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.