Japan set to launch emissions trading system in April

Japan is set to launch its emissions trading system in April with the first phase of ETS, involving voluntary participation from companies, that will continue for three years until the end of March 2026, marking a step forward in the development of its carbon pricing mechanism.

The move comes as Japan will formally start the GX League in April, with 679 companies having endorsed its basic concept of pursuing carbon neutrality and creating business opportunities, Minister of Economy, Trade and Industry Yasutoshi Nishimura said Feb. 14.

"The first phase [of the ETS] will start in April with a practical trading platform," Nishimura told the GX League Symposium 2023 in Tokyo.

"We aim to launch a full-fledged ETS from around 2026 after deepening our consideration to develop a framework that is more fair and effective by building necessary data and expertise with companies."

The launch of the ETS would not only effectively help drive corporate behavior towards 2050 carbon neutrality in the world's fifth largest CO2 emitter but also monetize local companies' push for reducing carbon emissions.

The companies that have endorsed the GX League concept must notify its secretariat on whether they will participate in the ETS by April 28, which will be followed by reporting of their voluntary greenhouse gas emissions reduction targets and setting base greenhouse gas volumes between early May and Sept. 29.

Voluntary base

As part of this process, the companies will voluntarily have to make "pledges" on their Scope 1 and Scope 2 GHG reduction targets in Japan for FY 2030-31 (April-March) and FY 2025-26 as well as a total GHG reduction target during the first phase over FY 2023-24 and FY 2025-26.

Their reported GHG reduction targets will basically be compared against their GHG emissions in FY 2013-14, with an exception for selecting one year between FY 2014-15 and FY 2021-22 as the base year, or including a three-year average including the selected base year.

The companies will have to report their GHG emissions by the end of October after the end of each fiscal year in March, with verification by a third party.

In the event of the companies not fulfilling their GHG reduction targets, they must offset their shortfall by procuring "eligible" carbon credits or explain their reasons for failing to hit targets during the first phase.

While only Scope 1 GHG emissions in Japan can be subject to the ETS trading, companies will be able to trade their GHG reductions that are in excess of the country's Nationally Determined Contribution, or NDC.

Japan targets a 46% cut in GHG emissions by FY 2030-31 from the levels in FY 2013-14 under its NDC.

Information regarding the degree to which companies are able to meet their GHG reduction targets and their carbon credit trading activities will be publicly available in the "GX Dashboard" once established.

During the first phase, the J-Credit will likely be a key source of carbon credits that are traded in the ETS. Japan ran a carbon credit market on the Tokyo Stock Exchange as part of the METI's demonstration project for about four months until the end of January.

The J-Credit Scheme is designed to certify the amount of greenhouse gas emissions reduced and absorbed through efforts to introduce energy-saving devices and manage forests.