On the path to decarbonisation: Japan enacts its first legislation on hydrogen and CCS

On 17 May 2024, the Japanese parliament approved two energy-related bills into law:

• the Hydrogen Society Promotion Act¹; and
• the CCS Business Act.²

These are Japan's first laws relating to the business of hydrogen and the business of carbon capture and storage ("CCS"), respectively. The double approval by the Diet reaffirms the Japanese government's commitment to energy transition.

Both laws were promulgated in the official gazette on 24 May and will come into effect as follows:

• the Hydrogen Society Promotion Act will come into effect on a date to be specified by a cabinet order but no later than November 2024; whilst.
• the CCS Business Act will come into effect on a date to be specified by a cabinet order but no later than May 2026 (though selected portions of the law will come into effect on an earlier date).

Hydrogen Society Promotion Act

Background

The Hydrogen Society Promotion Act is based on the discussions held within the Japanese government in the past few years. It follows, for example:

• the "Interim Report" (chukan seiri) released in January 2023;
• the "Draft Interim Summary Report" (chukan torimatome an) released in December 2023; and
• the "Interim Summary Report" (chukan torimatome) released in January 2024.³

The details to be set out in the implementation rules of the Hydrogen Society Promotion Act are also expected to follow the reports mentioned above.

Framework

The framework of the provisions under the Hydrogen Society Promotion Act is as follows:

• issuance of a basic policy by the government;
• creation of a new business plan approval regime;
• implementation of support mechanisms (e.g. subsidies) and special regulatory exemptions for approved business plans; and
• drafting of a code of conduct for hydrogen suppliers.

Definition of low-carbon hydrogen

"Low-carbon hydrogen" is defined as hydrogen and its derivative products (to be further defined in the relevant ministerial orders) which meet the following requirements:

• the amount of carbon dioxide ("CO2") emitted from its production is not more than a certain amount;
• the level of contribution to reducing CO2 emissions is recognised in light of the relevant internationally approved standards; and
• other requirements as may be set by the ministerial orders.

The term "derivative products" is expected to include ammonia, synthetic methane (e-methane) and synthetic fuel, although this will be specified in the relevant ministerial orders.

With regard to the above requirements, the Hydrogen Society Promotion Act does not expressly refer to any specific threshold or standards. The "Interim Summary Report" released by the government on 29 January 2024 however refers to a carbon intensity of "3.4kg-CO2/kg-H2 or lower" as an indicative threshold, and it is expected that this will be used as the basis for the Japanese government's further considerations in determining the required standards.

Basic Policy

The Japanese government is responsible for developing a basic policy for the purposes of promoting the supply and use of "low-carbon hydrogen" ("Basic Policy").

The Basic Policy will be jointly formulated by the Ministry of Economy, Trade and Industry ("METI") and the Ministry of Land, Infrastructure, Transport and Tourism ("MLIT") and is expected to set forth matters, including:

• the government's objectives for the supply and use of low-carbon hydrogen;
• priority matters in achieving green transformation (GX); and
• matters for consideration when promoting supply and use of low-carbon hydrogen.

The national and local governments as well as relevant business operators are expected to contribute to the efforts in promoting the supply and use of low-carbon hydrogen in accordance with the Basic Policy.

Business plan

Subsidies and other forms of support mechanism as well as special regulatory exemptions will be available to business plans that have been approved by METI and MLIT (subject to prior consultation with the Minister of Finance).

The following eligibility criteria (amongst others) will be considered with respect to each proposed business plan:

• the proposed business plan aligns with the Basic Policy;
• the business plan is economically feasible and reasonable and can be expected to contribute to the enhancement of the country's international competitiveness;
• the business plan has been prepared jointly by a "supplier" and a "user" of low-carbon hydrogen;
• the "supplier" is expected to commence its supply of low-carbon hydrogen by the timing to be specified by METI and to continue supplying for a duration to be specified by METI; and
• the "user" is expected to make investments in new facilities and to carry out new businesses to use the low-carbon hydrogen supplied in accordance with the proposed business plan.

For the purposes of the Hydrogen Society Promotion Act:

• "suppliers" would include (i) those who produce low-carbon hydrogen domestically and sell to end users and (ii) those who import low-carbon hydrogen and sell on to end users; and
• "users" would include businesses that use low-carbon hydrogen as source of energy or as raw material.

Support mechanisms (e.g. subsidies)

Japan Organization for Metals and Energy Security ("JOGMEC") will be responsible for granting the following subsidies in relation to the approved business plans:

• subsidies to supply low-carbon hydrogen in accordance with the approved business plans; and
• subsidies to build common infrastructure required for the implementation of approved business plans.

As the Hydrogen Society Promotion Act does not provide details on the above subsidies, the detailed requirements and the selection process for the subsidies are expected to be set out in the rules to be prepared by JOGMEC. These rules are expected to follow the "Interim Summary Report" released in January 2024.

