Japanese government allocates $21bn to clean hydrogen subsidies

Over the next 15 years, the Japanese government has unveiled a plan to invest ¥3 trillion (approximately $20.86 billion) in subsidies for clean hydrogen and its derivatives, as part of a scheme similar to the Contracts for Difference (CfD) model previously disclosed.

This program, encompassing both domestically produced and imported hydrogen, is designed to bridge the cost differential between low-carbon hydrogen and its fossil fuel counterparts, starting from the next year. A significant portion of the funding will be sourced from “GX (Green Transformation) Economic Transition Bonds” issued by the government.

In Japan, low-carbon hydrogen is classified as having a carbon intensity no greater than 3.4kg of CO2 per kilogram of hydrogen, irrespective of its origin.

The subsidy mechanism differs from traditional fixed payments or tax credits. Instead, it operates as a CfD system for both domestic and imported hydrogen (and derivatives like ammonia). Under this system, producers receive supplementary payments over a pre-determined reference price, or conversely, reimburse the government if production and transportation costs fall below this benchmark.

This strategy enables the sale of clean hydrogen at prices equivalent to fossil fuel alternatives, stabilizing the market against price volatility and encouraging buyers to commit to purchasing set volumes.

The subsidies are expected to gradually diminish as reference prices increase due to carbon pricing and other regulatory actions. Additionally, the government plans to allocate another ¥1.3 trillion towards aiding the decarbonization of heavy industries like steel and chemicals. This could potentially involve the utilization of clean hydrogen.

These resolutions were finalized at the GX executive committee meeting of the ruling Liberal Democratic Party, led by Prime Minister Fumio Kishida, on December 15, 2023.