Japan to launch mandatory emissions trading system in 2026

Japan is gearing up to implement a nationwide carbon emissions trading system targeting high-emission industries starting in fiscal 2026. The initiative, announced by the Ministry of Economy, Trade, and Industry, will make participation mandatory for companies emitting over 100,000 tons of carbon dioxide annually, affecting between 300 and 400 businesses across various sectors.

Key industries expected to fall under the program include steel, electricity, aviation, logistics, and food manufacturing. The government will assign annual emissions quotas to each company, and exceeding these limits will result in penalties. Conversely, businesses that emit less than their quota can sell surplus allowances to others.

The emissions trading system, a form of carbon pricing, is a globally recognized strategy to combat climate change by incentivizing companies to reduce their carbon output. In Japan, a trial version of the system has been running since fiscal 2023 under the Green Transformation (GX) League, but participation has so far been voluntary and limited.

To enforce the program, the government plans to submit a bill to revise existing laws during the regular Diet session next year. Full-scale trading under this framework is expected to begin in fiscal 2027. Companies eligible for the program will be determined based on their average emissions over the past three years, with those exceeding 100,000 tons per year required to participate.

Quotas will be allocated annually, and companies that exceed their limits must purchase additional allowances to cover the excess. Financial charges or other penalties will be imposed on firms that fail to comply even after purchasing extra allowances.

The exact methodology for calculating emissions quotas is still under development, with further details expected to be finalized in the coming months. As Japan transitions to this mandatory system, the initiative is expected to play a significant role in the country’s efforts to achieve its carbon neutrality goals and reduce its impact on global warming.