Nabilla Gunawan, Cameron Fairlie & Christina Ng | April 2026
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This commentary builds on Energy Shift’s earlier analyses of Japan’s GX framework and regional transition taxonomies by shifting the focus from policy intent to how transition finance is deployed and what it delivers in reality.
Japan is a critical test case for energy transition finance in Asia.
For one thing, the country dominates the global transition bond market, accounting for USD35.8 billion, or 76%, of issuances (Figure 1). How it allows transition finance to work in practice actively shapes expectations, standards and credibility thresholds across Asia.
If Japan puts a transition label on funding that supports projects which deliver limited emission cuts or, worse, entrench fossil fuels, other stakeholders in the region might take their cue from it, eventually normalising such practices.
The question of credibility is often at the forefront of transition finance discussions. For Japan, it came to a head in July 2024 when the Climate Bonds Initiative (CBI) declined to fully certify the country’s Green Transformation (GX) transition bonds, citing uncertainty over whether the proceeds would promote ammonia or hydrogen co-firing in coal or gas plants in reality. Under its Strategic Energy Plan and GX Framework, Japan recognises gas as legitimate transition initiative in the power sector, leaving the door open for such projects to be financed under its “transition” label.
By contrast, CBI criteria exclude gas-fired power generation and co-firing coal plants with ammonia, strongly suggesting that neither gas nor coal assets pass the minimum threshold of a robust and credible climate transition project.
In Japan, “transition” is framed around the continued role of gas, reflecting industrial priorities and energy security. |
CBI’s stance shows a fundamental tension. In Japan, liquefied natural gas (LNG) is central to the energy mix. “Transition” is framed around its continued role, reflecting priorities that extend beyond emission cuts to industry and energy security.
This dependence on gas raises questions about gas projects that operate under a transition label, in particular, their ability to credibly contribute to decarbonisation.
This commentary analyses the credibility of Japan’s non-sovereign, transition-labelled bonds against their decarbonisation or climate transition value, emphasising power utilities and gas due to the sector’s sizeable overall issuance. Specifically, two case studies are conducted on power utilities JERA and Tohoku, which adopt comparable gas-to-gas transition pathways but demonstrate different climate outcomes.
Analysis: Gas power in Japan’s transition bonds
In this analysis, Energy Shift Institute reviews non-sovereign transition bonds issued in Japan from 2021 to 2025. The main finding is that disclosed allocations of proceeds frequently go to activities across the gas value chain. These include the construction of high-efficiency thermal power plants, replacement or decommissioning of aged gas plants, research and development (R&D) of hydrogen and ammonia specifically for thermal co-firing, and LNG infrastructure.
Within the power utility and gas sector specifically, four issuers have disclosed replacing aged gas with new gas plants that continue to rely on LNG as the primary fuel source. These cases demonstrate that gas-to-gas replacement is a recognised transition pathway in Japan’s transition bond market.
Lower emission intensity alone does not guarantee meaningful total emission reduction. |
Gas-to-gas is supposed to reduce emissions mainly by replacing old steam turbine technology with new combined cycle gas turbines (CCGTs). CCGTs produce less carbon per kilowatt of electricity generated, that is, the technology has lower emission intensity. However, the final emission output largely depends on other factors.
Credibility of gas-to-gas ‘transition’
Replacing aged gas plants with newer and more efficient units is often presented as a pragmatic step in the energy transition. Japan’s Strategic Energy Plan recognises gas as a transitional fuel that can support the country’s climate goals, energy security and industrial competitiveness. Upgrading aged gas-fired plants with CCGTs is therefore seen as a way to reduce emission intensity and improve system efficiency while maintaining reliable power supply.
However, lower emission intensity alone does not guarantee meaningful total emission reduction.
The credibility of gas-to-gas transition investments ultimately depends on whether the replacement plant materially reduces absolute emissions. Energy Shift considers three factors that, in practice, determine genuine emission cuts.
- Annual emission: Whether emission intensity improvements translate into lower annual emissions and are not offset by larger plant capacity or higher usage (capacity factor).
- Cumulative emission: Whether the replacement meaningfully reduces cumulative emissions over the plant’s operating life, altering the long-term carbon trajectory of the power system.
- Lock-in risk: Whether the replacement has a credible pathway toward declining emissions over time, including safeguards to prevent further dependence on fossil fuels. For a gas plant to be considered as a low-carbon, credible transition project, it requires a time-bound plan of replacing the gas fuel with alternative low-emission fuel or switching to renewables by 2035, according to the International Energy Agency.
Case studies: Two gas replacements, two very different emission outcomes
Two Japanese gas power replacement projects in recent years provide a useful test of the credibility of the gas-to-gas pathway under the transition label.
