Australia powers Japan, literally, supplying more than one third of its energy needs. For decades, Japanese investment in energy projects and Japan’s energy purchases have helped build Australian prosperity. But that’s been in fossil fuels and the bilateral economic relationship will need a total transformation as both countries pursue transition to net zero emissions by 2050.

The transition is not off to a good start. In 2023 Australia exported AU$35.4 billion of coal to Japan, accounting for 41 per cent of total exports to Japan, Australia’s second largest trading partner. That’s after a major fall in the coal price. Exports of coal to Japan were at a record high of AU$57.1 billion in 2022, accounting for 48 per cent of total exports. Exports of coal alone in 2022 were larger than total exports to Japan every year prior except 2019. Coal and LNG exports accounted for 74 per cent in 2023.

The economic partnership between Australia and Japan that keeps the lights on in Japan for eight hours a day underpins a deepening people-to-people and political relationship as these two US allies become more important to each other strategically in an uncertain international environment.

A diplomatic spat last year is a warning that managing the change the relationship now needs can’t be taken for granted.

Last year, departing Japanese ambassador Yamagami warned Australia was seen as a risky energy supplier by Japanese firms. Major gas company Inpex President and CEO Takayuki Ueda also unleashed at Australian politicians and industry leaders, going as far as to say Australia’s gas policies threaten world peace.

Japan was consulted and advised on the nature of the policy changes and that it would have no impact on contracts and supplies to Japan. Japanese concerns continued to be aired in public and private despite reassurances by Prime Minister Anthony Albanese and his Ministers that Australia remains a stable and secure supplier of energy. The next most important sources of Japanese energy are Saudi Arabia at 15 per cent of imports, the UAE at 12 per cent and Russia, Indonesia and Qatar at less than 10 per cent each.

Japan relies on imports for 88 per cent of its energy needs and its concerns about energy security were rocked by Russia’s invasion of Ukraine. Australia was playing catch up on emissions policies — a major reason Labor was elected to government in May 2022 — and intervened in the energy market to ease the pressure on household energy prices in an unusual time of war-induced energy price inflation.

The interventions included gas and coal price caps, supply reservations and a ‘safeguard mechanism’ to help reduce emissions at Australia’s largest industrial facilities. The temporary price caps were excused by the government at a time when war has disrupted international gas markets. The other policies were consistent with Australian energy security and energy transition priorities. Western Australia already has a domestic gas reserve operating and certainty was needed after Australia ran out of gas to supply its East Coast markets in 2017, having to buy it back from Japan at a hugely inflated price.

Energy policy uncertainty in Australia over the previous 15 years led to under-investment in both renewable energy generation and fossil fuel extraction. This was exacerbated by increased litigation by environmental activists surrounding expansion of fossil fuel projects and the development of new projects. There is more certainty now with the Australian public sending a clear message to the political parties that they want accelerated action on climate change policies, even as they manage higher energy prices.

Australia has work to do in improving its investment environment, not just for Japanese companies. Australia has become a net capital exporter in recent years after consistently being a net importer of capital because domestic savings were insufficient to fund growth. Australia needs foreign capital to help build the infrastructure needed for population growth, domestic energy needs and to become a green energy exporter. Investors in energy are increasingly looking elsewhere where there is less green and red tape and lawfare by activists.

A symptom of Australia’s uncertain investment environment has been its approach to Chinese investment. Chinese capital, advanced technology, dominance in critical minerals and direct links into its huge domestic market will be important for both Australia’s and Japan’s decarbonisation. Chinese investment in the development of cleaner energy sources in Australia will reduce the risks and costs for Japanese investors.

The new complementarity in Australia–Japan energy trade won’t be realised through market forces alone because of the large-scale national investment in infrastructure needed in both countries. An elevation of leadership, investment in both capital and human networks by government and industry from both countries and close cooperation is needed to transform the energy relationship. Anything short of that is likely to frustrate the energy transition and see the withering of energy as a pillar of the bilateral economic relationship.

The energy relationship between Australia and Japan has to be entirely re-thought. Instead of Australia shipping raw energy to Japan, it is becoming cheaper and cleaner to produce intermediate inputs, processing more minerals in Australia, and exporting the embodied energy to Japan and beyond.

Both countries can lead the development of regional and global frameworks for the new trade in energy goods. For energy security, Japan will need more than one supplier and Australian industry will need more than one customer given the investment and scale needed.

It’s a huge agenda for Canberra and Tokyo that recommends lifting bilateral stakeholder and policy dialogue to the highest level. That was one of the main recommendations from our report on ‘Reimagining the Japan Relationship’ in 2021.

A bi-national body is needed to talk through energy transition scenarios from a medium to long-term perspective, help institutionalise and support the existing dialogues, drawing in private sector experience and sharing information to address their mutual interests in these big national strategic issues.

Shiro Armstrong is Professor and Director of the Australia–Japan Research Centre at the Crawford School of Public Policy at The Australian National University.

This article was first published here in the Australian Financial Review.

Image by Wmeinhart and sourced from Wikimedia.