1. Introduction

The Japanese Government has set targets to achieve carbon net-zero in 2050 and reduce greenhouse gas ("GHG") emissions by 46% in 2030 as compared to 2013, but there are only 6 years left until 2030. It is believed that carbon pricing, which means putting a price on greenhouse gases, is effective for promoting the reduction of greenhouse gas emissions at the government level and the private level. As part of this, various measures have been taken such as launching a "GX League" and issuing GX Economy Transition Bonds. Offsetting by carbon credits is also beneficial when taking into consideration the reduction of emissions in the product supply chain (see below, "Scope 3"), and the use of carbon credits is expected to promote decarbonization investment broadly.

On the other hand, some people criticize the use of carbon credits as a greenwashing measure (that is, achieving environmental value without substance). Therefore, it is necessary to take into consideration risks such as greenwashing risks before proceeding with carbon credit trading.

In this newsletter, we will canvass some recent developments in Japanese and overseas carbon credit markets and examine points to be noted when Japanese companies make use of a carbon credit trading mechanism.

2. Recent developments in carbon credit markets in Japan

2.1. Overview

Japanese carbon credit markets are mainly of two types, described below

  • Green Transformation (GX) League: This includes a voluntary emissions trading system in Japan ("J-ETS"). It imposes levies and onerous emission allowances as economic burdens and provides economic incentives for activities to reduce GHG emissions, such as allowing carbon credits to be purchased and sold upon the reduction of GHG emissions.
  • Subsidies, etc., based on the Act on the Promotion of a Smooth Transition to a Decarbonized Growth-Oriented Economic Structure (the "GX Promotion Act") backed by GX Economy Transition Bonds, etc.: Japanese companies need to promote decarbonization by their actions before relying on offsetting by carbon credits and are required to make an initial investment to promote the decarbonization of various industrial activities. This initial investment is promoted by the government through using subsidiaries, etc.

Based on the above, we will explain recent developments in each sector, below.

2.2. Recent developments in GX League

2.2.1. Schedule

 

Based on the "Carbon Credit Report" published by the Ministry of Economy, Trade and Industry in June 2022, the "Green Transformation (GX) League" was officially launched in April 2023. The schedule of GX League is as follows

  • Phase 1 (from FY 2023 to FY 2025): Experimental period (however, after the end of October 2024, the trading of allowances (chouka-sakugenwaku) will be launched)
  • Phase 2 (from FY 2026 to around FY 2032): Official operation of the emissions trading markets
  • Phase 3 (from around 2033): Further developments

2.2.2. Disclosure of GHG reduction targets via dashboard

On January 16, 2024, GX League opened a "GX Dashboard" on its official website displaying each participating company's GHG reduction targets were announced. In the GX League, as a premise of J-ETS, participating companies set their targets for reducing emissions and take measures to achieve them. The GX Dashboard serves as a platform for information disclosure for the participating companies to disclose their targets for reducing emissions or measures to reduce supply chain emissions. The total amount of direct emissions in FY 2021 of companies that have already submitted data accounted for more than 50% of GHG emissions in Japan. From next year onwards, each company's actual amount of emissions will be disclosed.

2.2.3. Eligible Carbon Credits

Primarily GX League participants shall reduce GHG emission by their own actions (e.g., use of renewable energies). However, if it is difficult or cost too much to achieve their GHG reduction targets by their own actions, GX League participants is entitled to reduce GHG emission by off-setting against "eligible credits". Currently "eligible carbon credits" include:

  • J-credits1 which are created in connection with GHG reduction/removal activities within the territory of Japan.
  • JCM credits2 which are created in connection with GHG reduction/removal activities within the territory of the host country with whom Japan has a bilateral arrangement.

2.2.4. Rule-making activities by GX League

In the GX League, various working groups are formed by the companies, etc. participating in the GX League to disseminate a variety of information, not only on carbon credits, but on measures to promote decarbonization. The following are typical examples:

  • On October 2, 2023, three Working Groups, including the "Eligible Carbon Credits Working Group", were formed to discuss the definition of Eligible Carbon Credits that have been available since Phase 1 of J-ETS and the certification of these credits.
  • On December 3, 2023, the GX Business Working Group announced the results of leveraging avoided emissions at COP28.
  • On December 27, 2023, the final report of the "Working Group for Consideration of Voluntary Carbon Credit Disclosure" was released. In this report, favorable measures taken by Japanese companies to expand the voluntary carbon credit markets are highlighted, which will be helpful when dealing with voluntary carbon credits.

2.3. GX Economy Transition Bonds

Pursuant to Article 7 of the Act on the Promotion of a Smooth Transition to a Decarbonized Growth-Oriented Economic Structure (the "GX Promotion Act") that came into effect on June 30, 2023, the government began to issue Decarbonized Growth-oriented Economic Structure Transition Bonds3 ("GX Economy Transition Bonds") in FY 2023 and will continue to issue these bonds for ten years until FY 2032 as a prior investment instrument to achieve GX. GX Economy Transition Bonds are designed to help promote private investment in projects that contribute to the reduction of GHG emissions and economic growth, a goal that is otherwise difficult to realize by initiatives taken by private companies alone.

According to some reports, the government will require companies that receive state support to participate in J-ETS as a precondition for subsequently receiving government support for the decarbonization measures funded by GX Economy Transition Bonds For more information, we will need to wait for follow-up reporting by the government, but this mechanism should provide an incentive for non-participating companies to consider participating in GX League.

2.4. Utilization of green financing

Separate from the government's support for decarbonization as funded by GX Economy Transition Bonds, various types of green financing, such as green bonds, green loans, transition bonds and transition loans, are provided by each financial institution. These are expected to deal with greenwashing risks and promote decarbonization investment by individual companies by complying with and implementing such guidelines.

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Footnotes

1. https://japancredit.go.jp/english/

2. http://carbon-markets.env.go.jp/eng/jcm/index.html

3. https://www.mof.go.jp/english/policy/jgbs/topics/JapanClimateTransitionBonds/index.html

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.