Japan's new emissions trading scheme faces scrutiny amid slow decarbonisation progress

Japan has put its first mandatory emissions trading scheme into operation at a moment when the country can point to real progress on greenhouse gases, but not yet the pace needed to meet its long-term climate goals.

According to figures released in April by Japan’s Environment Ministry and the National Institute for Environmental Studies, the country’s greenhouse gas emissions in fiscal 2024 fell 1.9% from the previous year to a record low, with net emissions dropping below 1 billion tonnes of carbon dioxide equivalent for the first time. That was the third straight annual decline and left emissions 28.7% below fiscal 2013 levels. Officials said the fall was driven by lower energy use in manufacturing and greater reliance on renewable and nuclear power.

Even so, Environment Minister Hirotaka Ishihara has said the descent remains too slow, and the government still faces a steep task in reaching net zero by 2050. The latest policy response is GX-ETS, Japan’s home-grown emissions trading system, which has now moved from a voluntary trial into a compulsory framework under the broader Green Transformation agenda unveiled by former prime minister Fumio Kishida in 2023.

The scheme places Japan alongside the European Union, South Korea and parts of North America in using carbon markets as a tool for industrial decarbonisation. In theory, cap-and-trade systems force companies to account for their pollution by buying and selling emissions allowances, creating an incentive to cut carbon where it is cheapest to do so. Japan’s version is meant to work as one of two pillars of a wider carbon-pricing strategy, with a fuel surcharge on fossil fuels due to follow from fiscal 2028, according to Tatsuya Terazawa, chairman of the Institute for Energy Economics Japan.

Yet the system has already drawn criticism from climate groups and some analysts, who argue that it is too soft to reshape investment decisions in heavy industry. Teruyuki Ohno, executive director of the Renewable Energy Institute in Tokyo, said the programme as designed does little to push companies away from fossil-fuel generation or into cleaner technologies. Critics say the initial structure gives many participants a relatively easy route to compliance, with allocations tied to efficiency benchmarks and the option to use credits and offsets for up to 10% of emissions.

Around 400 companies, each averaging at least 100,000 tonnes of emissions a year, are covered by the scheme, which the government says accounts for roughly 60% of the country’s greenhouse gas output. But unlike more established systems, Japan’s framework does not impose an overall cap on allowances for the sectors covered, a feature opponents argue weakens the market signal. In the power sector, where coal and gas still dominate, the paid allocation of allowances will not begin until 2033, leaving major utilities such as JERA and J-Power with limited near-term pressure.

Business resistance helped shape that cautious approach. Keidanren, Japan’s powerful business federation, and major industry groups lobbied against a mandatory cap-and-trade model, pushing instead for what officials describe as a growth-oriented design. Terazawa argues that this reflects political reality rather than failure, saying the allowance levels were set around what companies can realistically improve in the near term.

Supporters of a tougher regime say Japan could have learned more from Europe’s emissions trading system, which has gradually tightened over two decades, or from South Korea’s more regulatory model. South Korea’s scheme covers a larger share of national emissions and is tied to more aggressive reduction goals. California and Quebec, meanwhile, have shown how linked carbon markets can help fund clean-energy spending and deepen the price on pollution.

For now, GX-ETS represents an important institutional step rather than a finished answer. Japan is reducing emissions, but the question for industrial decarbonisation professionals is whether the country has chosen a market signal strong enough to change capital allocation in steel, chemicals, paper and power. As critics warn, a carbon market that is too lenient may create compliance infrastructure without delivering the scale of emissions cuts needed for 2030 and beyond.