Column 2026.02.03

The latest developments in the discussions regarding the "Japanese emission amount Trading Scheme (GX-ETS)" to begin in fiscal year 2026

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The emission amount-ETS, one of the pillars of the GX policy being promoted by the Japanese government, will begin full-scale institutionalization in fiscal 2026.

The emission amount Trading System (ETS) was the world's first fully implemented system for greenhouse gases (GHGs) in 2005 by the European Union (EU), and has since been introduced and expanded in countries such as South Korea (2015) and China (2021). These systems have been widely implemented internationally as market mechanisms that put a price on GHG emission amount and encourage reductions, and have become a standard method for global climate policy. In this context, the EU has introduced the Carbon Border Adjustment Mechanism (CBAM), establishing a system to impose an effective carbon price on imports from outside the EU.

GX-ETS aims to achieve both a decarbonized society and economic growth. As it moves from a trial phase in which companies participate voluntarily to a mandatory phase, active discussions are taking place regarding the companies that will be included, market operations, and ensuring effectiveness. The full introduction of the ETS system will be 20 years after Europe and 10 years after South Korea, but emphasis is being placed on system design that takes into account the experience and knowledge of advanced countries and changes in the international competitive environment. This article summarizes the basic scheme of GX-ETS, the companies that will be included, and current issues.

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Current status of GX-ETS discussions

Basic Scheme

The GX League is a platform led by the Ministry of Economy, Industry and Industry (METI) that brings together industry, government and academia to bring about change in order to achieve carbon neutrality by 2050. The emission amount trading system that has been tested for implementation within the GX League is called GX-ETS. Under this system, the government Settings the total amount of GHGs that can be emitted over a certain period of time and allocates emission allowances to companies. Companies compare their actual emission amount with the allocated amount, and if their emission amount are below the allocated amount, they can sell the surplus, or if they exceed the allocated amount, they must purchase emission allowances from the market. This encourages efficient GHG reductions across the private sector through price formation via the market.

It will become mandatory from next fiscal year.

The first phase of GX-ETS (a trial period in which companies can participate voluntarily) began in fiscal year 2023. The system has been operated under a system in which companies voluntarily Settings and achieve their emission reduction targets, generating reduction credits (certifying that a company has reduced its GHG emission amount below a benchmark, which can be used to adjust emission amount).

From fiscal year 2026, the second phase will begin, when emission amount trading will become mandatory and fully operational. The government plans to amend the GX Promotion Act to require companies to formulate and submit plans that include emission reduction targets and other related matters aimed at achieving carbon neutrality by 2050. Companies will then be required to calculate and report GHG emission amount and retire emission allowances. ^*1)

^{What is the scope of emissions trading?}

Target company criteria

The target corporations are those with business establishments whose direct CO2 emission amount from a single establishment exceed 100,000 tons on average over the three fiscal years up to the previous fiscal year. The companies that fall into this category are primarily in large-scale emitting sectors such as Manufacturing, electricity, chemicals, cement, petroleum, steel, and automobiles, and although a detailed list has not been made public, it is expected that approximately 300 to 400 companies will be affected. It is estimated that emission amount from companies of this size account for approximately 60% of Japan's total ^*2) . Given that emission amount management and investment decisions are conducted on a group-by-group basis, parent and subsidiaries of affected corporations are permitted to jointly submit emission targets.

Obligations of target companies

When reporting the emission targets and actual emissions amounts that form the basis of emission allowances, target companies are required to have their data verified by a nationally registered verification organization. With the launch of the system approaching, applications for registration by registered verification organizations have already begun. Target companies will need to proceed with contracts with registered verification organizations that will be announced by the Ministry of Economy, Trade and Industry in preparation for the launch of the system. ^*3)

System design and schedule

In the second phase of the Japanese version of GX-ETS, which will begin in fiscal 2026, the government will determine the amount of allocations, and companies will be required to procure and sell emissions allowances through buying and selling on the market. With the system set to begin, the Ministry of Economy, Trade and Industry plans to publish various guidelines regarding allocations and calculation methods around the end of March 2026. Fiscal 2026 will be the period for calculating each company's emission amount, which will form the basis for allocation applications, and based on this, the first year's allocation will be implemented in fiscal 2027. The trading market is also expected to open around autumn 2027. ^*1)

Current discussion points

Range of credits handled

Eligible companies are obligated to retire an amount of emission allowances equal to their actual emission amount each fiscal year, including allowances allocated free of charge. Only when actual emission amount exceed the amount allocated free of charge do they need to procure emission allowances from the market to make up the shortfall. In such cases, they are permitted to use government-run J-Credits or JCM (Joint Crediting Mechanism) to cover part of the shortfall instead of emission allowances. In order to encourage pricing of emission allowances and ensure incentives for emission reductions for eligible companies, the amount of credits that can be used is capped at 10% of the actual emission amount for each fiscal year ( emission amount before deducting Invalid credits).

