J-Credit demand, liquidity limited amid voluntary participation in Japan ETS until 2026

The demand and liquidity for the various types of J-Credits in the secondary market has been low as participation in Japan's Green Transformation (GX) ETS remains voluntary until 2026, according to data from S&P Global Commodity Insights and market participants.

"GX-ETS is categorized as 'compliance', but it is not mandatory for each company to participate. A company participating in the GX-ETS has no obligation to purchase any credit or allowances even if the company can't achieve their targets," one market participant said.

Tokyo Gas, a major gas provider in Japan, is one of the larger players actively trading in J-credits at the moment, though their exposure is at a much smaller percentage than what they would prefer.

There were mixed responses on whether J-Credits were trading at a premium or discount to the ones sold on the Japanese Exchange Group, with some sources even saying that there was no clear difference that could be seen between the two.

"The J-Credits I heard [trading] were slightly higher than the JPX, and my guess is because they are traceable and know from where they are purchasing," a carbon trader said.

Market sources generally said that the liquidity in both the secondary market and JPX is very low as the generation of J-Credits is only 1 million mt/year and a lot of Japanese players are still at a very preliminary stage to procure J-Credits and just carbon credits in general.

Price trends and premiums

Renewable energy J-credits heard traded at Yen 2,500/mtCO2e on June 7 for 5,000 mt, followed by a bid at Yen 2,700/mtCO2e for the same volume.

"The price range for [the different types] of J-Credits varies widely, but a company with a strong background naturally pays more," a second trader said.

Under the J-Credit Scheme, the government certifies the amount of greenhouse gas emissions reduced or removed by sinks through efforts to introduce energy-saving devices and manage forests as credit.

Forestry J-credits in the OTC market were indicatively heard trading at a premium to the other types of J-Credits at Yen 10,000-14,000/mtCO2e, followed by solar renewable energy J-Credits at roughly Yen 4,000/mtCO2e.

Forestry J-credits are traded often on OTC-basis because they need some co-benefits to be sold, the second trader said further.

"The owners of these projects are also linked to the local government who are not in a hurry to sell," a carbon broker said, adding that it would be the price to be changed once set, because forests are considered a city-owned asset and would have to pass city parliament approvals.

The indicative value for other renewable energy J-Credits heard ranged between Yen 2,300-3,900/mtCO2e, while energy efficiency J-Credits were heard at around Yen 1,600-1,700/mtCO2e, according to market participants.

Solar renewable energy credits are at a premium to the other renewable energy types and energy efficiency because of its current low supply in the market amid strong demand, the broker said.

OTC transactions are typically for a larger volume than what is seen on the JPX, in which multiples of 5,000-10,000 mt are necessary for a reasonable margin of return, although smaller volumes are traded as well, the broker added.

GX-ETS obligatory participation

The GX-ETS was launched in April 2023 as part of Japan's GX plan which is a core policy that outlines regulatory, financing, and technology development priorities for greening industries and covers roughly 600 million mt/year of emissions.

The Japanese government intends to implement stricter rules in 2026 for participation to be compulsory but this has seen some opposition from mass emitting companies with political influence, a Japanese broker added.

Despite there being some companies lobbying against this move, the broker said that large emitter companies across industries are already preparing for compulsory participation in the ETS as it would be very difficult for them to avoid it when the time comes.

"The companies know that they cannot expect less stringent targets because then the government would not be able to achieve its Paris Agreement targets," the broker added.

Japan aims to reduce its greenhouse gas emissions by 46% in its 2030 fiscal year from its 2013 fiscal year levels, which aligns with their long-term goal of achieving net-zero by 2050.

When stricter rules are in place for participation in the GX-ETS in 2026, the demand for J-Credits and other eligible credits will be higher, the second trader said.

According to a third trader, however, the demand for J-credits will still depend on the supply of other eligible compliance offset credits including JCM credits and specific voluntary removal credits once the ETS transitions to a compulsory scheme.