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Last Update:2024.01.18

Global Trends in CO2 Emissions Trading and the Future of J-Credits

Credit trading is a method of offsetting (offsetting) CO2 emissions that a company cannot fully reduce by itself by purchasing carbon credits from a third party. This presentation will provide an introduction to the "J-Credit" system, which is used in Japan to encourage this type of trading.

In Japan, "J-Credit," a trading system based on the baseline and credit method (*1) that encourages voluntary efforts by consumers, has been in operation since 2013. Meanwhile, more active credit trading is taking place in other countries, as seen in the introduction of cap-and-trade emissions trading schemes with a strong regulatory aspect, such as the EU-ETS (EU Emissions Trading Scheme). In light of these global trends, this session will explain the challenges and future prospects of J-Credits.
(*1) A system that allows trading of emission reductions (credits) when some project to reduce emissions is implemented, compared to the case where no project is implemented (baseline).

Emissions trading born in the U.S. and expanded in Europe

─ ─ What is the significance of emissions trading as a premise?
Tsugane: When we think of emissions trading, we tend to focus on the "cost burden" aspect, such as the cap on one's own CO2 (greenhouse gas) emissions, the need to make efforts to reduce greenhouse gas emissions in addition to one's core business, the need to purchase credits from third parties if one exceeds the emission cap, and, depending on the system, fines. In some systems, the "cost burden" is the most important aspect.
However, from a different perspective, I think it is more important to consider that if you make an effort to reduce emissions, the excess emission reductions will be returned as "value = revenue" through trading. In other words, promoting emissions trading will also promote the development of technologies and initiatives that contribute to emissions reduction.
Yasumasa Tsugane, Senior Manager, Environment & Energy Sales Office, Commodity Markets Department, Corporate Development Division, Mitsui & Co. He joined The Tokyo Tanshi Co., Ltd. in 1990. After working in foreign exchange business for 9 years, he was transferred to NATSOURCE (in New York), a leading emission rights trading company in the U.S., in 2000. After that, he established Natsource Japan Corporation (already dissolved) and returned to Japan in 2003. In April 2010, he moved from Goldman Sachs (2007-2010) to Mitsui & Co., Ltd. as a contractor to launch an emission rights business. In 2004, he was given the mission to start up the Japanese electricity futures business, and became a career hire in 2005. His current main business is electricity futures trading. He continues to follow up on the topic of CO2 credits, as his potential clients have a close relationship with CO2 credits. Most recently, he participated in a carbon credit demonstration project by the Tokyo Stock Exchange commissioned by METI as the main person in charge.
─ When it comes to emissions trading, the European Emissions Trading Scheme (EU-ETS) seems to have taken the lead.
Tsugane: Emissions trading began in the 1990s as an air pollution control measure by the U.S. Environmental Protection Agency (EPA). This was before the Kyoto Protocol. The EPA is an agency that regulates air pollution and waste, and initially conducted emissions trading as an acid rain control program targeting SOx (sulfur oxides) and NOx (nitrogen oxides), to which CO2 was added.
In the EU, discussions began around 2000, and the U.K. first introduced an emissions trading system (ETS) in 2002, using the U.S. as a reference. The European Union Emissions Trading System (EU-ETS) was launched in 2005 to incorporate the ETS.

What is cap and trade?

─ What is the EU-ETS system?
Tsugane: The EU-ETS is based on the principle of "cap and trade," in which countries and companies set a cap on greenhouse gas emissions, and if emissions are expected to exceed the cap, they purchase (trade) allowances from others who have been able to reduce emissions beyond their targets.
If emissions exceed the cap, a fine of 100 Euros per ton will be imposed.
─ It appears that the EU-ETS has taken root in Europe and that emissions trading is active.
Tsugane: Initially, there was strong opposition to the introduction of the EU-ETS from industry, and the German steel industry, for example, even filed a lawsuit against the system. However, the EU Parliament halfway forced the introduction of the system. Although the EU-ETS was met with strong opposition from companies when it was first introduced, the scope of industries subject to regulation was expanded in stages, and currently the EU-ETS is applied to about 60% of all companies in the EU, or 70-80% of CO2 emissions, under Phase 4.
─ It seems that all of the countries that have introduced emissions trading schemes have adopted a mechanism similar to the EU-ETS.
Tsugane: In addition to Europe, other countries that have introduced emissions trading systems include Canada, China, South Korea, and some U.S. states, all of which are based on the "cap and trade" principle. Therefore, although there are minor differences in the content and scope of the regulations, I believe that the systems are generally designed in a similar manner.

