Current Status of the Carbon Credit Market in Japan
The following is a partial translation of the Japanese language newsletter by Anderson Mori & Tomotsune, dated March 2024. The firm has been providing valuable legal commentary on the carbon credit markets for a while, with some of the earlier documents (also available in English) going into more detail on the different schemes, in case that is of interest to our readers.
The authors of this newsletter are: Kenji Miyagawa, Attorney-at-Law, Mai Kurano, Attorney-at-Law, and Ryotaro Kagawa, Attorney-at-Law
Introduction
The Japanese government has set goals of achieving carbon net zero by 2050 and reducing greenhouse gas (GHG) emissions by 46% compared to 2013 levels by 2030. However, with only six years remaining until 2030, time is running out. Carbon pricing, which puts a price on GHG emissions, is considered an effective way to promote GHG emission reductions at both the government and private sector levels. Various measures have been introduced as part of this effort, such as the GX League and the issuance of GX economic transition bonds. Considering the need to reduce emissions throughout the supply chain (Scope 3), carbon credit offsets are also a valuable tool, and the use of carbon credits is expected to promote decarbonization investment.
On the other hand, there is criticism of carbon credits, such as concerns about greenwashing (superficial environmental measures). Therefore, it is necessary to proceed with carbon credit transactions while taking into account risks such as greenwashing.
The carbon credit market in Japan can be broadly divided into two aspects:
(1) GX League: This includes the Japan Emission Trading Scheme (GX-ETS), a voluntary emissions trading system. It imposes economic burdens such as surcharges and paid allocation of emission allowances, while also allowing the use of eligible carbon credits to achieve GHG emission reductions, thereby providing economic incentives for GHG emission reduction activities.
(2) GX Economic Transition Bonds and Other Support: Under the Act on the Promotion of a Smooth Transition to a Decarbonized Growth-Oriented Economic Structure (GX Promotion Act), subsidies and other forms of support are provided. While Japanese companies need to decarbonize through their own actions before relying on carbon credit offsets (the so-called “hierarchy approach”), initial investments are required to decarbonize various industrial activities. The government promotes such initial investments through subsidies and other means.
Based on the above, the following provides an overview of trends in each area.
Trends in the GX League
(1) Schedule
Following the Carbon Credit Report published by the Ministry of Economy, Trade and Industry (METI) in June 2022, the Green Transformation (GX) League was officially launched in April 2023 as a Japanese emissions trading market. The schedule for the GX League is as follows:
- Phase 1 (FY2023-FY2025): Trial period, with trading of excess reduction allowances scheduled to begin after the end of October 2024.
- Phase 2 (FY2026-around FY2032): Full-scale launch of the emissions trading market
- Phase 3 (around FY2033 onwards): Further development
(2) Target Disclosure through Dashboard
In January 2024, the “GX Dashboard” was launched on the official GX League website, publicly disclosing the GHG emission reduction targets of participating companies. In the GX League, as a prerequisite for the GX-ETS, participating companies set their own emission reduction targets and take initiatives to achieve those targets. The GX Dashboard serves as an information disclosure platform for publicly disclosing the emission reduction targets and supply chain reduction efforts of participating companies. The total direct emissions in FY2021 of companies that have already submitted data accounted for more than 50% of Japan’s GHG emissions. From next year onwards, the actual emission reductions achieved by each company will also be published.
(3) Eligible Carbon Credits
If GX League participating companies find it difficult or economically burdensome to achieve their set targets, they will consider the option of offsetting (balancing) with “eligible carbon credits.” Currently, the following are recognized as “eligible carbon credits”:
- J-Credits
- Bilateral Credits (JCM Credits)
(4) Information Dissemination by Working Groups
Various working groups (WGs) have been formed within the GX League by participating companies and others, and information is being disseminated on initiatives to promote decarbonization, not limited to carbon credits. Some prominent examples include:
- On October 2, 2023, three WGs, including the “Eligible Carbon Credit WG,” were established to discuss the definition and certification of eligible carbon credits that can be used in Phase 1 of the GX-ETS.
- On December 3, 2023, the Management Promotion WG published its deliverables on “reduction contribution amounts” at COP28.
- On December 27, 2023, the final report of the “Voluntary Carbon Credit Information Disclosure Study WG” was published. It introduces desirable initiatives for Japanese companies to expand the voluntary carbon credit market and serves as a reference for handling voluntary carbon credits.
GX Economic Transition Bonds
Based on Article 7 of the GX Promotion Act, which came into effect on June 30, 2023, the government will issue decarbonization growth-oriented economic transition bonds (GX Economic Transition Bonds) over a ten-year period from FY2023 to FY2032 as a pre-emptive investment for achieving GX. GX Economic Transition Bonds are intended to promote private investment in projects that contribute to GHG emission reductions and economic growth but are difficult for private companies to implement alone. The actual issuance of these bonds began in February 2023.
According to some reports, as a prerequisite for government support for decarbonization using GX Economic Transition Bonds as a source of funding, the government will require eligible companies to participate in the GX-ETS. While details are pending further government reports, this will serve as an incentive for non-participating companies to consider joining the GX League.
Utilization of Green Finance
Apart from government support for decarbonization funded by GX Economic Transition Bonds, various green finance options are offered by financial institutions, such as green bonds, green loans, transition bonds, and transition loans. Guidelines and other frameworks for green finance have been developed, and it is expected that by implementing green finance in compliance with these guidelines, decarbonization investments by companies will be promoted while addressing greenwashing risks.
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