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Japan to establish trade in government approved carbon credits, establishes transparency

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A market to trade carbon credits authenticated by the government is being established by the Japan Exchange (JPX) and the Ministry of Economy, Trade and Industry (METI), which will add transparency to emissions trading in the country.

  • The country’s first carbon trading market will be launched as a demonstration project within the Tokyo Stock Exchange (TSE), before going live in April 2023.
  • Intended to improve transparency in process and trades, JPX and METI hope it will boost the country’s decarbonization plans by prompting greater participation.
  • Japan’s climate change targets, policies and finance have been rated ‘insufficient’ by Climate Action Tracker (CAT), needing improvement to be consistent with the Paris Agreement.

Japan targets a 46% reduction in its GHG emissions by 2030, in its updated nationally determined contribution (NDC) statement, based on a 2013 base, and aims to achieve a 50% reduction, which it believes is aligned with achieving net zero by 2050.

CAT’s rating reflects the country’s energy policy – maintaining a 19% share of electricity generation from coal-fired power goes against a goal of fully phasing out coal by 2030, while a 22% share from nuclear power seems unrealistic, given local opposition.

Carbon trading confusion in Japan needs reform

While JPX and METI are setting up the first national carbon trading market in Japan, several different types of Japanese carbon credits exist, which have been traded in foreign markets. The number of different credit types adds confusion to the market and include:

  • J-Credits – Government certified credits relating to the amount of emission reductions via the use of energy-saving equipment and renewable energy, and through appropriate forest management. Seen as a way to promote the involvement of more companies by converting emission reductions, carbon absorption and carbon removal activities in Japan into carbon credits which will ultimately contribute to the achievement of Japan’s NDC.
  • Non-fossil Certificates – Given to low-carbon fuel sources, such as nuclear power, these can be traded on the Japan Electric Power Exchange (JEPX), these were created for retail electricity sellers and were initially only available for renewable power generated under a Feed-In Tariff (FIT) scheme.
  • Green electricity certificates – Issued by private companies since 2001, designed to protect and support the renewable energy sector. Based on a third party assessment of renewable power generation capability, it allows power generating companies to apply for certification and sell to anyone interested in buying green electricity.
  • Joint Crediting Mechanism (JCM) – Accredited institutions use this to evaluate Japan’s contributions to GHG emissions reductions in developing countries by providing them with decarbonisation technologies. Subject to government approval, JCM credits issued after January 1, 2021 can be used to achieve Japan’s NDC.
  • Voluntary carbon credits – Credits issued by private or non-governmental credit certification organisations, such as those issued by Verra or Gold Standard, are collectively called “voluntary credits”. These are currently not permitted under the domestic system in Japan, with no guidelines on how they should be used. 

A study undertaken by METI in December 2021 sought to clear the confusion over the various types of credits as well their use, with the aim of increasing the supply of carbon credits and stimulating demand for new carbon removal technologies and carbon sequestration using natural methods. 

The recommendations of the study were published in METI’s 2022 Carbon Credit Report, which called for the setting up of a transparent market that helped stimulate demand for credits, encourage supply via new technologies and methods.

New carbon credit market rules reflect Japan’s climate challenges

One of the challenges of the new carbon trading market contributing to Japan’s NDCs, part of the reason for setting it up, is as it is a voluntary scheme, with no failure to meet emission reduction goals.

This is in contrast to the EU’s emission trading system (ETS) which mandates participating companies to reduce emissions. The ETS is a “cap and trade system” which requires entities to buy or receive emission allowances, which can be traded among them as needed.

At the end of every year, enough allowances have to be surrendered by entities to cover its emissions, or be fined €100 per ton of excess emissions.

The fear with the voluntary aspect of the Japanese market is the setting of unambitious targets, which may be easily met, and hence not stimulate many credit transactions. This, in turn, will detract from the goals of setting up the market.

Japan’s challenge to incentivise its industry to decarbonise stems from its legacy of relying on heavy industrial investment domestically, and government backed export of equipment to neighbouring countries, which has supported industrial heavyweights.

As the largest shareholder of the Asian Development Bank (ADB), Japan has also been responsible for financing fossil-fuel based projects in the region, which are contrary to the stated policy of the G7, of which it is a member.

Whether the establishment of a voluntary carbon trading market domestically helps transform and transition its industry, and whether Japan’s rhetoric on climate change  matches its commitment, remains to be seen.  

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