RFF Carbon Pricing Dialogues | A Deep Dive on the Emerging Contours of Japan’s Emissions Trading System
Event Details
Economists from the Research Institute of Innovative Technology for the Earth (RITE) in Japan visited RFF on Monday, June 1 to provide an update and deep dive on the emerging contours of Japan’s Emissions Trading System. While the nature of their visit is primarily academic, RITE works closely with the government and can offer additional perspectives. RFF arranged for the Carbon Pricing Dialogue network to participate in a Chatham House Rule presentation including an update on the program’s development.
Executive Summary:
The Japanese Emissions Trading System, commonly referred to as GX-ETS, has entered its second, mandatory phase. A voluntary phase one trial ran from April 2023 to March 2026. Phase two began in April of 2026 and is compulsory for industrial emitters with emissions >0.1 MtCO2/yr, but is limited to measuring emissions. The market (payment) component will start in 2027. Eighty percent of industrial emissions are covered by the program, and only scope one emissions are covered in the current phase.
The government is shifting program design to account for increasing power demand in recent months. Part of this is in response to data centers, though the dynamics and politics of data centers have evolved very differently in Japan than they have in the US. Though these adjustments seem likely to weaken the program, based on its carbon pricing and other green finance provisions (e.g. fuel levies), it is still expected to collect roughly 20 trillion yen (~$125 billion) by 2040; a significant revenue stream. The GX-ETS is a baseline-and-credit program, in which emissions only need to be paid for when they exceed a benchmark. Benchmark values are set to decrease from the intensity of the top 50 percent of companies down to 32.5 percent of industry average by 2030.
At present, the benchmark is fuel-specific but will later convert to a whole-sector benchmark. Some industries, such as small-scale farms, will be grandfathered in. The average CO2 intensity improvement is currently set at 1.7 percent/year. In many sectors, there are too few available data to set meaningful benchmarks, so this rate is a fallback. Because of different benchmarks by sector and some by industrial process, the program sets a 7.5 percent margin above or below which an additional adjustment will be applied.
The program will use a price ceiling and floor, or price collar, subject to inflation adjustments of 3 percent per year. The low price will start at 1700 JPY/tCO2 (i.e. $10.60/tCO2), and the high price will be 4300 JPY/tCO2 (i.e. $26.80/tCO2). The lower bound was set considering J-Credit prices, while the upper bound was decided by coal to LNG switching prices. Program designers are also trying to avoid leakage.
The power sector is scheduled to be included in 2033 (note: the power sector in Japan is a regulated sector, not a market as in the US). As the program enters phase two, the government is focused on coordination with other carbon reduction programs already functioning in Japan, such as the existing carbon tax and J-Credit programs. Coordination of price impacts on industries and consumers from other programs is a bigger focus than programs in other countries, such as the EU CBAM.
While more academic than the typical meeting for our network, this was a valuable complement to our usual programming and an example of the synergies we continue to realize with our new home at RFF.
