution, battery production, and supply of critical materials for battery manufacture.

Some investors have reportedly raised concerns about the transition label for the bond, feeling that it could be used to maintain existing technologies rather than implementing new ones. There are therefore question marks with some institutions on whether it can be included in their green bond allocation.

It's fairly obvious that the Climate Transition Bond does support areas that could be classified as industrial policy, particularly the heavy allocation towards R&D in existing Japanese industries such as steel. Pragmatically it could be argued that improving the climate footprint of the existing industrial base while supporting new technologies is a responsible approach towards use of proceeds.

The use of proceeds does specifically exclude both gas-fired power plants and hybrid coal/ammonia generating stations, which have been concerns regarding the Japanese government’s broader green transition plans. Nonetheless the caveats remain.

The offering does at least make one small step towards meeting global goals for climate finance. Data from the Green Digital Finance Alliance shows that global issuance of bonds for green, social, sustainability, and sustainability linked purposes reached $4.2 trillion in 2023. This has to be set against the Climate Policy Initiative estimate of $10 trillion per year needed between 2031 and 2050.

So even given its size and its importance as a precedent, Japan's Climate Transition Bond is only one step in the right direction.