Japan has taken a significant step in climate action by introducing a nationwide Emissions Trading System (ETS), scheduled to take effect in 2026. Legislation passed in May 2025 mandates participation from the country’s largest emitters, supporting Japan’s 2050 carbon neutrality goal.
Japan’s ETS will cover approximately 60% of the country's total emissions—over 1 billion tonnes of CO₂e annually. An estimated 300–400 companies will be involved from the start, primarily within the energy and heavy industry sectors.
This makes Japan’s system the second-largest ETS in Asia, behind China, placing it among the world’s most ambitious carbon market initiatives. For context:
Japan’s ETS will be phased in with a clear timeline for adaptation and progressively stricter requirements. The system is built on a revised version of the so-called GX laws, passed in May 2025. These laws require any company that emitted more than 100,000 tonnes of CO₂ per year on average over the past three years to participate starting in fiscal year 2026.
From 2026 onward, the system becomes legally binding for major emitters. That year also marks the next phase: more rigorous auditing and verification, potential sectoral expansion, and a shift from free allocation of allowances toward auctioning.
A striking feature of Japan’s ETS is that companies are allowed to meet part of their obligations using certified carbon credits. Up to 10% of a company’s annual emissions can be offset through such credits, provided they meet certification standards and originate from approved systems.
Companies can choose between:
However, all credits must be third-party certified and approved by Japanese authorities. The aim is to enhance flexibility, boost cost-effectiveness, and support international cooperation—showcasing how carbon markets and offset mechanisms can work hand in hand.
Since 2020, companies in the EU ETS have not been allowed to use certified carbon credits to meet their compliance obligations. The EU system exclusively relies on emission allowances allocated by governments—either for free or through auction. All allowances are tracked and verified through the Union Registry, ensuring transparency, traceability, and regulatory oversight.
Other types of credits, such as those from afforestation, peatland restoration, or renewable energy outside the ETS, currently have no role within the system.
However, in 2022 the European Commission proposed a new regulatory framework: the Carbon Removal Certification Framework (CRCF). Its goal is to establish a robust and unified certification method for carbon removals, particularly from land-use-based activities like forestry, peatland restoration, soil carbon management, and durable carbon capture and storage.
CRCF was approved by the European Parliament in 2024 and is now under development, focusing on scientific standards and economic viability. The framework aims to ensure that removals are permanent, traceable, transparent, and real—meeting the highest standards for quality and impact.
There is growing discussion about integrating CRCF-certified removals into the EU ETS, especially for high-integrity technology-based solutions such as Climeworks and Carbfix. The big question for the near future is whether and how carbon removal credits might be granted a formal role in the EU ETS—mirroring developments now underway in Japan.