Tohoku Electric Power’s Joetsu project and JERA’s Goi replacements both involve retiring aged gas-fired plants in favour of CCGTs.
On paper, the technological pathway appears similar. Both projects deliver improvements in emission intensity and maintain LNG as the primary fuel source. Yet when the plant capacity, expected usage and lifetime emissions are taken into account, the climate outcomes begin to diverge.
Energy Shift assesses the projects through the lenses of annual emissions and cumulative emissions over 30 years, and reveals how seemingly similar upgrades can produce very different implications for the carbon trajectory. The analysis focuses on direct combustion emission only; upstream methane emission are excluded but should be considered in assessing gas-related transition investments, as they increase lifecycle emissions.
Efficiency improves but emission needle barely moves
The first metric that most transition bond frameworks highlight is emission intensity. This is the amount of carbon dioxide (CO2) emitted per unit of electricity produced.
From this metric, both cases look impressive. Between the old gas units and the new high-efficiency CCGT plants, the emission intensity typically falls from roughly 544g CO2 per kilowatt-hour (kWh) to 344g CO2/kWh – an improvement of about 37%.
These emission results reflect the thermal efficiency of each plant type. The old gas units operated at around 25-40% efficiency, while the new CCGT facilities can achieve 63%-64%, among the highest attainable for gas-fired generation. It is this efficiency change that drives the reduction in emissions per unit of electricity produced.
This means the new Joetsu and Goi plants produce the same electricity with less fuel, hence emitting less CO2 per unit of generation.
But intensity improvements alone do not determine whether emissions actually fall. What ultimately matters for the atmosphere is “total emissions”, which depend on plant efficiency, plant size and how often the plant runs (capacity factor).
This is where the two cases begin to diverge.
Tohoku: Smaller, more efficient replacement
Tohoku replaced its aged steam-gas units, comprising 700 megawatts (MW) in total, with Joetsu, a new CCGT facility of 572MW. It is not only smaller but also more efficient.
Assuming the old units operated at 50% capacity factor and the new plant runs somewhat more frequently at 60% due to its improved efficiency and reliability, the Energy Shift analysis shows the annual emissions fall from around 1.67 million tonnes of CO2 (MtCO2) to about 1.03MtCO2. Between the old and new plants, Tohoku emissions drop 38% as a result of the smaller and more efficient replacement. (Figure 3)
But there is a caveat: Replacement gas plants typically have a design life of 30 years or more. Tohoku has not spelled out usage limits or a credible pathway for declining emissions over time. The new plant therefore risks becoming a long-lived fixture in the power system. As such, questions need to be asked about Tohoku’s plans for mitigating long-term emissions from Joetsu in order to justify the transition label.
JERA: An efficiency paradox
The picture looks very different in this second case.
JERA replaced its 1,886MW gas power station with a new CCGT facility of 2,340MW. The replacement is 24% larger, which fundamentally changes the emission equation.
Applying the same assumptions as Tohoku – a 50% capacity factor for the old plant and 60% for the new – the annual emission reduction is marginal. Emissions fall from 4.49MtCO2 per year to 4.23MtCO2, a difference of less than 6 percent. (Figure 3)
In this case, the climate benefit from the improved efficiency is offset by the larger capacity. This illustrates an efficiency paradox of gas transition investments. A plant can become far more efficient while barely moving the emission needle.
The scale of the impact becomes clear when looking at electricity output. Despite the near-identical emission totals, the new Goi plant generates about 12.3 terawatt-hours (TWh) of electricity per year, 48% more than the 8.3TWh from the old facility. In other words, it produces significantly more power from roughly the same carbon budget.
A plant can become far more efficient while barely moving the emissions needle. |
Modern CCGT plants are typically designed to run more often. Their economic viability depends on it. If a large new plant operates more often than assumed, the emission balance can change quickly, as shown in the following sensitivity analysis (Figure 4).
Under the baseline assumption of 60% usage of the new Goi, emissions are slightly lower. But if it operates at 63% capacity or higher, annual emissions exceed the old Goi plant at 50% capacity factor.
The climate outcome in this case depends not only on the technology installed, but also on how the plant operates in practice. A transition investment whose emission benefit disappears when the plant runs longer raises uncomfortable questions about the robustness of the transition claim.
Investors should consider not how efficient a plant is, but how much carbon it adds to the atmosphere over its lifetime. |
The real credibility test: Cumulative emissions
For investors concerned with climate risk, what ultimately matters is not how efficient a plant is, but how much carbon it adds to the atmosphere over its lifetime.
