≫ Appendix 1
≫ Appendix 2
≫ Appendix 3
Climate Integrate has released a new report “What’s GX-ETS?”
In April 2026, Japan will launch an Emissions Trading System (GX-ETS). In this report we have outlined the structural mechanisms of the Japanese system and provide an in-depth analysis of carbon price projections and their policy implications.
Key Findings
Phase 2
- Mandatory participation, starting in FY2026, following the voluntary Phase 1.
- Core policy for carbon neutrality, targeting 300–400 companies covering about 60% of Japan’s greenhouse gas emissions.
- Bottom-up approach without an overall GX-ETS emission cap. The degree of contribution toward achieving the national GHG reduction target (NDC) is unpredictable.
- Free emissions allocation, determined based on benchmark standards of top-tier efficiency within each industry. Sector-specific adjustments and considerations may limit reductions toward FY2030.
- Weak incentive for emission reductions due to free allocation, various concessions, low price ceiling/floor, and ability to use external credits (offsets) for up to 10% of actual emissions.
Phase 3
- Allowances for the power sector: From 2033, emissions allowances for power generators will shift to paid allocation, imposing costs on CO₂ emissions. Other industries will continue to receive free allocation.
- Funding for GX Bonds: Revenue from paid allocation will be used to redeem the GX Economy Transition Bonds issued by the government.
- Upper limit constraints: Annual collection amounts for the Fossil Fuel Surcharge and the Specified Business Operator Contribution are constrained by an upper limit, to fall within the range of the reduction in revenue from the Petroleum and Coal Tax and the Renewable Energy Surcharge.
- Low carbon prices: There is a possibility of an initial shortfall of funds for the redemption of GX Bonds until around 2035.
Climate Integrate focuses on two pivotal areas regarding this system, an essential climate policy to drive Japan’s decarbonization.
- Mitigation efficacy: The actual reduction impact during the second phase.
- Carbon pricing dynamics: The relationship between carbon prices and the redemption of GX Bonds.
Through this analysis, the report clarifies the unique characteristics of the Japanese approach.
Kimiko Hirata, Executive Director of Climate Integrate and lead author: “Japan’s corporate decarbonization is finally moving from a voluntary framework to a government-led allocation system. However, without an aggregate emission cap, it remains unclear if the GX-ETS can deliver the emissions cuts required to meet Japan’s 2030 and 2035 targets (NDC). Ensuring transparency to track progress will be vital.”
Yuka Manabe, Corporate Analyst and contributor to the report: “The government’s benchmarks include adjustments and considerations for the industry. In the power sector, efficiency standards are currently categorized by fuel type—such as coal versus LNG—and remain relatively weak, providing little incentive for fuel switching. Our simulations indicate that under current GX-ETS requirements, reductions could actually be more lenient than companies’ own commitments, potentially even allowing emissions to increase. It is therefore critical to establish a mechanism that ensures alignment between this system and Japan’s NDC.”
Hirata concluded by emphasizing the opportunity for the industry: “The GX-ETS is a system to help companies that are currently less efficient to enhance competitiveness. It is an opportunity to strengthen corporate resilience and emerge as global leaders in the era of decarbonization.”
