GX bonds and lingering concerns about carbon lock-in

By Hana Heineken and Asahi Yamashita

5 March 2025 - A total of around 3 trillion yen of GX (green transformation) transition bonds (Climate Transition Bonds) have been issued so far. A year ago, when they were first issued, there was a  ‘greenium’ (green premium) where the yield was lower than that of regular government bonds. However, this now appears to have disappeared, indicating that GX Bonds are not the preferred issuances for investors to hold. Funds are being used to support hydrogen and ammonia and foreign investors are concerned that this risks ‘carbon lock-in’ which would maintain and prolong the life of fossil fuel-related assets over the long-term. 

30% of bonds held by Bank of Japan  

The government has set a target of deploying JPY 20 trillion in public finance, combined with private finance to a total of JPY 150 trillion to achieve carbon neutrality by 2050. This will be financed by GX Transition Bonds, which were first issued in February 2024 and issued six times by January this year. Of the issued GX Transition Bonds, about 30% are held by the Bank of Japan.  

According to the basic policy of the relevant ministries and agencies, the use of the funds include mainstreaming renewable energy, investment in the battery industry and the development of submarine DC transmission, etc. However, there are also a number of non-green uses, such as hydrogen/ammonia and gas infrastructure development, and carbon capture, utilization and storage (CCUS). There is a large concern in particular about co-firing hydrogen and ammonia in high carbon emitting sectors such as in energy generation.  

In general, transitioning to a carbon emission-free production facility will need a significant amount of capital investment and the transition finance to support this must be heavily promoted. However, in the case of high carbon emitting operations and production facilities, the transition to a decarbonized society needs to be aligned with the pathway to achieving the Paris Agreement temperature goals. Financial support for high carbon emitting sectors could lead to carbon lock-in that prolongs the life of fossil assets. Two strict questions must therefore to be asked: ‘is this transition scientifically credible‘ and ‘is this off the track of transition’? It is essential that states and companies have a transition plan which is Paris-aligned. If it is possible to achieve facilities that emits almost no carbon, they should install these facilities. If this is difficult and they are forced to maintain fossil fuel-based equipment, they need to demonstrate a decommissioning deadline also known as a  ‘phase-out date’.  

Blue hydrogen may undermine decarbonization  

It is also irresponsible to focus only on one part of the supply chain such as power generation or steel production. There must be a reduction of carbon emissions throughout the life cycle of the product, including mining, transport, manufacturing and use. If carbon emissions increases during the life cycle, that is not transition finance.  

For example, the way hydrogen and ammonia is made must be taken into account in its life-cycle carbon emissions. As it is currently mostly derived from fossil fuels, the International Energy Agency (IEA) sees the majority of current hydrogen supply as a cause of climate change rather than a solution to climate change.  

When carbon capture and storage (CCS) is attached, such hydrogen is called blue hydrogen. However, CCS has technical and economic challenges, such as transport and storage locations, and the CO2 capture rate is far from 100%. Furthermore, fossil fuels required for CCS operation, as well as methane leakage during fossil fuel extraction, must be taken into account. When blue hydrogen is used in the energy sector, several researchers have found these to have a higher life-cycle emissions profile than natural gas. 

Concerns over ammonia and synthetic methane 

Decarbonizing ammonia is a higher hurdle than hydrogen. Ammonia is mostly produced from natural gas and requires a lot of energy in its industrial production through the high-temperature and high-pressure Haber-Bosch process. If CO2 is emitted, such ammonia is known as grey ammonia and if CCS attached, this is called blue ammonia. Both have a risk of methane leakage during natural gas extraction and emissions of nitrous oxide (N2O), which has a global warming potential approximately 300 times higher than that of CO2, during ammonia combustion, so life-cycle carbon emissions are not small. 

Similar problems arise with synthetic methane, which the Ministry of Economy, Trade and Industry (METI) aims to introduce in its technology roadmap for the gas sector. Synthetic methane is made from hydrogen and CO2, and in addition to the issue of how much carbon emissions can be reduced, there are also concerns about the expansion of gas infrastructure. 

Liquefied natural gas (LNG) has very high life-cycle CO2 emissions, not only during combustion, but also due to methane leaks during upstream extraction and transport. For example, the global warming effect of LNG exported by the US is said to be more than 30% higher than that of coal, and under the new Trump administration, the current situation will likely stay the same or, in some cases, worsened.    

Review of the use of proceeds is essential  

Expansion of gas infrastructure, ammonia co-firing at coal-fired power plants and hydrogen co-firing at gas-fired power plants raise significant carbon lock-in concerns. Hydrogen injection into blast furnaces is also subject to carbon lock-in concerns that keep coal-based blast furnace steelmaking alive.  

For GX Transition Bonds to be true transition finance, there will need to be a principle of not funding technologies that lead to carbon lock-in or increase life-cycle carbon emissions.  Furthermore, support needs to be selected on the basis of emission reduction pathways that are rigorously grounded in scientific evidence and consistent with the Paris Agreement. 

Indeed, METI has provided a decarbonization transition roadmap for high carbon emitting sectors, but it does not take life-cycle carbon emissions into account. The roadmap needs to be revised to include life-cycle carbon emissions and to be consistent with the Paris Agreement from an up-to-date scientific perspective. 

In addition, phase-out dates for certain high carbon emitting installations should be set by law, and a mechanism should be introduced whereby funding is provided for earlier decommissioning, while funding clawed back in the event of a failure to achieve the committed emissions reductions. 

This article originally appeared on Nikkei GX and is reproduced with permission here. 

The original Japanese article is available here