This is where the comparison between Tohoku and JERA becomes stark when viewed through the lens of cumulative emissions, assuming three decades of operations.
In Tohoku’s case, even after the efficiency upgrade, Joetsu emits roughly 31MtCO2 over 30 years (Figure 5).
Joetsu emits about 0.63Mt less CO2 each year than the retired facility. Cumulative emissions grow much slowly over time, increasing the amount of carbon avoided. Over a 30-year operating life, the cumulative savings add up to about 19Mt of CO2 against a base case of 50Mt had the old plant continued to operate – a reduction of 38%.
By contrast, the new JERA Goi plant emits about 127MtCO2 over the same 30 years (Figure 6).
The cut in annual emissions is small, roughly 0.26MtCO2. As a result, cumulative emissions from the new Goi increase at almost the same pace as the old one.
Even after 30 years, the total emissions avoided (Figure 6) are expected to remain quite flat, amounting to only about 7.9MtCO2, compared with the roughly 127MtCO2 emitted by the new plant over the same period.
In JERA’s case, the investment modernises the asset but barely alters its long-term carbon trajectory.
In terms of emission intensity, the new Goi improves gas power efficiency by 37% but retains a significant lifetime carbon footprint by virtue of its larger size. Over 30 years, it still emits well over 100MtCO2.
This does not necessarily mean JERA’s new Goi plant is unjustifiable. Power systems undergoing transition still require reliable capacity, and modern gas plants may help maintain grid stability amid external headwinds.
But the cumulative emission figures make it clear that such investments are in fact large long-term carbon commitments despite being framed as “transition” projects.
Hydrogen question: Aspiration versus asset reality
Both power utilities list future hydrogen co-firing as part of a decarbonisation strategy. In theory, substituting hydrogen for gas could lower emissions over time. However, no publicly available documentation specifically identifies the Joetsu or Goi plant as a hydrogen conversion project, nor provides timelines, blending ratios or the infrastructure required to support such a change.
Even if hydrogen blending were eventually introduced, most emissions are locked in during the early years when the plants run on gas – limiting the impact of fuel switching on the overall carbon trajectory. It does not boost the credibility of transition claims that rely on hypothetical future fuel switching.
Without asset-level commitments, the currently committed operating mode using gas-fired generation and cumulative emissions remain the most realistic representation of the replacement plant’s long-term carbon footprint.
Discussion: Transition activities should be worth the bond proceeds
Japan’s transition bond market is often presented as a blueprint for other Asian economies. Hence, the credibility of its early examples matters greatly.
This Energy Shift analysis explains the emission outcomes of two Japanese case studies that both claim the “transition” label.
- Tohoku’s new gas plant Joetsu is smaller, more efficient and materially less carbon-emitting in the baseline scenario. It lowers both annual and cumulative emissions in a meaningful way, but also prompts questions around the company’s plans for mitigating carbon lock-in.
- JERA’s gas-for-gas project is more ambiguous. It improves efficiency but leaves the overall carbon pathway largely unchanged and any emission reduction potentially reversible if the new Goi plant operates more often.
Efficiency improvements alone are not sufficient evidence of transition. What matters is whether projects deliver sustained and optimal reductions in absolute emissions. |
These case studies show that a project can be technologically modern, more efficient, and even labelled as part of a transition strategy, and yet still commit the energy system to decades of substantial emissions.
For transition bond investors, efficiency improvements alone are not sufficient evidence of transition. What ultimately matters is whether the project delivers sustained and optimal reductions in absolute emissions, rather than improvements that exist only under specific operating assumptions.
Transition bonds must be credible to deserve the label. Gas-to-gas replacements stretch that credibility when the “transition” delivers marginal emission reductions and leave the overall carbon trajectory unchanged.
Nabilla Gunawan is a Senior Analyst of the Energy Shift Institute, focusing on sustainable finance and energy transition developments in Asia. Her work includes examining corporate transition frameworks and labelled financing instruments, with a focus on their implications for financial markets.
Cameron Fairlie is Transition Finance Lead of the Energy Shift Institute. He has experience in sustainable investment advisory and the assessment of gas and coal assets, including emission profiling and plant-level performance, and he has advised investors and governments on thermal asset transitions and low-carbon energy strategies.
Christina Ng is Managing Director of the Energy Shift Institute. Her work focuses on strengthening the role of financial markets in Asia’s decarbonisation, drawing on over two decades of experience in financial reporting standard-setting, financial risk analysis, and sustainable finance research in the energy sector.
The Energy Shift Institute is an independent non-profit energy finance think tank driving context, clarity and credibility for Asia’s energy transition pathways.