Japan’s Climate Commitment and Carbon Markets: A Comprehensive Overview

Japan, a major economic player, is navigating a new era of carbon markets to combat climate change. This article delves into Japan’s climate roadmap, challenges, and global carbon pricing context.

At the heart of the global battle against climate change are carbon markets, which assign a monetary value to carbon emissions, compelling businesses to reduce their environmental impact. This intricate system relies on carbon credits – governmental permits allowing companies to emit specific greenhouse gas amounts annually.

Japan’s Current Situation

As the world’s fourth-largest economy, Japan is making strides toward ambitious climate goals. A detailed exploration of Japan’s roadmap reveals a commitment to cutting greenhouse gas emissions by 46% from 2013 levels by 2030. Additionally, Japan aims to develop innovative technologies by 2050 to actively contribute to a carbon-free atmosphere.

Strategies and Initiatives

Japan is implementing a multifaceted approach to tackle climate change. The Green Growth Strategy, introduced in June 2021, outlines challenges and solutions in 14 specified fields crucial to sustainable development. This includes the establishment of a $15 billion Green Innovation Fund, supporting projects in areas like storage batteries, offshore wind power, next-gen solar cells, hydrogen, and carbon recycling.

Recognizing the need for collaboration, the Japan Climate Initiative, formed in 2018, unites 727 companies, local governments, and NGOs to accelerate climate action. Collaboration is deemed vital in achieving Japan’s ambitious target of becoming a carbon-neutral society by 2050.

Introduced in spring 2022, Japan’s ETS aims to make its economy greener while maintaining competitiveness. The government targets a 40% reduction in carbon emissions from 2013 levels by 2030, with a more ambitious goal of achieving net-zero emissions by 2050.

The ETS, implemented in five key stages, involves the creation of a carbon credit market at the Tokyo Stock Exchange (TSE), where existing carbon credits (J-credits) can be traded. The official ETS is set to launch in 2024, with guidelines for a fair and secure system introduced by 2026/27. By 2028/29, a tax on fossil fuel imports will be introduced, gradually increasing over the years. Finally, by 2033/34, auctions for emission allowances will enable power producers to purchase additional certificates.

Predictive Effectiveness

 To estimate Japan’s ETS effectiveness, we turn to existing systems worldwide. The European Emissions Trading System (ETS), inaugurated in 2005, stands as one of the world’s largest cap-and-trade systems. Lessons from the EU ETS and California’s comprehensive carbon pricing approach provide valuable insights for predicting Japan’s ETS effectiveness.

In 2023, Austria’s tax deductions related to investments in ecological initiatives come into place. As it stands, next year, companies who invest in sustainable projects will be subject to a tax credit of 10% capped at €1 million. Although the price cap limits the impact of said policy, the cap is expected to be increased once it comes into place. Moreover, self-produced and consumed photovoltaic energy will also be subject to tax cuts.

In conclusion, carbon markets are pivotal in Japan’s climate commitment through its new ETS. With a roadmap aligning with global climate goals, Japan is positioning itself as a leader in the fight against climate change. The effectiveness of its ETS, mirroring global models, holds promise for achieving ambitious emission reduction targets.

Read the full paper on our LinkedIn