Concerns over adverse effects on business development and employment have long been cited as a key reason for Japan's delay in implementing a national carbon market. As Japan plans to launch a nationwide mandatory ETS in 2026, a central question demands an answer: does carbon trading necessarily come at the cost of economic performance?

A research team from Waseda University recently investigated the Saitama ETS, Japan's second regional emissions trading scheme launched in 2011. By examining energy use and economic performance at the facility level, the study provides empirical evidence on whether a voluntary ETS can achieve emissions reductions without compromising economic activity.

The team published their findings in Energy and Climate Management on February 09, 2026.

This study is examining the impact of the Saitama ETS on economic activity. By simultaneously considering both energy consumption and employment, the research assesses whether the scheme effectively reduces energy use and whether it has any adverse effects on production activities.

Unlike the Tokyo ETS, the Saitama ETS focuses on the industrial sector and adopts a voluntary approach, encouraging regulated facilities to reduce CO₂ emissions without strict penalties. Using facility-level panel data from 2007 to 2018 and a difference-in-differences (DID) method, the team found that heavy oil consumption among regulated facilities declined by 5.69% in the first phase and 34.82% in the second phase, city gas decreased by 25.58%, while electricity consumption increased slightly by 3%–4%.

As the authors note in the paper, "The observed decline in heavy oil use alongside a tendency for increased electricity consumption following the introduction of the ETS may partly indicate a shift in the energy composition of facilities. Rather than cutting overall energy use and potentially compromising production activity, regulated facilities in Saitama may have sought to achieve emissions reductions by shifting their energy mix toward lower-emission sources".

More importantly, contrary to the widespread concern that carbon trading might harm economic performance, the study found no evidence of negative impacts on employment. In fact, a statistically significant positive effect emerged in the second compliance period, the number of employees in regulated facilities increased by 5.67%. This suggests that firms may have achieved emissions reductions not through blunt measures such as layoffs or production cuts, but through flexible strategies of transitioning toward lower-emission energy sources.

These findings carry important implications for Japan's upcoming nationwide mandatory ETS. The voluntary nature of the Saitama ETS has granted firms flexibility that facilitated early compliance, but this design may face challenges under more stringent reduction targets.

The authors concluded: "The Saitama ETS has proven effective, partly due to its relatively modest standards and the flexibility it offers to firms. However, when faced with more stringent reduction requirements, a voluntary mechanism carries the risk of becoming ineffective. Therefore, the 'voluntary nature' of the scheme must be carefully evaluated in the design of future ETSs in Japan and beyond."

This research was supported by the Environment Research and Technology Development Fund (JPMEERF20202008) of Japan, the JSPS KAKENHI grant (JP21H04945), and the Waseda University Grant for Special Research Project (2025Q-002).

See the Article:

Assessing the impact of Saitama Emissions Trading Scheme on energy consumption and economic performance at the facility level