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Japan to test carbon credit market feasibility in 2022

06 August 2021

Japan's Ministry of Economy, Trade and Industry (METI) is planning to test the feasibility of a nationwide carbon credit market from 2022 as part of efforts to achieve carbon neutrality by 2050, according to an interim report from a ministerial study group published 5 August.

Under this proposal, which is yet to be adopted, a Carbon Credit Market (CCM) would be formed. Companies would participate on a voluntary basis.

Japan's capital city of Tokyo introduced a regional emissions trading scheme in 2010, the first such cap-and-trade scheme in Asia, but a non-localized emissions trading program has so far eluded the country.

Under a national trading program, participants would be able to trade carbon credits to achieve their emissions targets or monetize unused quotas. Transaction prices for the carbon credits would be published by an exchange.

Setting a price on carbon and launching an emissions trading program is part of Japan's push to decarbonize its economy to net-zero levels by mid-century. The country has an interim goal of a 46% CO2 emissions reduction by 2030.

According to the METI report, the group of participating companies, tentatively named as the "Carbon Neutral Top League," would be required to pledge and disclose their emissions reduction targets in accordance with methodology set by the government. And their performance would be reviewed by the authorities annually.

The tradable carbon credits would be created from either emissions reductions by participants or projects that generate carbon credits, including existing domestic credit schemes or overseas voluntary credits that meet recognized international standards.

The study group also identified the need to accelerate growth in existing private sector carbon markets, including the non-fossil fuel value trading market, J-Credit scheme, and the Joint Crediting Mechanism (JCM).

The non-fossil fuel value trading market allows companies to trade certificates that were originally issued by the government for electricity generated from renewable energy sources. The J-Credit scheme is for GHG emissions reduced or removed by forestry projects or energy-saving devices. The JCM covers carbon credits generated by Japanese companies from overseas initiatives.

To realize its interim goal, "the Government of Japan will work to maximize utilization of decarbonized power sources, such as renewable energy, and take incentive measures sufficient for inducing investment by companies," Prime Minister Yoshihide Suga said at the Leaders Summit on Climate in April.

In a 19 May online discussion with investors, Suga administration officials recognized the difficulties sectors like steel and power generation face in shifting to a business model that relies on clean sources of energy. Japan was the world's fifth-largest consumer of energy in 2019, with fossil fuels—petroleum, natural gas, and coal—contributing 87% to the mix, the US Energy Information Administration reported in November 2020.

During the same discussion, Fumihiro Kajikawa, director of METI's environmental economy office, said a carbon price would be a disincentive for companies with a heavy carbon footprint, while recognizing that the challenge of decarbonizing is particularly hard for hard-to-abate sectors.

Japan has had a carbon tax for the fossil fuel industry since 2012 of about ¥289 per metric ton of carbon ($2.62/mt) in addition to separate taxes that the country imposes on the coal, oil, and gas sectors, according to an April 2021 paper examining the impact of Japan's taxes on product prices. Other sectors of the economy are not similarly taxed.

Meanwhile, the government-study group also acknowledged the importance of carbon footprint tracking technology. Development in this area is necessary to enhance the country's international competitiveness.

The study group said it would proceed next with the design of the carbon credit trading system and development of a carbon footprint infrastructure, among other concerns.

--Original reporting by Lujia Wang, OPIS; contributions by Amena Saiyid, Net-Zero Business Daily.

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