Chasing zero

Japan and Taiwan take steps toward a low-carbon future

JAPAN

TAIWAN

Storage battery opportunities amid Japan’s green transformation

A transition to promoting renewable energy as a major power source is one of the core drivers in advancing green transformation in Japan. The “GX 2040 Vision”, approved in February 2025, places establishing renewable energy as a major power source at the epicentre of supply-side energy sector initiatives.

As indicated in the 7th Basic Energy Plan (2025), making renewable energy a major power source is also a key pillar of Japan’s energy policy, expected to account for the largest share (about 40-50%) of the power generation mix towards 2040.

The concept of the growth-oriented carbon pricing scheme materialised by the GX Promotion Act 2023 enters full implementation phase in 2026.

Japan GX boosts renewables viability

Meanwhile, phased introduction of a legally mandated emissions trading system starting in 2026, and a carbon levy starting in 2028, is expected to increase costs for fossil fuels-derived power generation, further enhancing the economic viability of renewable energy.

Geopolitical risks surrounding energy – namely, rising crude oil prices against the backdrop of recent Middle East tensions and turmoil in the natural gas market stemming from the Russia-Ukraine crisis since 2022 – have also brought the vulnerability of Japan’s energy supply structure into sharp relief again.

Headwinds affecting the transition to decarbonisation include rising development costs in sectors such as offshore wind, contributing to project delays, and evolving policy priorities in major economies.

But Japan’s GX vision remains important; not only as an environmental policy but also for ensuring stable energy supply, one of the key pillars of the country’s S+3E energy policy – prioritising safety, energy security, economic efficiency and environment.

Role of storage batteries

Storage batteries are considered critical infrastructure for addressing the variability of renewable energy and ensuring stability of Japan’s power systems.

In 2022, the Ministry of Economy, Trade and Industry (METI) announced the Storage Battery Industry Strategy aimed at strengthening the competitiveness of Japan’s storage battery industry.

The importance of deploying flexible resources such as storage batteries and pumped-storage hydropower to support the transition towards renewable energy as a major power source is also underscored in the 7th Strategic Energy Plan and GX 2040 Vision.

An increasing need for output curtailment accompanying the introduction and expansion of renewable energy sources such as solar power is additionally enhancing the value of storage batteries as a means of absorbing surplus electricity.

The market-linked feed-in premium (FIP) system introduced in 2022, meanwhile, encourages the active use of storage batteries that enable output adjustment and time shifting in response to price fluctuations.

Japan battery storage liberalisation

Since the full liberalisation of Japan’s electricity retail market in 2016, foreign-affiliated companies have already entered the power generation and retail electricity businesses. While prior notification or a post-facto report may be required under the Foreign Exchange and Foreign Trade Act 1949, such requirements do not pose a significant barrier to market entry by foreign companies.

Storage batteries have attracted attention as an investment target in recent years driven by liberalisation of the electricity market, progress in carbon-neutral policies, and the development of an investment support framework. Regulatory reforms aimed at promoting investment in battery storage have progressed in tandem.

Following an amendment of the Electricity Business Act in 2022, a business that discharges electricity from grid-scale batteries with a capacity of 10,000kW or more is classified as “power generation business”.

As a result, the same grid connection rules as the rules of power generation facilities – notably that general electricity utilities shall not refuse a request for grid connection without justifiable grounds – are now applied to electric facilities related to grid-scale storage batteries. This facilitates grid connection access for such facilities.

Further, based on deliberations by the relevant government council in 2023 regarding storage batteries installed alongside FIP power sources (which are treated as part of the power generation facilities [ancillary facilities] under relevant laws), these batteries may, under certain conditions, be charged not only from the associated power generation facilities but also from the grid.

Electricity charged from renewable energy sources when these batteries generate power became eligible for FIP payment on top of the market price. In addition, starting with electricity generated in April 2025, such electricity is eligible for non-fossil value recognition through the issuance of non-fossil value certificates (non-FIT).

