This article was written as of January 2024.

A voluntary emission trading system called GX League ("J-ETS") was preliminarily launched in September 2022 and was officially launched in April 2023 based on "Carbon Credit Report" published by Ministry of Economy, Industry and Trade ("METI") in June 20222. Compared to other emission trading schemes (e.g., EUETS), J-ETS has unique aspects as set out below:

2Please refer to our newsletter published in June 2022 for further details in connection with Carbon Credit Report.

1. Key features of J-ETS

■ It is understood that J-ETS is a platform in which any company/financial institution in Japan can join and contribute to drafting rules in connection with carbon credit trading in Japan. Although it is voluntary to participate in J-ETS, as of November 30, 2023, more than 600 companies from many industries, such as manufacturing, service, and financial institution, have participated in J-ETS, the total amount of greenhouse gasses emitted by such participants are roughly 40% of the total amount of greenhouse gasses emitted by Japan as a whole.

■ Although J-ETS is a voluntary scheme in Phase 1 (i.e., from 2023 to 2025), it is expected that participants of J-ETS may be subject to more stringent rules in Phase 2 (i.e., from 2026 to 2032). Although it is still subject to review of the detailed rules, the basic concept of J-ETS are as follows:

• ● J-ETS participants will be required to set their own targets for direct/indirect emissions reductions in Japan and to calculate and report their actual amount of emissions.
• ● Sell-side: From 2030 onward, allowances will be allocated to certain J-ETS participants who will achieve GHG reduction/removal at a level which is higher than NDC equivalent (e.g., 46% GHG reduction by 2030). After the end of October 2024, the trading of allowances will be launched and such J-ETS participants will be able to sell such allowances to other J-ETS participants.
• ● Buy-side: If certain J-ETS participants will not be able to achieve GHG reduction/removal at a level which is higher than NDC equivalent, such J-ETS participants will need to take certain actions (including off-setting their GHG emissions against "eligible carbon credits" (including J-credits, JCM credits)).

■ Separate from J-ETS, an emission trading platform3 ("Carbon Trading Markets (TSE)") has been officially launched at Tokyo Stock Exchange in October 2023. It can be said that Carbon Trading Markets (TSE) is a trading market in order to (a) activate carbon credit tradings in Japan and (b) provide price indications to various players in Japan/outside of Japan. The differences between Carbon Trading Markets (TSE) and J-ETS are as follows:

• ● As of November 2023, only J Credits are traded in Carbon Trading Markets (TSE) on the Tokyo Stock Exchange.
• ● In order to become a participant of Carbon Trading Markets (TSE), it is necessary to apply to and be registered with the Tokyo Stock Exchange.

3Please refer to JPX website below for further details.

2. Expected Timeline

It is expected that J-ETS will be developed in a timeline set out below:

■ From April 2023 to March 2026: Phase 1 (J-ETS will be operated on a voluntary basis);

■ From April 2026 to March 2033: Phase 2 (J-ETS will be operated with certain compliance obligations); and

■ After April 2033: Phase 3 (J-ETS will be operated with further developments (e.g., auction of allowances in energy sector)).

3. Carbon credits to be traded at J-ETS

J-ETS plays a key role in Japanese carbon markets and one of the key questions is what kind of carbon credits can be traded at J-ETS. It is understood that eligible carbon credits at J-ETS are currently limited to J-credits and JCM credits only, but there are on-going discussions to expand the scope of eligible carbon credits at J-ETS. Development of such discussions should be carefully watched in order to assess demands of various carbon credits by Japanese companies.