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Making GX-ETS a Truly Effective Carbon Pricing System Part 4 Comments on the Government’s Proposal for GX-ETS Policy Design

Akiko Hirose, Research Staff, Renewable Energy Institute / Teruyuki Ohno, Executive Director, Renewable Energy Institute

12 February 2026

in Japanese

(originally published in Japanese on 29 January 2026)

On 29 January 2026, Renewable Energy Institute submitted its public comment to the Government of Japan on the proposed policy design of the GX-ETS1.

This comment examines five key issues related to the “Implementation Guidelines” for emissions allowance allocation and also the proposal for upper and lower price limits for emissions allowances under Japan’s emissions trading system, which will become mandatory from FY2026.

Below are excerpts of our opinions and rationales supporting them.

[Reference]
e-Gov (Japan), Public Comment on the GX-ETS policy design proposal (in Japanese)

  1. GX-ETS refers to Japan’s Green Transformation Emissions Trading System, a government-led emissions trading system introduced as part of Japan’s GX (Green Transformation) policy framework.

1. Relationship between the Total Allowance Volume (Cap) and National Emissions Reduction Targets

Opinion
Although GX-ETS does not specify an overall cap on emission allowances, the government should clarify from the initial stage of allowance allocation how the total volume of allowances aligns with Japan’s emissions-reduction targets set out in its nationally determined contribution (NDC), so that the system effectively contributes to achieving those targets.

Rationale
Unlike typical emissions trading systems adopted in many other countries, GX-ETS does not involve the Japanese government setting an explicit overall cap on emissions allowances. In addition, because neither projections nor target levels for emissions reductions under the system have been made explicit, the current proposal leaves the relationship between the total volume of allowances and the achievement of Japan’s emissions-reduction targets under its NDC unclear.

At the same time, covered entities are required to submit “Transition Plans” to the government prior to applying for allowance allocation. These plans are required to include projected emissions (targets) for FY2026–2030, annual emissions performance, capital investment plans and outcomes, and other corporate strategies toward achieving carbon neutrality, as stipulated in the summary documents of the Subcommittee on the Emissions Trading System.

In the government’s strategic document “GX 2040 Vision”, approved by the Cabinet in February 2025, covered entities are expected to present ambitious targets, taking into account their social responsibility as major emitters, sectoral characteristics, progress in GX-related initiatives in international markets, and the government’s NDC toward FY2030. The Vision emphasizes that such external commitments by companies are intended to promote the steady achievement of decarbonization investment.

However, without the government presenting concrete emissions reduction targets or clarifying how allowance allocation under GX-ETS aligns with the NDC, covered entities cannot determine the level of emissions reductions required to meaningfully contribute to national targets. This lack of clarity risks undermining the system’s effectiveness by limiting the ability of companies to act proactively.

[Source/Reference]

2. Benchmarks for the Power Generation Sector

Opinion
In principle, a single, unified benchmark should be adopted to all power generation sources, regardless of technology or fuel type, from FY2026. At a minimum, such a benchmark should apply to thermal power generation as a whole, rather than be differentiated by fuel type. In addition, a process is needed to verify whether the emissions reduction effects of GX-ETS in the power sector are consistent with Japan’s NDC and the Strategic Energy Plan.

Rationale
Under the current proposal, fuel-specific benchmarks fully apply to fossil-fired power generation until FY2028. In FY2029 and FY2030, a unified benchmark for thermal power generation is partially introduced and combined with fuel-specific benchmarks. However, this approach is not consistent with the scenario presented in Japan’s Strategic Energy Plan, which envisions an almost fully decarbonized power sector by FY2040, including the phase-out of coal-fired power generation, with an emissions intensity of 0.00–0.04 kg-CO₂/kWh.

Japan is already 10–20 years behind other major countries and regions in introducing emissions trading, leaving limited time to achieve its NDC targets for 2035/2040 and carbon neutrality by 2050. Moreover, GX-ETS is designed primarily around free allocation of allowances, with auctioning in the power generation sector to be introduced only gradually from FY2033 onward.

Given this timeline, any transitional measures introduced at the early stage of the system must be carefully calibrated in both duration and stringency. Excessive accommodation of thermal power generation, such as the continued protection of coal-fired power, would weaken the effectiveness of the ETS and risk delaying decarbonization in the power sector, including fuel switching and plant retirement. As discussed in the Power Generation Benchmark Working Group (3rd meeting) under the ETS Subcommittee, such an approach could also reduce Japan’s attractiveness as an investment destination from an international investment perspective.

[Source/Reference]

3. Use of Credits

Opinion
The use of credits under GX-ETS should be improved in both quantitative and qualitative terms.

