Carbon pricing mechanisms toward net-zero emissions in Japan

The grand design has been formulated recently for the "Growth-oriented Carbon Pricing" concept in Japan. The blended approach, combining voluntary participation of the businesses with phased regulatory enforcement, deserves attention due to its potential to serve as a model for other countries in Asia. This paper gives an overview of the latest progress in the practices of carbon pricing mechanisms in Japan. Under the green transformation (GX) initiative, carbon pricing mechanisms have been planned systematically but could start from low levels. The emissions trading scheme, namely GX-ETS, is currently implemented on trial in the first phase, and will establish a mandatory market mechanism after full-scale operation in fiscal year 2026 (FY2026). Fossil fuel levy will be launched in FY2028, and emission allowances will be allocated to specified businesses by auctions from FY2033. To support the smooth and effective implementation of carbon pricing mechanisms in operation and planning in Japan, several issues are suggested for further studies. These issues include the policy stringency necessary for achieving the announced mitigation targets, the behaviour changes of highly affected businesses, and the design of policy revenue recycling.