Publication date: Sept 1, 2025 Japan Prepares for Introduction of Emissions Trading System (ETS)

Japan Prepares for Introduction of Emissions Trading System (ETS)

From FY2026, Japan’s Emissions Trading System (ETS) is expected to begin operation, covering businesses with direct CO2 emissions of 100,000 tons or more. Under the Subcommittee on the Emissions Trading System, detailed discussions have begun regarding benchmark and grandfathering methods for baseline activity levels and emissions, as well as calculation methods, treatment of new or decommissioned facilities, and adjustment procedures in the event of activity fluctuations. Those affected are required to hold “emission allowances” equivalent to their annual emissions. In the ETS framework, these allowances function as tradable assets that can be exchanged economically with other companies; therefore, the method of allocating allowances to covered entities is a critical point of debate.

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Framework and Benchmark Development

In Japan, the ETS trial period (Phase 1) began in FY2023. For Phase 2, starting in FY2026, the baseline activity level (benchmark method) will be calculated based on the three most recent fiscal years (for FY2026, this means FY2023–2025). During this period, if an entity’s activity level changes by more than a threshold of 7.5% compared to the baseline year, as measured by the average of the past two years, the baseline activity level will be updated to reflect that two-year average for allocation in the following year.

Sector-specific working groups have started detailed discussions regarding benchmark methods. In July, the first meeting of the Manufacturing Benchmark Working Group was held, where benchmark proposals were presented for three sectors, namely, petroleum refining, petrochemicals, and pulp and paper manufacturing. More recently, the first meeting of the Power Generation Benchmark Working Groupwas convened, announcing plans to collect data from power producers with thermal generation facilities on electricity output and CO2 emissions for the three fiscal years through 2024.

Discussions on settling benchmark levels across different sectors are expected to accelerate toward the end of this year in preparation for the system’s introduction in April next year.