Publication date: Oct 5, 2026
Key Takeaways
Japan’s GX-ETS is moving toward full implementation, with mandatory participation for large emitters beginning in FY2026 and a dedicated emissions allowance trading market planned for fall 2027. Power generators are expected to become subject to mandatory participation from Phase 3 in FY2033.
For the power sector, the key impact will be on pricing and investment. Generators may be able to pass GX-ETS compliance costs through wholesale electricity bids, while the planned fossil fuel levy from FY2028 could add further cost pressure across wholesale and retail electricity markets.
Japan’s GX-ETS Market Design: Implications for Power Prices and Market Dynamics
Japan has introduced the Green Transformation Emissions Trading System (GX-ETS) to accelerate its decarbonization process. Phase 1, the voluntary phase, began in FY2023. Phase 2 started in April 2026, introducing mandatory participation for large emitters. A dedicated emissions allowance trading market is scheduled to launch in fall 2027, with its trading rules now taking shape. The system then moves to Phase 3 from FY2033 onward, which requires even stricter regulations over CO₂ emissions. It is from this final phase that power generators will become subject to mandatory participation in the market, bringing the GX-ETS into full operation.
Who is subject to it, and what has commenced so far?
The GX-ETS will cover companies with average annual direct emissions of 100,000 tonnes of CO₂ or more over a three-year period. Emissions allowances will be allocated using either industry benchmarks (for about 90% of participants) or ‘grandfathering.’ For instance, for manufacturers, benchmarks will measure CO₂ emissions per unit of production. Each company’s performance against its benchmark will determine its allowance allocation and compliance burden. During FY2026, covered entities must calculate their actual emissions, notify the government that they are subject to the scheme, and submit a transition plan (METI), preparing themselves for the market launch.
Market design is taking shape
Recently, discussions on ETS market design have accelerated across expert meetings, revealing some of the core structure of the planned market.
Passing through the cost
Generators could be allowed to reflect GX-ETS compliance costs in wholesale electricity bids in the same fiscal year in which they arise. Generators could estimate free allowances and emissions by the end of the preceding fiscal year, allowing them to reasonably estimate costs.
Participation by non-covered entities to boost market liquidity
The emissions allowance market is primarily intended to help covered entities meet their compliance obligations. Participation by other (non-covered) entities, will therefore be kept to a minimum. However, businesses expected to facilitate trading, known as ‘market makers,’ will also be allowed to participate. Their eligibility will take into account their trading records and other relevant experience in the Tokyo Stock Exchange’s carbon credit market (METI).
Trading method, schedule, and price limits
The market will use a call auction to match orders, operating five days a week with one auction daily at 3:00 p.m. This will concentrate orders to avoid the possibility of low liquidity as the market gets going. To prevent erroneous orders, price limits will be set at ±90% of the reference price—the most recent transaction price.
Further market design discussions and timeline
The expert committee will continue discussions on the following topics through to the end of 2026 to refine the market design:
- Conditions for triggering price floor and ceiling measures
- Disclosure of allowance allocations and related information
- Measures to encourage allowance sales
- Market monitoring and enforcement
- Calculation methods for the fossil fuel levy.
Among these, the fossil fuel levy is planned for introduction in FY2028 for importers of oil, coal, and natural gas. The levy will be imposed based on CO₂ emissions from imported fossil fuels, and the costs are expected to be reflected in wholesale electricity prices and retail electricity rates, therefore its calculation methods will be crucial. The levy level, together with the GX-ETS, will affect power generators’ capacity development and investment plans.
Market participants will need to closely monitor the development of the GX-ETS as the remaining market rules take shape. Its impact will extend beyond covered entities: the ability of generators to pass through compliance costs in wholesale prices and bilateral contracts means the scheme could directly affect procurement costs for retailers and traders, and ultimately electricity prices for consumers. The interaction between the GX-ETS and the fossil fuel levy will therefore become an increasingly important factor in power pricing and investment decisions.
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