On 1 April 2026, Japan’s GX-ETS entered its mandatory phase 2, following a three-year voluntary period (FY2023–2025). The second phase will run for seven years, covering FY2026–2032. The Upper House of Parliament enabled the transition by amending the “GX Promotion Act” in May 2025.
During the voluntary phase 1, more than 700 companies participated in the GX-ETS, collectively accounting for over 50% of Japan’s national greenhouse gas (GHG) emissions. The mandatory system now applies to companies with average annual direct CO₂ emissions of at least 100,000 tonnes over FY2023–2025, corresponding to approximately 300–400 entities.
The GX-ETS operates as a baseline-and-credit system, with an absolute cap determined from the bottom up. Each covered entity is allocated a certain number of emission allowances which correspond with their baseline. This baseline is primarily determined through benchmarking complemented by grandfathering where benchmarking is difficult. Benchmarks gradually decline over time. The aggregate of all baselines constitute the system-wide cap, which represents a fixed emissions limit. However, the exact cap has not yet been established, as baselines are expected to be determined and published in autumn 2026 or later.
Entities must surrender allowances corresponding to their actual emissions. Those emitting less than their allocation may sell surplus allowances, while those exceeding their baseline must purchase additional allowances from other participants. Banking provisions are not yet in place, although the government is considering introducing them in FY2027. Borrowing of allowances is not permitted.
Up to 10% of an entity’s compliance obligation may be met by external credits. Domestic J-Credits and international credits under the Joint Crediting Mechanism (JCM) are allowed.
The system includes both upper and lower price limits. If allowance prices exceed the upper limit, set at JPY 4,300 (USD 28.73) for FY2027, entities may comply by paying this ceiling price. Conversely, if prices remain below the lower limit for a specified period, a reverse auction mechanism will be triggered to stabilize the market. The lower price limit for FY2027 is set at JPY 1,700 (USD 11.36).
In the third GX-ETS phase, beginning in FY2033, auctioning of allowances will be introduced for high-emitting companies in the power sector. Further details on this phase are yet to be defined.