Where We Are Now in Emissions Trading in Japan

───Has there been any discussion about introducing an emissions trading system in Japan?
Tsugane: The Kyoto Protocol, adopted in 1997, set a target of reducing greenhouse gas (GHG) emissions in developed countries and countries with economies in transition by 5% below 1990 levels in principle(*2), and allowed the international transfer of emission reductions (emissions trading) as one means of achieving this target. In Japan, the "Domestic Credit System" was introduced in 2008 to promote low-carbon investment by small and medium-sized enterprises (SMEs) and to encourage GHG emission reductions.
(*2) Based on total CO2 emissions in 1990, developed countries target to reduce average annual emissions to 95% or less from 2008 to 2012
─ So credit transactions were more advanced. Has this trend led to "J-Credit"?
Tsugane: As discussions and efforts to decarbonize have been in full swing since the adoption of the Paris Agreement in 2015, the "J-Credit" system, including the "Domestic Credit System", has been operated to unify several credit trading systems in Japan in an easy-to-use format.
In Japan, the cap-and-trade emissions trading system will not be introduced, but the baseline and credit system (*1), in which emission reductions are traded as credits, will be introduced.
─ ─ Does this mean that a cap-and-trade emissions trading system will not be introduced in Japan?
Tsugane: At the time, there was strong opposition to the idea that if regulations were imposed only on developed countries, including Japan, while developing countries were not subject to emission controls, their industries would lose international competitiveness. However, the Tokyo Metropolitan Government in 2010 and Saitama Prefecture in 2011 introduced regional cap-and-trade emissions trading schemes.
Currently, the "GX League," a cooperative effort by industry, academia, and government to achieve carbon neutrality by 2050, is experimenting with cap-and-trade emissions trading. The GX League is voluntary, but companies that pledge to participate must set reduction targets, even if only on a voluntary basis, and are subject to penalties if they fail to meet them.

