Explained | Japan's carbon pricing scheme at Tokyo Stock Exchange

The Tokyo Stock Exchange (TSE) started trading carbon credits on Wednesday, a key element in Japan's strategy to tackle climate change.

The world's fifth-largest carbon dioxide (CO2) emitter is the latest among Asian nations to formulate plans for a carbon pricing mechanism and emissions trading system, aiming to cut emissions by 46% from 2013 levels by 2030 and achieve net zero by 2050.

What is Japan aiming to accomplish with the scheme?

The carbon pricing scheme, which Japan launched in April in a staged rollout, is aimed at speeding up decarbonisation to help limit global warming in a country that has lagged other major economies in implementing policies to curb emissions.

Japan believes the scheme, which combines emissions trading and a carbon levy, will help make the world's third-largest economy greener while maintaining the global competitiveness of its industries, including heavy emitters like steelmakers.

Europe and the United States have developed state support tools to help the private sector meet risks and costs associated with green investments.

The Japanese government estimates the public and private sectors will need to invest more than 150 trillion yen ($1 trillion) in decarbonisation measures over the next 10 years.

It will contribute 20 trillion yen of the total by issuing bonds, with the revenue from the carbon levy and emission allowances to be used to finance the redemption.

How is the emission trading scheme being rolled out?

The scheme, based on proposals mainly by Japan's ministry of economy, trade and industry and approved by the cabinet this year, consists of emissions trading and a carbon levy.

As a first step, the TSE launched a new carbon credit market on October 11, 2023 to trade the existing carbon credits, known as J-Credits.

In the next step, Japan's version of an emissions trading system (ETS) will start in 2024 involving a forum for "green transformation" called the "GX League".

Participants - about 680 companies as of the end of January accounting for more than 40 per cent of Japan's emissions - will be given emissions allowances and required to set emissions-cutting targets that will help the country meet its 2030 and 2050 goals.

Companies that beat their targets and the country's target, will be able to sell emissions allowances, while those that do not meet their targets would need to buy allowances.

Details have yet to be finalised on GX League emissions trading, due to begin on the TSE next October.

By the 2026/27 fiscal year, Japan aims to set guidelines for the ETS and introduce a mechanism for third-party certification of companies' targets to make the system fair and effective.

Official supervision may also be introduced for those abusing the system.

From around 2033/34, auctions for emission allowances for power producers will begin.

A carbon levy will be introduced from around 2028/29 on fossil fuel importers such as refiners, trading houses and electricity utilities. The initial tax will be set low but will gradually rise.

How will TSE's carbon trading work?

A total of 188 entities had registered as participants of TSE carbon credits trading as of September 19. Trading hours are 9:00-11:29 am(0000-0229 GMT) and 12:30-2:59 pm (0330-0559 GMT).

Via the new market, registered members can trade J-Credits on the TSE, a unit of Japan Exchange Group Inc. Transaction prices are set twice a day and published after trading hours.

Under the J-Credit system, the government certifies as a "credit" the amount of greenhouse gas emissions, such as CO2, reduced or removed through efforts to introduce renewable energy, energy-saving equipment or forest management. ($1 = 148.6400 yen)