Japan probes 'green transition' bonds ahead of full-scale emissions trading in FY2026

TOKYO -- The government on Oct. 26 convened a meeting on decarbonization and other measures to promote Japan's green transformation, or GX, launching discussions on the introduction of tentatively named "GX economic transition bonds" while eyeing the full-fledged introduction of emissions trading in fiscal 2026.

The government plans to tap a carbon pricing system to fund Japan's transition to a greener society. It is expected to present a course of action by the end of the year on specific pricing measures, such as a carbon tax on companies according to their CO2 emissions, and an emissions trading system.

In the Oct. 26 meeting, held at the prime minister's office, Prime Minister Fumio Kishida instructed Minister of Economy, Trade and Industry Yasutoshi Nishimura to consider an effective mechanism for the transition, "such as a hybrid system combining charges for carbon with an emissions trading market." He asked that a concrete system proposal be presented at the next meeting.

In September this year, the economy ministry launched the "GX League," a market for trading carbon dioxide emissions within the Tokyo Stock Exchange. Some 500 companies which together account for about 40% of all carbon emissions in Japan have announced they will join the market. The government has indicated it plans to develop the GX League and launch full-scale emissions trading in fiscal 2026 that will require a certain number of companies to participate.

The government will also advance discussions on whether to introduce a carbon tax as a carbon pricing measure. However, there are concerns that this will increase the burden on companies. Moreover, it remains unclear just how much this will contribute to CO2 reductions, resulting in deep-rooted caution in the industry about adopting the tax.

The outlook accordingly remains uncertain even within the ruling coalition's tax commission, which is leading tax reforms that are expected to move into full swing toward the end of the year. After the Oct. 26 meeting, Masakazu Tokura, chairman of Keidanren (the Japan Business Federation), indicated anew to reporters he was reluctant to see a carbon tax introduced.

Regarding the implementation of carbon pricing, the government indicated that it would set a transition period so that companies do not end up moving their production bases overseas. It aims to promote both economic growth and decarbonization efforts, and plans to keep the burden on companies low for a set period following the introduction of carbon pricing, and then gradually increase the amount they must shoulder.

The government aims to achieve net zero greenhouse gas emissions by 2050. It estimates that investment of 150 trillion yen (close to $1.03 trillion) will be necessary in the public and private sectors over the next 10 years to achieve this. The government intends to raise 20 trillion yen (about $136.88 billion) of this amount through transition bonds, and encourage related investment.

(Japanese original by Mikako Yokoyama, Business News Department, and Nozomi Gemma, Political News Department)