Japan fears the future of its Carbon Market after 2026, according to Norihiro Kimura. Indeed, this senior climate change negotiator at the Ministry of Economy, Trade and Industry (METI), said that the Japanese government has not yet decided what the next phase of its carbon market will look like after 2026, when the first phase of voluntary emissions reductions ends. There is little likelihood of a cap-and-trade system or regulated emissions reductions.
Japan launched its emissions trading system, known as GX ETS, last April, with an initial phase based on a voluntary approach. Companies decide voluntarily whether they wish to participate in the Emissions Trading Scheme (ETS), and commit themselves voluntarily to reducing their emissions.
The uncertain future of GX ETS
Norihiro Kimura stated that the Japanese government has not yet decided whether the GX ETS will evolve into a conventional ETS system after the initial phase. “It’s one of the possibilities, but nothing has been decided yet,” he said. In a conventional ETS, such as those of the European Union, South Korea and China, governments decide which companies or sectors are to be included in the ETS markets. They also set mandatory emissions reduction targets for companies, and issue emissions allowances to companies that manage to reduce their emissions by more than what governments require.
Kimura also indicated that companies should set their own emissions reduction targets for 2025 and 2030. “Nothing has been decided, but I can’t imagine that we will radically switch to a government approach to setting targets,” he added.
Industry reluctance
Asked why Japan has adopted an unconventional approach to carbon pricing, Kimura explained that industry movements are very important, which has made them reluctant to introduce a top-down ETS system. He explained that at the time of the Kyoto Protocol, Japanese industries had been given emission reduction targets, and companies were struggling to meet them. Since the announcement of the national goal of carbon neutrality by 2050, he has noted a change in the government’s approach, but they still plan to develop the carbon market gradually. “Even with this voluntary approach, we cover 40% of the country’s emissions,” he stressed. GX ETS succeeded in attracting over 600 companies to participate voluntarily.
The Carbon Credit Market in Japan
Kimura revealed that they have no plans to introduce a carbon tax combined with GX ETS, as this would probably place too heavy a burden on the private sectors. He also mentioned that companies participating in GX ETS are now allowed to purchase two types of credits if they emit beyond their voluntary targets, namely J-credits from domestic projects and Joint Credit Mechanism or JCM credits, to be issued from overseas projects financed by Japan under Article 6.2 of the Paris Agreement.
Japan has recently launched a trading-based carbon credit market, where companies can both use the market to acquire credits in compliance with GX ETS and voluntarily offset their emissions as part of their corporate social responsibility practices. J-credits prices for renewable energy projects were around $16 to $21 per tonne of CO2 equivalent, while nature-based projects were higher, at $46 to $67 per tonne of CO2 equivalent, due to higher project development costs in Japan.
Kimura said that Japan does issue JCM credits, but that this remains a matter of discussion on pricing. He also noted that project host countries want to keep more credits for their own use, rather than exporting them to Japan.