As a result, these batteries can not only charge electricity generated from renewable energy sources and sell it during peak market hours; they can also engage in market arbitrage by leveraging price differential in the electricity market to generate revenue similar to grid-scale batteries, which is expected to improve utilisation rates.

From a broader focus, the feasibility of battery storage businesses spans multiple markets such as energy value (wholesale electricity market), balancing value (supply and demand adjustment market), and capacity value (capacity market).

But unlike the traditional FIT-based power generation business, battery storage businesses cannot rely on single long-term fixed revenue and are inherently exposed to market risks arising from market price fluctuations and operational strategies.

As a result, success or failure of a storage battery business depends on operational capabilities such as market participation strategies.

Long-term auction boosts battery storage

Regarding the development of an investment support framework, the Long-Term Decarbonised Power Source Auction, introduced in 2023, supports new installation of and replacement of decarbonised power sources – particularly capital-intensive technologies such as grid-scale storage battery, nuclear power, hydrogen and ammonia, and thermal power – and enhances revenue foreseeability in the capacity market.

This support mechanism expands the capacity market framework by providing capacity payments to the electricity generation utility, from capacity contribution funds contributed by electricity retailers through to long-term contracts of up to 20 years.

It enables recovery of revenue equivalent to the level of fixed costs associated with power sources, subject to conditions designed to prevent double counting with revenues from other markets, including the wholesale electricity market and the supply and demand adjustment market.

According to 2024 results of the auction, storage batteries accounted for 27 out of all 38 successful bids, comprising about 22% of the total awarded capacity. This represented an increase of about 25% compared to 2023, indicating expansion in the storage battery business.

Barriers to entry regarding storage batteries may appear to be increasing due to reduced maximum solicitation volumes and expanded requirements: for example, a minimum six-hour discharge duration requirement for storage batteries, together with limits on foreign-made lithium-ion cells, and the JC-STAR certification framework introduced from cybersecurity and supply chain perspectives.

But while 2025 auction results had not yet been announced at the time of writing, the auction continues to play an important role as a complementary system that supports business viability.

While foreign companies cannot participate in auction bidding on their own, they may participate through a consortium that establishes a special purpose company (SPC) in Japan.

Alongside the auction, the METI’s subsidy programme for expanding renewable energy deployment and supporting grid-scale battery and other energy storage systems also plays an important role.

In December 2025, the ministry announced the 2025 results of this subsidy programme, under which a record-high amount of about JPY36.3 billion (USD228.4 million) was approved and a record-high 37 projects were selected, indicating growing expectations for grid-scale batteries.

In addition, other subsidy programmes supporting storage batteries are available at the Ministry of the Environment, and at local government levels.

Although project financing for battery storage projects has been constrained by revenue uncertainty and other challenges, a growing number of transactions across various business models has been observed, indicating that the market is evolving.

EU battery rules reshape Japan

In Europe, under the EU Battery Regulation (2023/1542), a comprehensive regulatory framework covering the entire lifecycle of battery storage is being introduced in phases.

The regulation sets out requirements relating to carbon footprint, recycled content and due diligence, which impacts Japanese companies that place batteries or battery-containing products on the EU market.

In response, the importance of ensuring sustainability and addressing supply chain issues is growing in Japan as well, with initiatives such as development of a Japanese version of the “battery passport” underway.

CITY-YUWA PARTNERS
Marunouchi Mitsui Bldg., 2-2-2 Marunouchi,
Chiyoda-ku, 100-0005 Tokyo, Japan
Tel: +81 3 6212 5500
Email: takuro.awazu@city-yuwa.com
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Legislation driving sustainability in Taiwan

Sustainability has become a central policy priority in Taiwan following the government’s announcement of its 2050 Net Zero Pathway on 20 March 2022. Under this framework, Taiwan has committed to achieving net zero greenhouse gas (GHG) emissions by 2050, focusing on four key transition sectors – energy, industry, lifestyle and society – and supported by two foundational pillars: technological innovation and climate legislation. This policy direction reflects not only domestic climate imperatives but also Taiwan’s strategic positioning within an increasingly sustainability-driven global economy.

