Japan eyes voluntary carbon market amid low J-Credit liquidity

Given the lack of clarity on the rules and regulations around Japan's GX-ETS, the country's planned emissions trading scheme to help meet national climate targets, carbon market participants have shifted their focus to the voluntary carbon market.

Market sources that S&P Global Commodity Insights spoke with in Tokyo during the week ended July 7 said they expected a slow start to the GX-ETS as the operation details and trading format were being finalized.

The first phase of the GX-ETS scheme, which was launched in April, is expected to begin in October. Phase one of the scheme was planned to be voluntary, however, 700 companies have already endorsed the GX-League concept.

Credits traded in the scheme will be J-Credits and carbon credits that are used voluntarily within Japan. Prior to this, J-Credits were auctioned bi-annually.

A Tokyo-based trader said the market was confused about the J-Credit process.

"We have had to go to the secondary market in the past as the timing for J-Credit auctions were not known. We hope the process would become clearer now with the coming of the GX-ETS," the source said.

The low supply of J-Credits also resulted in traders planning a portfolio made up of both J-credits and VCM credits.

"The Japanese government's aim is to generate a total of 0.1 gigaton of J-Credits and JCM by 2030. But it's not sufficient to satisfy Japanese demand. We need to supply VCM credits for the rest," a Tokyo-based intermediary source said.

Another source said the portfolio mix depended on buyers' priorities.

"If our client wants to offset for net zero goals, they tend to choose VCM credits. If our client wants to offset emissions under nationally determined contribution requirements to the government, they need to use J-Credits," the source.

This year up until May 31, total retirements from Verra, an indication of demand, by Japanese companies were valued at 494,557 mt, data compiled by S&P Global showed.

A large part of the retirements, amounting to 211,250 mt, were done by Toho Gas Limited with the Marubeni Corporation for LNG carbon offsetting. Takeda Pharmaceuticals was the Top 16 retirer of VCM credits, according to S&P Global Analytics Voluntary Carbon Market Scorecard published in June 2023, having retired over 3.5 million mt from the Verra registry over 2020-2023.

The S&P Global data showed that retirements by Japanese companies increased in 2022 as compared with the previous year; a reversal of the global trend where carbon credit retirements fell 4% in 2022 as compared with 2021.

Japanese companies retired 2.3 million mt of credits in 2022 as compared with 1.81 million mt in 2021. The exact reasons for the spike in retirements in 2022 are unclear. Retirements were highest in 2020 at 3.46 million mt.

While Japan is active on the retirement front, there are a few VCM projects created within Japan.

"We have no land for forestry and do not meet additionality requirements for other kinds of projects," a trader said.