Rationale

  1. Based on Japan’s total CO₂ emissions in FY2023 (approximately 989 million t-CO₂), the system would allow the use of up to around 60 million t-CO₂ worth of credits annually under the proposed 10% limit. However, according to publicly available data from METI and related databases, the volume of J-Credits issued over the past three years has been only around 1–1.5 million t-CO₂ per year. Even when combined with credits issued under the Joint Crediting Mechanism (JCM), which reached its historical maximum of around 0.6 million t-CO₂ in 2023, the total annual supply remains below 2 million t-CO₂. This represents a significant gap between the theoretical upper limit of credit use and the actual availability of credits.
  2. In addition, credit quality has become an increasingly important issue in recent years, particularly in the context of international discussions on the implementation rules for Article 6 of the Paris Agreement and the standardization of voluntary carbon markets. Although Japan applied for the eligibility of J-Credits under the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) established by ICAO, J-Credits are currently not approved for use. The assessment conducted at the time of application in 2023 identified partial inconsistencies across multiple criteria, including permanence, additionality, “do no net harm,” and the realism and credibility of baselines. These findings indicate that there remains substantial room for improvement in the quality of the crediting system.

[Source/Reference]

4. Strengthening Benchmark Levels

Opinion
The pace at which benchmark (BM) levels are strengthened should be accelerated.

Rationale
The proposed pace of benchmark tightening—raising the benchmark from the top 50% to the top 32.5% over a five-year period—is based on historical improvements in energy efficiency over the past decade under Japan’s Energy Conservation Act. This approach implicitly assumes that future improvements in energy efficiency will continue at the same pace as in the past.

However, at COP28, countries, including Japan, agreed to both triple global renewable energy capacity and double the rate of energy efficiency improvements. Furthermore, because benchmarks under GX-ETS are defined in terms of emissions intensity, strengthening benchmark levels can be achieved not only through energy efficiency improvements but also through increased deployment of renewable energy and other decarbonization measures.

In light of these considerations, the proposed benchmark trajectory is insufficient and does not reflect the level of ambition required under current international commitments and domestic decarbonization pathways.

[Source/Reference]

5. Allowance Price Ceiling

Opinion
To promote emissions reductions, including fuel switching from carbon-intensive coal-fired power to lower-emitting gas-fired power generation, the price ceiling level should be raised promptly after the start of the system.

Rationale

  1. The initial price ceiling at the start of the system has been set at JPY 4,300 per t-CO₂. According to Ministry of Economy, Trade and Industry (METI)’s presentation material for the ETS Subcommittee (7th meeting), this level is explained as reflecting the carbon price required to incentivize fuel switching from inefficient coal-fired power plants to high-efficiency LNG-fired power plants. The underlying fuel switching cost is calculated based on the median of time-series data from 2016 onward, covering the past ten years (Fig.1). This dataset includes 2022 and 2023, during which gas prices declined sharply relative to coal prices, contributing to a lower median value. By contrast, fuel switching costs prior to 2016 were substantially higher. As a result of this time span setting, the price ceiling remains at JPY 4,300 per t-CO₂.

Fig.1 Basis for Allowance Price Ceiling in FY2026（METI）

Source: Ministry of Economy, Trade and Industry (METI), "Proposed levels of the upper and lower limit prices for emissions allowances under the GX-ETS” (December 19, 2025), Subcommittee on the Emissions Trading System (7th meeting), Document 3, P.10 (in Japanese), Extracted and translated by Renewable Energy Institute.

When future coal and gas procurement costs are considered instead of historical data, the picture changes significantly. According to BloombergNEF data based on fuel cost projections for the next five years, a carbon price of at least JPY 8,400 per t-CO₂ would be required in 2026 to enable fuel switching from coal to gas in Japan’s power sector. While coal prices are expected to decline, LNG prices are projected to rise moderately, indicating the need for a substantial upward revision of the proposed price ceiling.

Figure 2 presents an estimate of power generation costs incorporating the proposed GX-ETS price ceiling, showing that, as the timeline approaches 2030, the cost gap between coal-fired and gas-fired power generation widens. By 2030, a carbon price of approximately JPY 16,000 per t-CO₂ would be required for generation costs to reverse, making a shift toward lower-emission power sources feasible. Accordingly, the currently proposed price ceiling is insufficient to promote decarbonization in the power sector.

Fig.2 Estimated Power Generation Costs for Coal- and Gas-Fired Power (CCGT)
Based on the Proposed GX-ETS Price Ceiling (JPY/kWh, 2026-2030)

Source: Created by Renewable Energy Institute based on BloombergNEF, Levelized Cost of Electricity 2025 (February 2025) [subscription required]

  1. Furthermore, the price ceiling for FY2026 is lower than levels previously identified as effective for achieving meaningful emissions reductions, and the gap with EU-ETS prices is substantial. The projected price ceiling for FY2030 (JPY 4,840 per t-CO₂ + inflation) also remains far below the carbon price level of USD 130 by 2030 suggested for advanced economies in the International Energy Agency’s Net Zero Scenario. From the perspective of how GX-ETS will be evaluated internationally, the proposed price ceiling cannot be regarded as appropriate.

[Source/Reference]


 

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