Japan plans new trading market for greenhouse gas emissions

The aim is to put the envisaged system into operation in fiscal 2022, allowing companies that successfully cut emissions beyond their reduction target to sell the surplus to companies that fail to meet their goal, according to sources.

The government will compile guidelines to make it easier to set reduction targets and sales prices, among other elements, encouraging the public and private sectors to jointly strive for decarbonization, the sources said.

Companies that make efforts to cut their greenhouse gas emissions will be paid for their achievements in the planned trading market, so this is expected to heighten their motivation to reduce their emissions even further.

The government hopes the trading system will particularly prompt cuts by the companies whose greenhouse gas emissions account for more than 90% of the nation’s total.

The Economy, Trade and Industry Ministry will announce the outline of the envisaged market sometime before this summer and incorporate it in the government’s Growth Strategy, the sources said.

Under the plan, companies participating in the market will set their own reduction targets, and the government will give appropriate goals its seal of approval.

Decarbonization is gaining momentum in many countries and regions. There have been increasing calls for the government to create a new market, as participating in such a system would help firms develop their businesses globally.

In Japan, there is a growing trend among large corporations, such as Toyota Motor Corp. and Sony Corp., to publicize their decarbonization strategies and measures to combat climate change. The government therefore expects these big firms to participate in the new market.

Japan already has a system called the J-Credit Scheme in place, under which the government certifies as credits the amount of emissions cut by entities that are active in decarbonization efforts, making it easier for them to sell their credits to others.

However, J-Credit is not widely used, mainly because the price of credits is determined through negotiations among the parties concerned. As a result, it is difficult for these reduction efforts to be recognized domestically or internationally.

The European Union introduced the EU Emissions Trading System in 2005 to set a cap on CO2 emissions by industry for companies in its member states. Companies that exceed their emissions allowance must purchase quotas from others that do not use their full allowance.

However, investment funds and others are also participating in the EU market, causing transaction prices to soar. In Japan, the government plans to limit market participants to companies that have voluntarily set their own CO2 reduction targets and devise a mechanism to prevent excessive price fluctuations.