Japan will introduce a price corridor for carbon emissions trading in fiscal 2026 as it prepares to launch a nationwide market aimed at pushing its biggest polluters to invest in cleaner technologies and cut greenhouse gas output.
The scheme is part of Japan’s “green transformation”, or GX, strategy, which seeks to steer the world’s third-largest economy toward carbon neutrality by 2050 through a mix of regulation, public funding and market-based incentives, while maintaining the global competitiveness of its export-oriented manufacturers.
Under the system, companies will face a floor price of JPY1,700 (US$11) and a ceiling of JPY4,300 (US$27) per tonne of carbon dioxide for the first year of the scheme, according to guidelines set by the Ministry of Economy, Trade and Industry (METI).
The trading of emission allowances is scheduled to begin in autumn 2027, with fiscal 2026 serving as a preparation year in which covered firms must measure and report their emissions and authorities finalise market rules and participation requirements.
METI set the initial price range in December 2025 under a revised “GX Promotion Law” to give companies early visibility on future carbon costs and encourage pre-emptive investment in decarbonisation, rather than waiting for prices to be set entirely by the market after trading begins.
Participation will be mandatory from fiscal 2026 for companies that emit more than 100,000 tonnes of CO2 a year. The government estimates the system will cover about 300 to 400 firms, including steelmaker Nippon Steel, automaker Toyota Motor and power producer JERA, accounting for roughly 60 per cent of Japan’s domestic emissions.
Under the scheme, the country will allocate emission allowances annually based on industry benchmarks. Companies that exceed their allocation will be required to purchase surplus allowances from other firms through a centralised market operated by the GX Promotion Agency, a government-backed body.
Although prices will be set by market supply and demand, the upper and lower limits are designed to prevent extreme swings that could either drive production overseas if costs spike or weaken incentives to invest in cleaner technologies if prices fall too low, a concern for policymakers in a country heavily dependent on energy imports.
The JPY4,300 ceiling reflects the estimated cost of switching power generation from coal to liquefied natural gas, while the JPY1,700 floor is based on historical prices of domestic carbon credits known as “J-Credits”, which are traded on the Tokyo Stock Exchange’s carbon market.
From fiscal 2027 onwards, both limits will be raised annually by the rate of inflation plus an additional 3 per cent, a level METI has said is intended to exceed typical corporate investment discount rates and encourage early spending on low-carbon equipment and fuel switching.
As a safeguard, the government can allow companies facing a shortage of allowances to meet their obligations by paying the upper-limit price, rather than buying permits in the market. If prices remain below the floor for an extended period, authorities can intervene by reducing the number of allowances in circulation.
Japan’s move comes as major economies in Asia and the West expand carbon markets and border measures to price emissions embedded in traded goods, raising the stakes for exporters in carbon-intensive sectors such as steel, chemicals and automobiles.
The initial price band is broadly aligned with carbon markets in China and South Korea, but remains well below ranges in New Zealand and the US state of California, where carbon prices can be several times higher.
