Japan, the world’s fifth-largest CO2 emitter, will launch a carbon pricing scheme in stages beginning in April to motivate companies to reduce emissions and reach carbon neutrality by 2050.

The country is the most recent Asian government to develop plans for a carbon pricing mechanism and emissions trading system.

The plan aims to hasten decarbonization in order to combat climate change, but Japan trails behind other significant economies that have already adopted comparable measures.

Nevertheless, Japan is confident that the programme, which mixes emissions trading and a carbon levy, will contribute to making the third-largest economy in the world greener while preserving the competitiveness of its sectors, including heavy emitters like steelmakers, on the global market.

According to Shigeki Ohnuki, head of the environmental policy division at the ministry of economy, trade, and industry, the private sector cannot commit to green investments on its own because of the high costs and risk. As a result, Europe and the United States have created state support tools (METI).

To encourage businesses to alter their behaviour, Japan also needs to swiftly commit to supporting green investment, he said.

The METI-based plan, which the cabinet authorised this year, combines emissions trading with a carbon tax.

The “GX League,” a platform for “green transformation,” has established Japan’s version of an emissions trading system (ETS), which will launch on a voluntary basis in the fiscal year 2023/24 and go into full operation around 2026/27.

Participants, who as of the end of January accounted for about 680 companies and more than 40% of Japan’s emissions, would have to promise and reveal their emission-reduction goals.

They will trade emissions through the market if the goal is not reached. Trading will probably take place at the Tokyo Stock Exchange, where a demonstration ran from September to January of last year.

Japan would establish rules for the ETS by 2026–2027 and put in place a system for third-party certification of companies’ goals. The introduction of official monitoring may also be made for system abusers.

Auctions for emission permits for the power generation industry will start around 2033–2034.

Discussions are taking place about specifics like the cost of carbon, the extent of covering, and whether it is required.

The carbon tax will be imposed starting in 2028 or 2029 on businesses that transport fossil fuels, including refineries, trading companies, and electric utilities. The fee will start out small and increase over time.

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