Japan: GX-ETS – mandatory emissions trading from fiscal year 2026, a price band of 1700–4300 yen

The Japanese emissions trading system GX-ETS (Green Transformation Emissions Trading System) is a mandatory cap-and-trade system, similar to the EU ETS. According to the law firm Anderson Mori & Tomotsune, the act on promoting a smooth transition to a decarbonised, growth-oriented economy (the GX Promotion Act) was amended on 28 May 2025, and GX-ETS was to start on 1 April 2026. Transatlantic Law confirms that the system began full operation on 1 April 2026, moving from the voluntary GX League to a legally binding regime. Fiscal year 2026 is, however, a preparatory year: companies measure and report emissions while the authorities finish the market rules. Allowance trading is planned for autumn 2027.

Who is covered

Participation is mandatory for entities called Large Emitters, whose average annual direct CO₂ emissions (Scope 1) over the last three years are at least 100,000 t (Article 33 of the amended act). The government estimates that this will cover about 300–400 companies, including Nippon Steel, Toyota Motor and JERA, responsible for almost 60% of Japan's greenhouse gas emissions. Transatlantic Law notes that for now the system covers direct emissions, not indirect emissions (Scope 2) or the supply chain (Scope 3).

Allocation of allowances

The Minister of Economy, Trade and Industry allocates allowances to Large Emitters free of charge, in line with an allocation policy that takes account of sector specifics (Article 34). According to AMT, two methods are used: sector benchmarks (where the specifics of energy-intensive sectors need to be taken into account) and so-called grandfathering, i.e. reliance on the company's historical emissions, permitted where benchmarks are hard to establish. Allocations take into account earlier reduction efforts, the risk of production relocating abroad (additional allowances for producers of traded goods), spending on GX-related R&D and changes in activity level (an adjustment within a ±7.5% band). Draft implementing regulations and the allocation policy were published for consultation on 16 January 2026.

Trading and the price band

Allowances can be traded on a market administered by the GX agency (GX Accelerating Agency, Articles 38, 77 and 111). Companies exceeding their allocation must buy allowances or pay a “compensation charge” for unsurrendered allowances, calculated as the volume of unsurrendered allowances × the reference maximum price × 1.1 (Article 41). METI set in December 2025 a price band for the first year of the system: 1700 yen (about 11 USD) per tonne of CO₂ as the lower bound and 4300 yen (about 27 USD) as the upper bound. According to Eco-Business, the upper bound corresponds to the estimated cost of switching from coal to LNG in power generation, and the lower one is based on historical prices of J-Credits traded on the Tokyo Stock Exchange carbon market. From fiscal year 2027 both bounds are to rise each year by the inflation rate plus 3 percentage points. If prices remain below the lower bound for long, the authorities may reduce the number of allowances in circulation.

Allowance register and security

According to AMT, ownership of allowances is determined on the basis of entries in the allowance account ledger (Article 46), and a transfer takes effect only once the increase is recorded in the acquirer's account (Article 51). A good-faith acquirer who has received recorded allowances can acquire them effectively, unless they acted in bad faith or with gross negligence (Article 54). The amended act currently contains no provision prohibiting the creation of pledges over allowances. Transatlantic Law adds that the system provides for both a reference maximum price and a standard price for adjustments, which in fiscal year 2026 were set at 4300 and 1700 yen per tonne respectively, with a mechanism for gradual adjustment in subsequent years. Eco-Business notes that companies short of allowances can meet their obligation by paying the upper price instead of buying permits on the market.

Offsets

Large Emitters exceeding their allocation may use external credits – J-Credits and credits from the Joint Crediting Mechanism (JCM) – to cover up to 10% of actual CO₂ emissions (AMT, Transatlantic Law). According to the report of the Financial Services Agency working group of 20 June 2025, the carbon credit market requires, among other things, information disclosure and prevention of conflicts of interest.

What about biogas

The threshold of 100,000 t CO₂ a year means that the system itself will not cover typical biogas plants. Their role may emerge as a source of credits or as a way of reducing fossil fuel use at plants covered by the ETS. The detailed rules for recognising such credits should be checked in METI documents.