Japan is advancing a new carbon market strategy as part of its plan to reach carbon neutrality by 2050. Central to this effort are the Green Transformation (GX) initiatives, including the GX-League and the GX-Emissions Trading Scheme (GX-ETS). These frameworks combine voluntary corporate action with a phased approach toward regulation. Together, they aim to reduce greenhouse gas emissions, support low-carbon innovation, and prepare the economy for long-term decarbonization.

As the world’s fifth-largest emitter and third-largest economy, Japan’s approach to climate mitigation carries significant weight. Its carbon market evolution not only signals a domestic transition toward net-zero emissions by 2050, but may also serve as a potential blueprint for emerging markets in the Asia-Pacific region and beyond, as well as either a parallel (or counter) to Europe’s emissions trading system.

What is the GX-League?

Launched in April 2022, the GX-League brings together more than 550 companies, which are collectively responsible for over 50% of Japan’s greenhouse gas emissions. While participation is voluntary, companies in the GX-League are expected to develop emissions reduction targets and align their business strategies with national climate goals.

The GX-League provides a platform for collaboration between government and industry. It also lays the groundwork for future regulatory measures by encouraging early action and transparency in corporate decarbonization planning. Finally, through private sector engagement and leadership, the GX-League brings higher climate ambition to major global companies and a pathway to demonstrate leadership, creativity, and commitment. 

Japan’s GX-ETS: A new carbon market

In April 2023, Japan launched the GX-ETS, a voluntary carbon trading scheme that allows companies to trade emissions allowances. This initial phase is intended to help companies prepare for future regulation, test carbon pricing mechanisms, and begin integrating market-based tools into their climate strategies. In 2026, GX-ETS will become a compliance-based system. This means that companies will eventually be required to stay within emissions limits and participate in allowance trading. By 2033, Japan also plans to introduce auction mechanisms for emissions allowances, adding a price discovery process that is typical of more mature carbon markets.

While still early in its development, the GX-ETS is expected to become Asia’s second-largest carbon market, following China’s national ETS. For comparison, the EU ETS (currently the world’s largest) covers around 40% of total EU emissions. Japan’s market remains voluntary for now, but its planned expansion over the next decade signals a shift toward stronger domestic carbon pricing.

Public funding of Japan’s GX Initiative

One of the most notable aspects of Japan’s GX initiative is the scale of public funding. The Japanese government has pledged USD $1 trillion over 10 years, aimed at accelerating the country’s transition to a low-carbon economy. This funding will support a wide range of projects, including:

• Carbon dioxide removal (CDR) within Japan and abroad.

• CO₂ shipping pilots narrowed to a few large-scale projects.

• Deployment of biocoke in steel production.

• Expansion of low-carbon ammonia imports and overseas production of clean hydrogen, ammonia, and shipping fuels.

Although in the early stages, the expectation is that most of this funding will go to GX-League member companies, reinforcing the role of the private sector in implementing national climate strategies and creating positive competition between rival companies.

Gaps and opportunities in Japan’s carbon market

Despite the scale and ambition of Japan’s carbon market efforts, several critical policy details remain unresolved:

• The emissions cap for domestic industries, by sector, and in aggregate;

• Eligibility criteria for companies and projects to enter the GX-ETS market; and

• Definitions of acceptable “Japanese content”, especially for international investments.

These policy uncertainties create challenges for businesses and investors, but also offer opportunities. As Japan finalizes the rules, early movers may help shape the market’s direction and build partnerships aligned with future policy priorities, potentially creating openings for better market design, climate ambition, and economic outcomes.

The role of carbon credits and 'J-Credits'

In October 2023, the Tokyo Stock Exchange launched a new carbon credit market focused on the trade of 'J-Credits'. These credits currently include emissions reduction and energy efficiency projects, though they do not yet cover large-scale carbon removal. As of January 2024, there were 249 participants, including 82 members of the GX-League. This market provides an additional tool for companies to meet their climate goals and may grow in importance as Japan’s carbon pricing system develops. In April 2025, the Tokyo Metropolitan Government also launched the Tokyo Carbon Credit Market (TCCM), a new platform that allows buyers to directly access J-Credits and voluntary credits through an online interface. The TCCM uses blockchain to improve transparency and aims to broaden participation in carbon offsetting.

At present, it is unclear how J-Credits will harmonize with the new GX-ETS or the EU-ETS.

Japan maintains a small carbon tax of JPY 289 (approx. $2.16 USD) per tonne of CO₂. Looking ahead, a carbon levy on fossil fuel importers is planned for 2028, bringing a more direct price signal to fossil fuel consumption and complementing the GX-ETS and J-Credit systems. It remains unclear how J-Credits will align with other international carbon markets, and whether or not some or all J-Credits will qualify under Europe’s Carbon Border Adjustment Mechanism (CBAM).

Japan’s carbon market and global climate action

Japan’s carbon market design is notable for its blended approach, combining voluntary commitments with phased regulatory enforcement. As Japan expands its GTX-ES crediting system, its strategy may also serve as a model for other nations, and influence international carbon trading, particularly in the Asia-Pacific region. For investors and climate-focused businesses, Japan’s evolving carbon market presents opportunities to shape international climate action and participate in a growing emissions trading landscape. 

Japan’s carbon market evolution is just one part of a broader global shift toward more ambitious, decentralized climate action. From new regional trading systems to updates in international standards, the landscape is changing fast.

For a deeper dive into how these developments are unfolding around the world, explore the April 2025 edition of The Navigator. This quarterly report analyzes global climate policy, carbon market trends, and the latest in carbon science, including Japan’s GX-ETS, new benchmarks in Switzerland, and evolving strategies for scaling clean energy and carbon removal.