Japanese companies should pivot to a more pragmatic approach to decarbonisation from 2026, focusing on profitability, energy security and adaptation, as rising costs and geopolitical risks reshape the global climate agenda, according to a new report.
Tokyo-based think tank Japan Research Institute said the decarbonisation drive has entered a “slowdown phase” since 2024, marking a transition from an ideal-driven push to a more “realistic” path prioritising economic returns and resilience. The shift reflects higher inflation and interest rates, policy uncertainty in Western economies and changing capital flows.
Rather than signalling the end of decarbonisation, the slowdown represents an “adjustment phase” that will force companies to reassess investment decisions and restructure business portfolios, the report explained.
Capital-intensive projects such as renewable energy and hydrogen have been hit particularly hard, as higher financing costs erode profitability. This has led to delays in final investment decisions and revisions to project plans, it added.
At the same time, a “green backlash” in parts of Europe and the United States – including reduced subsidies, regulatory changes and more uncertain permitting processes – has increased risks for projects reliant on policy support.
Financial markets are also shifting, with investment flowing increasingly into defence and artificial intelligence (AI) sectors amid rising geopolitical tensions and the rapid adoption of generative AI, the report said. This has slowed capital inflows into decarbonisation and weakened broad-based ESG investment trends.
As a result, investment in low-carbon projects is moving away from a broad-based approach towards greater selectivity, with some projects cancelled or delayed.
The report identified five key megatrends shaping decarbonisation beyond 2026, including a widening divide between viable and unviable projects, a reassessment of the feasibility of 2050 net zero targets, and a growing emphasis on climate adaptation alongside emissions reduction.
Investment is increasingly concentrating on lower-cost technologies such as energy efficiency, carbon capture and biofuels, while higher-cost options such as direct air capture and synthetic fuels face greater scrutiny, it noted.
However, the report noted that in the United States, where policy and market headwinds intensified in 2025, investment in relatively cost-effective areas such as efficiency and CCS has remained resilient, indicating companies are not retreating from decarbonisation but recalibrating portfolios based on returns.
It concluded that confidence in achieving net zero emissions by 2050 is weakening among policymakers, as emissions reductions become harder in so-called hard-to-abate sectors and progress remains uneven across countries.
With the pace of efforts to cut emissions expected to slow, attention is shifting towards climate adaptation, including disaster-resilient infrastructure, stronger supply chains and climate risk-related financial products. Demand for adaptation finance is rising, particularly in developing countries, where funding needs far exceed current levels.
Insurance companies in Europe and the United States are expanding offerings such as parametric insurance and resilience-linked products, while in Japan, firms including MS&AD Insurance Group and NEC are forming partnerships to develop adaptation-related businesses.
Carbon pricing mechanisms are also set to tighten from 2026, with measures such as Japan’s GX emissions trading scheme, the European Union’s (EU) carbon border adjustment mechanism (CBAM) and changes to the EU emissions trading system expected to take effect.
However, uneven global progress on emissions reductions risks raising costs, weakening industrial competitiveness and triggering carbon leakage or trade tensions, the report said, noting criticism of the EU’s CBAM from the United States and others.
Governments are therefore likely to maintain ambitious climate targets while adjusting policy implementation towards a more pragmatic approach, including more flexible regulations and simplified disclosure requirements.
China’s growing dominance in clean energy supply chains is expected to intensify competition, the report said. Accounting for roughly 40 per cent to 50 per cent of global solar and wind capacity, China is projected to continue large-scale renewable deployment through 2030, supported by strong government backing and cost reductions.
While decarbonisation investment slows in Western economies, China’s momentum remains relatively robust, strengthening its competitiveness in sectors such as renewables, batteries and electric vehicles.
This divergence is likely to push Japan, Europe and the United States to adopt defensive measures and differentiation strategies, including trade tools such as CBAM, as decarbonisation becomes increasingly intertwined with geopolitics and industrial competition, the report explained.
