Overview

Description

Japan's GX-ETS ran as a voluntary baseline-and-credit system from FY2023 through FY2025, with participation from more than 700 companies accounting for over 50% of national GHG emissions. In April 2026, the GX-ETS transitioned to a mandatory baseline-and-credit system for Phase 2 (FY2026–FY2032). Companies with annual direct CO? emissions of 100,000 tonnes or more are covered, regardless of sector. Under the mandatory phase, covered companies receive individual company-level emissions limits (baselines) set for the entire compliance period. The total emissions cap is the sum of these individual baselines and is fixed ex-ante. Allocation uses a combination of fixed benchmarking and grandparenting, depending on the sub-sector. From FY2033, auctioning will be introduced for high-emitting corporations in the power sector. Upper and lower price limits apply to market trading. Japan's broader decarbonization policy combines several instruments: a carbon tax on fossil fuels in place since 2012, the GX-ETS, and a GX-Surcharge on fossil fuel importers and domestic extractors, planned from FY2028. These form part of the Basic Plan for the Green Transformation (GX) Policy, Japan's ten-year decarbonization roadmap. Japan participates actively in international carbon markets. Its Joint Crediting Mechanism (JCM) supports decarbonizing technologies and mitigation actions in 31 partner countries. JCM credits are eligible for use in the GX-ETS. Japan also leads the Article 6 Implementation Partnership, a global capacity-building initiative with 90 partner countries and over 300 participating organizations.

Recent Developments

The mandatory GX-ETS commenced in April 2026, following passage of the Amended GX Promotion Act by the Upper House of the Diet in May 2025. During 2025, the Ministry of Economy, Trade and Industry (METI) held a series of working group consultations on design elements for the mandatory phase, including benchmark and grandparenting methodologies for setting company baselines and the upper and lower price limits for allowance trading.

Coverage

The GX-ETS covers companies with annual direct CO2 emissions of 100,000 tonnes or more across all sectors, including power generation, industry, transport (cargo road), aviation, and maritime. Sectors covered by benchmarking include paper, cement, petroleum refining, aluminium, power generation, freight road transport, domestic marine transport, and air transport, among others. All other covered sectors receive grandparented allocations.

Pricing and Allocation Approaches

Free allocation

Compliance Approaches

Annual

Relation to Other Compliance CPIs

The GX-ETS is not linked with any other system.

Covered Sectors

Electricity and heat

Industry

Mining and extractives

Transport

Aviation

Buildings