Current Status and Future Prospects of J-Credits

─ ─ Please give us an overview of the J-Credit System.
Tsugane: J-Credit Scheme is simply a system under which (1) projects that contribute to the reduction of greenhouse gases are registered and implemented, (2) the emission reductions achieved through the projects are certified by the J-Credit Scheme Certification Committee, and (3) the emission reductions are either used as credits to meet their own reduction targets or traded with a third party. This is the system.
While cap-and-trade emissions trading is a system with a strong regulatory aspect, credit trading is a system that promotes voluntary efforts by consumers and supports voluntary trading by consumers. On the other hand, it is meaningful for the government to intervene to certify and give credibility to the credits so that no lax trading will take place.
Source: J-Credit Scheme HP (as of December, 2023)
─ Are J-credits actively traded?
Tsugane: The J-credit market is still in its infancy, with an overwhelmingly insufficient amount of credits issued in relation to the amount of CO2 emissions in Japan. Therefore, companies that wish to trade J-credits must search for buyers and sellers on their own, as it is unclear where and at what price J-credits can be traded. However, interest in credit transactions is steadily growing, and demand is expected to expand in the future.
─ ─ Is there a fair price for credit transactions?
Tsugane: The price varies greatly depending on the origin of the emission reduction activity. For example, while J-credits derived from renewable energy (solar power) are traded at about 3,000 yen per ton of CO2, in Europe they were traded at over 100 euros this spring. However, if the trading price is low, companies may think that they can just buy the credits and neglect their emission reduction efforts, which may hinder technological innovation. On the other hand, if the transaction price is too high, the number of buyers may decrease and the market may cease to function.
The price is a matter of "reduction value" that can be used to achieve the internationally agreed targets of the Paris Agreement, so it will be necessary to keep a close eye on international price trends.
J-Credit Scheme HP "Outline" (as of December, 2023)
─ How is the actual credit transaction conducted?
Tsugane: Currently, transactions are conducted on a "relative" basis on an individual basis. Although there are intermediaries called "carbon offset providers," they match businesses that want to sell credits with businesses that want to buy credits, either on their own or through intermediaries.
In contrast, the Ministry of Economy, Trade and Industry (METI) conducted a carbon credit trading experiment (commissioned by the Tokyo Stock Exchange) from September 2022 to January 2023, which demonstrated a marketplace where transactions are conducted through bidding. There is also a movement among private companies to develop a marketplace for carbon credit trading, and it is expected that such a marketplace will enable easier and more open credit trading.
─ ─ What are the challenges of the J-credit system?
Tsugane: As a premise, Japan has not introduced a cap-and-trade emissions trading system, i.e., greenhouse gas emission reductions are not mandatory. For this reason, many companies and organizations lack strong incentives to purchase J-credits at this time, and the buyers of J-credits are limited to companies that want to voluntarily demonstrate their environmental contributions and energy suppliers that need to comply with the Act on Advancement of Energy Supply Structure(*3).
We do not question here whether it should be mandatory or not, but we believe that it is necessary to formulate a motive for credit trading if we want to make it more active.
(*3) Law to encourage electric utilities and gas utilities that supply energy domestically to use non-fossil energy raw materials and to use fossil energy raw materials effectively.

Voluntary Credit Transactions Growing Overseas

Voluntary credit" transactions seem to be very active in other countries.
Tsugane: Carbon credits that are allowed to be used as a means to achieve agreed emission reduction targets are called "compliance credits. For example, companies participating in the GX League are allowed to set emission reduction targets and offset any emissions expected to exceed those targets through J-credit trading (*4).
(*4) Since the GX League is a pilot program at this time and has not yet been institutionalized into law, J-credits are not strictly considered compliance credits.
In contrast, credits certified and issued by NGOs such as VCS (Verified Carbon Standard) and GS (Gold Standard) and traded on a voluntary basis are called "voluntary credits.
Even if a business is not subject to emission reduction targets (mandatory), voluntary credits are often purchased by companies that are committed to emission reductions at the request of their business partners or by businesses that want to voluntarily demonstrate their environmental contributions. Voluntary credits have no legal influence, but they are more widely issued and more reasonably priced than compliance credits, making them more accessible from this perspective.
However, the GX League initiative, for example, does not allow the use of such voluntary credits, so there is little incentive to trade voluntary credits in Japan at this time.

Carbon credit trading should be integrated as a means to achieve the reduction targets agreed to in the Paris Agreement.

─ Finally, please tell us about the path that J-Credit should take in the future, what is your vision for the future?
Tsugane: Japan's excess emission allowances should be offset by credits generated in Japan, and J-credits are expected to become the core of credit trading in Japan. On the other hand, as I mentioned earlier, the amount of J-Credits issued is overwhelmingly insufficient for the amount of CO2 emissions in Japan. This would make it necessary to look at international trading for the value of reductions made outside of Japan, and there may be a need to utilize the bilateral credit (JCM) system and voluntary credits. From this perspective, all credit transactions, including J-credits, should be recognized as a means to achieve the reduction targets agreed to in the Paris Agreement, and ultimately be integrated into one "common value.

Incidentally, J-credit trading has been positioned as one of the means for participants to set and achieve emission reduction targets through the "GX League," including a move to form a J-credit trading market (marketplace). I believe that Japan is taking a "good step forward" in trying to form a unified mechanism and rules in cooperation between the public and private sectors, including the formation of a J-credit trading marketplace.
─ ─ Thank you very much for your time today.

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