METI begins detailed design of emissions trading scheme; focus on allocation framework
On July 2, the Ministry of Economy, Trade and Industry (METI) began discussions on the detailed design of Japan’s emissions trading system, “GX-ETS,” which is set to be fully launched next fiscal year. On the same day, METI clarified the definition of “closely related parties” that jointly report CO₂ emission targets, the upper limit on the use of carbon credits, and the requirements for registered verification bodies responsible for verifying and certifying each company’s actual emissions. Regarding the allocation of emissions allowances, it was also decided to establish a working group (WG) to examine benchmark calculation formulas for the power generation sector.
The first meeting of the Industrial Structure Council’s Emissions Trading System Subcommittee was held. The discussion began with the scope of closely related parties. Taking into account that the Energy Use Reporting System under the Energy Conservation Act allows group-wide reporting, it was clarified that subsidiaries and affiliated companies under the Companies Act would be included. Considering that parent companies could fall outside the ETS if their direct emissions are below 100,000 tons, sister companies were also included.
To strengthen corporate incentives for emissions reduction, METI proposed setting the upper limit for the use of carbon credits—including J-Credits and Joint Crediting Mechanism (JCM) credits—at 10% of actual emissions. Committee members suggested that the cap should be flexibly adjusted based on the supply and demand of emission allowances. They also pointed out that the use of absorption-based credits should be considered.
Regarding registered verification bodies that audit emissions reports, the government outlined a phased approach to ensure sufficient numbers of bodies and the quality of their work. From FY2026 to FY2029, corporate emissions reports will be subject to “limited assurance” while the operational framework is being established. From FY2029 onward, the system will transition to “reasonable assurance” for large-scale facilities with high emissions, providing a higher level of certainty. The standards for both levels of assurance will align with the International Sustainability Assurance Standard 5000 and ISO 14064:2016.
It was also decided to establish two working groups under the subcommittee: the “Manufacturing Benchmark WG” and the “Power Generation Benchmark WG.” These WGs will examine benchmark calculation formulas for allowance allocation rules in their respective sectors and report detailed proposals to the subcommittee. The Power Generation WG is expected to discuss whether the range of power sources used as benchmarks for determining emission intensity should be expanded to include non-fossil power sources.