Price stabilization

Another important issue is how to ensure the stability of emissions allowance prices and market liquidity. As a price stabilization measure, the government plans to Settings upper and lower limits on trading prices and indicate the price range in advance, thereby increasing the predictability of trading prices and promoting decarbonization investment. This means that if the price of emissions allowances rises sharply, obligations can be fulfilled by paying a predetermined upper limit price, and if the trading price in the market falls below the lower limit price for a certain period of time or longer, a reverse auction will be held to adjust the amount of emissions allowances in circulation. According to an announcement by the Ministry of Economy, Trade and Industry on December 19, 2025, the upper limit price is expected to be around 4,300 yen/t-CO2 and the lower limit price around 1,700 yen/t-CO2 in fiscal 2026. ^*4)

Trading market management system

In order to promote fair price formation in emissions trading, the government will entrust the operation of the emissions trading market to the GX Promotion Organization, which is responsible for running the system.In addition, from the perspective of balancing the vitalization of trading with the maintenance of trading order, the government plans to allow market participants who are not subject to the system to participate as long as they meet certain requirements, such as having a certain amount of trading experience.

Third-party verification

To ensure the effectiveness of the system, third-party verification of emissions records will be mandatory. However, since it will take a certain amount of time for the third-party verification organizations and the business operators subject to the system to establish the necessary systems, the confirmation of emissions records will be limited for the first three years, and from fiscal year 2029 onwards, large-scale business establishments will be required to confirm reasonable standards in stages. Details of the guarantee standards, etc. will be considered separately from fiscal year 2026 onwards.

How to ensure an effective ETS

GX-ETS, which is scheduled to fully launch in fiscal 2026, is one of the ongoing trial-and-error efforts toward achieving carbon neutrality by 2050. Following a voluntary trial period, the second phase will see the transition to legal and mandatory implementation. Many Issue remain to be considered, such as market participant requirements and detailed procedures. However, if the system is properly designed, it has the potential to become a powerful measure to enhance the decarbonization competitiveness of Japanese companies. GX-ETS aims to encourage investment in low-carbon technologies, thereby strengthening corporate competitiveness. By supporting the introduction of renewable Energy, energy-saving investments, and the development of green technologies, the system aims to be an "effective system" that balances economic growth and decarbonization. We will continue to closely monitor detailed information and rule changes released by the Ministry of Economy, Trade and Industry (METI) ahead of the system's launch, as we strive to build an effective emission amount trading market.

We are accepting public comments on GX-ETS until February 14, 2026. If you are interested, please feel free to comment.
Public comments on the draft ministerial ordinance amending the Enforcement Regulations of the Act on Promotion of Smooth Transition to a Carbon-Free Economic Structure and the ministerial ordinance on finance and accounting of the Organization for Promoting the Transition to a Carbon-Free Economic Structure

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*1) Industry Structure Council emission amount Trading Scheme Subcommittee, "Interim Report (Draft) - Matters Concerning Implementation Guidelines for Allocation of Emission Allowances," Ministry of Economy, Industry and Industry, December 9, 2025 , www.meti.go.jp/shingikai/sankoshin/sangyo_gijutsu/emissions_trading/pdf/006_03_00.pdf
* 2) Cabinet Secretariat GX Promotion Office, "Summary of Issues Related to the emission amount Trading Scheme Contributing to the Realization of GX (Draft),"December 19, 2025
* 3) Ministry of Economy, Industry"emission amount Trading Scheme" website: www.meti.go.jp/policy/energy_environment/global_warming/ets.html
* 4) Industry GX Group, “Upper and Lower Price Limits in the emission amount Trading Scheme (Draft),”December 19, 2025, www.meti.go.jp/shingikai/sankoshin/sangyo_gijutsu/emissions_trading/pdf/007_03_00.pdf