METI intends to begin accepting applications under the Hydrogen Society Promotion Act in the summer of 2024 with an aim to commence providing the subsidy support later this year. METI also intends to allocate a total budget of three trillion yen (approximately USD 20 billion) for the above subsidies relating to the supply of low-carbon hydrogen.⁴

Special regulatory exemptions

Business operators that have obtained approval under the Hydrogen Society Promotion Act will be eligible to enjoy special exemptions from regulatory requirements, including:

• approvals under the High Pressure Gas Safety Act;
• approvals under the Road Act; and
• notifications under the Port and Harbour Act.

Code of conduct for hydrogen suppliers

METI will be responsible for drafting a code of conduct for "suppliers" of low-carbon hydrogen to follow in order to promote the supply of hydrogen. As the Hydrogen Society Promotion Act does not provide details on the above code of conduct, METI is expected to draft such code of conduct and to release it in due course.

CCS Business Act

Background

The CCS Business Act is aimed at promoting the use of CCS in Japan. Various discussions within Japanese government have impacted the drafting of the law, for example:

• in January 2023, METI introduced the concept of the CCS Long-term Roadmap (the "CCS Roadmap") to accelerate the development of CCS technologies for commercial deployment, specifically setting the goals to reach a CO2 storage capacity of 6 - 12 million tonnes per year by 2030 and 120 - 240 million tonnes per year by 2050;
• a working group was set up in the Agency for Natural Resources and Energy to consider the CCS Roadmap, which issued a final report in March 2023; and
• a subcommittee was set up within METI to deliberate in a series of joint working group meetings (held between September 2023 and January 2024), which issued the "Interim Summary Report" (chukan torimatome) on 29 January 2024.

The new CCS Business Act follows the principles and policies laid out in the above final report and the Interim Summary Report.

Framework

The framework of the provisions under the CCS Business Act is as follows:

• introduction of a new licensing regime for CCS operators; and
• implementation of new regulations on CO2 pipelines.

Licensing regime

METI will be responsible for granting the newly introduced license for CCS projects. Licences will be granted through public tenders as follows:

• METI will designate "specified zones" for areas that have existing or potential reservoirs;
• METI will issue tender guidelines for each "specified zone";
• business operators intending to conduct CO2 business in the "specified zone" must apply for a licence through the tender; and
• METI will select the most suitable applicant for each "specified zone".

If a business operator intends to undertake storage or exploratory drilling activities in a location that has not yet been designated as a "specified zone" (but which the operator considers as an existing or potential reservoir), it can make a proposal to METI to designate such location as a "specified zone". Also, if an operator intends to undertake both storage and exploratory drilling activities, it will need to be licensed in respect of each of these activities separately.

Once METI releases the results of the tender, the selected business operator will be granted a legal right to undertake storage or exploratory drilling activities (as applicable), thereby effectively excluding or restricting any other rights a third party may have to the extent that the exercise of such third party's rights interferes with the approved activities of the licensed operator.

Responsibilities of each licensed operator will include:

• timely commencement of the approved activities in compliance with the applicable ministerial ordinance;
• submission of an implementation plan for approval before the relevant activity can be commenced;
• monitoring the conditions of the reservoir and reporting the same to the government;
• setting aside, by way of a reserve fund, amounts to cover its monitoring and other costs to be incurred during the storage period (i.e. following completion of CO2 injection until termination of its storage licence);
• contributing funds to JOGMEC to cover its costs following a termination of the licensed operator's storage business (upon which JOGMEC will take over the storage rights and will commence monitoring of the site); and
• compliance with various safety rules.

The CCS Business Act does not expressly provide for any financial support that may be available to the licensed operators, and therefore, these operators will need to rely on other options for financial support (e.g. emissions trading or subsidies under other regimes).

Regulations on CO2 pipelines

The CCS Business Act also establishes notification and other obligations to regulate the operation and safety of CO2 transportation via pipelines for the purpose of CCS projects. For example:

• operators engaged in the business of transporting CO2 via pipelines (including, for example, pipeline transportation for onward shipment to a storage reservoir located overseas) must notify METI with details of their business;
• operators engaged in the business of transporting CO2 via pipelines on behalf of third parties must establish terms and conditions (setting out, amongst other things, their fees for the transportation services) pursuant to which they are required to carry out their operations; and
• the above pipeline transporters must comply with various safety rules.

Future Outlook

Both laws establish a framework relating to the business of hydrogen (in the case of the Hydrogen Society Promotion Act) and CCS (in the case of the CCS Business Act). However, relevant details are not included in the laws themselves, and therefore, detailed guidance and requirements with respect to hydrogen and CCS projects are anticipated to be announced and clarified by JOGMEC and/or other relevant ministerial offices in the coming months.

_{1 The Act on the Promotion of Supply and Utilization of Low-Carbon Hydrogen and its Derivatives for a Smooth Transition to a Decarbonized, Growth-Oriented Economic Structure.
2 The Act on Carbon Dioxide Storage Businesses.
3 For details of the Interim Summary Report, please refer to our previous newsletter Japan Hydrogen Update - Interim Summary Report dated 7 February 2024.
4 Other investments are also expected. For example, Japan Hydrogen Association (JH2A) revealed a plan for a USD 1 billion hydrogen fund, to be set up by end of 2024.}
 

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_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

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