Japan initiates effort to boost liquidity in newly set up carbon market

Japan’s newly launched carbon credit market has initiated a trial scheme, under which it introduced several financial institutions and trading companies as "market makers" to test if they will boost liquidity of this nascent market, Japan Exchange Group or JPX said in a statement on Nov. 27.

This scheme, called the Trial Market Maker Scheme, will be implemented from Nov. 27, 2023, to Feb. 29, 2024. Two types of carbon credits are allowed to be traded by the appointed market makers, including J-Credits generated from energy saving projects and renewable electricity projects, JPX said.

The appointed market makers include Sumitomo Corporation, Daiwa Securities Co. Ltd., Marubeni Corporation, Mizuho Bank, Ltd., and MITSUI & CO., Ltd, according to JPX.

Since its start in October, Japan's carbon credit market has been facing relatively low liquidity compared with other more mature APAC markets. For instance, on Nov. 24, the trade volume of China emission allowances (CEAs) totaled 1.45 million mtCO2e, and the trade volume of Korean Allowance Units (KAUs) totaled 122,607 mtCO2e, while the trade volume of J-credits totaled 2,500 mtCO2e, official exchange data showed.

This trial scheme is backed by the Ministry of Economy, Trade and Industry (METI), a government body that oversees the Japanese carbon market. This trial scheme followed the "Carbon Credit Market Trading Stimulation Project" organized by METI earlier, JPX said.

Uncertainties ahead

Currently, one reason for the low liquidity is that Japan is yet to establish a compliance carbon market.

Japan's emission trading scheme or ETS, called GX ETS, kicked off this April, however, in the initial phase till 2026, companies are allowed to voluntarily participate in the ETS and voluntarily propose their own emission reduction targets. This is different from a conventional ETS, under which the government set compulsory emission reduction targets and require certain companies or industries to participate.

The Japanese government has not come up with a long-term plan in terms of whether Japan will transform its GX ETS into a conventional, compliance ETS. As such, despite the introduction of these market makers, it remains uncertain whether the trade volume of J-credits will significantly improve, analysts said.

Another factor that limits demand growth is the relatively high level of J-credit prices, market participants said. J-credits are generated from decarbonization projects within Japan, which are usually of higher costs compared with projects in developing countries.

As of Nov. 24, the closing prices were Yen 1,700/mtCO2e ($11.41/mtCO2e) for J-credits from energy saving projects and Yen 3,160/mtCO2e ($21.20/mtCO2e) for J-credits from renewable electricity projects.

In comparison, Platts, part of S&P Global Commodity Insights, assessed Korea's KAU price at Won 7,500/mtCO2e ($5.74/mtCO2e) Nov. 24. China's CEA daily weighted average price was Yuan 71.84/mtCO2e ($10.04/mtCO2e) on Nov. 24, official exchange data showed.