Among the regulatory instruments deployed to achieve this target, carbon pricing has emerged as a core mechanism, complemented by the promotion of a circular economy. At the same time, sustainability considerations are increasingly embedded in Taiwan’s external economic relations. Notably, the Taiwan-US Initiative on 21st Century Trade, launched on 22 August 2022, formally integrates environmental, social and governance (ESG) principles in bilateral trade discussions, reflecting a broader shift toward values-based trade governance and supply chain accountability.

Overview of Taiwan’s carbon fee framework

The carbon fee, introduced under the Climate Change Response Act, 2023, constitutes Taiwan’s primary regulatory tool for internalising the cost of GHG emissions. By assigning a price to emissions, the regime is intended to incentivise emission reductions and drive changes in corporate behaviour. More broadly, it signals Taiwan’s transition towards market-based climate governance, aligning with international trends while maintaining a calibrated approach to industrial competitiveness.

On 29 August 2024, the Ministry of Environment (MOENV) promulgated three key regulatory instruments – often referred to as the “three arrows” of the carbon fee framework:

1. 1. Regulations governing the collection of carbon fees;
   2. Designated GHG deduction goals for entities subject to carbon fees; and
   3. Regulations for administration of self-determined reduction plans.

At present, the carbon fee applies to electricity and gas suppliers, as well as manufacturing entities with annual Scope 1 and Scope 2 GHG emissions exceeding 25,000 metric tons of carbon dioxide equivalent (tCO2e). Entities that are direct emission sources from electricity generation may submit documentation certifying the emissions associated with electricity consumption and apply to the MOENV for a deduction of GHG emissions subject to carbon fees. This threshold-based approach reflects a policy decision to focus regulatory burdens on large emitters while minimising compliance costs for smaller enterprises.

Carbon fees are assessed annually and payable by May each year, based on the previous year’s emissions. The chargeable emissions amount is not equivalent to total annual emissions. Under the applicable regulations, it is calculated as follows:

Chargeable emissions = (annual emissions − K value) × emissions adjustment coefficient. The K value is set at 25,000 tCO2e. Accordingly, for most regulated entities, only emissions exceeding this threshold are subject to the carbon fee, after application of the emissions adjustment coefficient. By contrast, for businesses designated as having a high carbon leakage risk (high carbon leakage businesses) the K value is zero, meaning that their full emissions are used in the calculation. This differentiation balances environmental effectiveness with competitiveness concerns.

Once the chargeable emissions amount is determined, the carbon fee payable is calculated by multiplying that amount by the applicable rate:

Carbon fee payable = chargeable emissions × applicable rate. The standard applicable rate is TWD300 (USD9.45) per tCO2e. Preferential rates of TWD100 or TWD50 may apply where a regulated entity submits a voluntary reduction plan, commits to designated reduction targets, and obtains MOENV approval. This creates a hybrid regulatory model combining mandatory pricing with performance-based incentives, encouraging early compliance and emissions reduction planning.

For high carbon leakage businesses, the emissions adjustment coefficient plays a critical role. The coefficient is designed to mitigate the risk of carbon leakage by balancing regulatory stringency with industrial competitiveness. It will be phased in over the first three years at 0.2, 0.4, and 0.6, respectively. On 12 January 2026, the MOENV designated 17 entities as high carbon leakage businesses under the relevant review guidance, including businesses in sectors such as oil and coal products, iron and steel, and computers and peripheral equipment manufacturing. This phased approach provides transitional relief while maintaining a clear trajectory towards stricter carbon cost internalisation.

With the rollout of these regulations, Taiwan has formally entered the era of carbon pricing. Carbon fee revenues are allocated to the Greenhouse Gas Management Fund and are expected to support investments in emissions reduction technologies, climate adaptation measures, and broader decarbonisation initiatives. For businesses, this signals not only a new compliance obligation but also potential opportunities for funding and technological upgrading.

Legislative shift to circular economy

Parallel to carbon pricing, Taiwan is transitioning from a linear “produce-use-dispose” model towards a circular economy. This reflects a growing recognition that emissions reduction is insufficient without addressing resource efficiency and lifecycle impacts.

On 29 May 2025, the MOENV introduced two major legislative proposals: a comprehensive revision of the Resource Recycling Act, 2009, to be renamed the Resource Circulation Promotion Act (RCPA), and amendments to the Waste Disposal Act, 1974 (WDA). These reforms aim to embed the “3R” principles – reduce, reuse, recycle – across the full product lifecycle, shifting regulatory focus from end-of-pipe waste management to upstream design and resource efficiency. The Executive Yuan, Taiwan’s executive branch of government, approved the proposed legislative amendments on 9 April 2026, and they will now proceed to the Legislative Yuan (the legislature) for deliberation.

The proposed RCPA adopts a “carrot and stick” approach, combining regulatory obligations with incentive-based mechanisms. On the regulatory side, the MOENV will be authorised to establish green design standards for products and construction projects, mandate reduction or reuse requirements for designated products, packaging and containers, and impose restrictions or bans on materials deemed environmentally harmful or energy-intensive.

The proposed RCPA also introduces incentives to encourage compliance and innovation, including certification labels for qualifying products, as well as subsidies, tax incentives and preferential financing for businesses demonstrating strong performance in resource circulation. To address greenwashing risks, unauthorised use of sustainability labels will be subject to enforcement measures.

In parallel, proposed amendments to the WDA would authorise the MOENV to mandate recycling of specified waste streams – even where not commercially viable – prioritising resource optimisation over short-term economic efficiency. Businesses engaged in recycling will face enhanced compliance obligations including reporting, material tracking and disclosure requirements. These reforms signal a shift towards a more interventionist regulatory model.

ESG in Taiwan trade policy

Taiwan’s sustainability agenda is increasingly reflected in its trade policy architecture. This underscores the growing convergence between domestic regulatory frameworks and international economic governance.

Under the Taiwan-US Initiative on 21st Century Trade, ESG considerations – particularly labour and environmental standards – were explicitly incorporated into the negotiation framework. While the initial agreement concluded in May 2023, focused primarily on traditional trade facilitation issues, it nonetheless signalled a clear policy direction towards integrating sustainability into trade governance.

This trajectory was further reinforced by the Taiwan-US Reciprocal Trade Agreement, announced on 13 February 2026, which formally embeds labour and environmental provisions into the bilateral framework. On the labour front, the agreement covers core labour rights, including freedom of association, while also addressing emerging concerns such as forced labour. The environmental provisions emphasise the promotion of resource efficiency and environmental protection, aligning closely with Taiwan’s domestic circular economy initiatives. The agreement illustrates a convergence between domestic regulatory reforms and international trade commitments, positioning ESG as an increasingly binding component of cross-border economic relations.

Companies engaged in cross-border trade will need to ensure that their supply chains, labour practices and environmental performance align not only with domestic regulations but also with evolving international standards embedded in trade agreements.

Taiwan embeds sustainability across governance

Since announcing its 2050 Net Zero Target, Taiwan has made significant progress in establishing a comprehensive sustainability framework spanning carbon pricing, resource circulation and ESG-aligned trade policy. These developments reflect a broader transformation from reactive environmental regulation to proactive governance of economic and industrial systems.

Although initiatives remain under legislative consideration, developments – like the Ministry of Labour’s issuance of the Reference Guidelines for Enterprises to Prevent Forced Labour, on the same day as the Taiwan-US Reciprocal Trade Agreement – underscore the government’s increasingly integrated approach to sustainability governance.

Businesses must recognise that sustainability is no longer a peripheral consideration but a deeply embedded legal and regulatory imperative. Compliance will require not only adherence to evolving statutory requirements but also the proactive integration of sustainability into corporate strategy, risk management and cross-border operations. In this context, early engagement with regulatory developments and investment in sustainability capabilities will be critical to maintaining competitiveness.

LEE AND LI ATTORNEYS-AT-LAW
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Taipei – 11072, Taiwan
Tel: +886 2 2763 8000
Email: attorneys@leeandli.com
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