The Tokyo Metropolitan Government (TMG) has finalized regulations for its third compliance period (2020-2024) of its cap-and-trade program, including an expansion of options to reduce compliance obligations through entities’ use of low-carbon energy. The regulations were finalized 29 March 2019 and made publicly available in May.

In the third compliance period, entities covered by the Tokyo ETS will be required to reduce CO2 emissions 25-27% below the 2000 baseline, up from 15-17% in FY2015-2019. Tokyo’s system covers about 1,200 facilities and buildings with annual energy usage equivalent to 1,500 kiloliters or more of crude oil.

The most recent data from TMG show that entities regulated under the Tokyo system had already collectively reduced emissions by 27% compared to the base year by March 2018. That data release also showed that by March 2018, about 80% of facilities had already achieved the target levels set for the current second compliance period, which ends in March 2020. At the end of the first compliance period in FY2014, entities had already collectively reduced emissions by 25% below the 2000 baseline.

TMG is also looking to expand the use and production of low-carbon and renewable energy through new incentives that allow covered entities to reduce their compliance obligations under the ETS. Incentives for the third compliance period include:

  • Use of “non-fossil value” (renewable energy) certificates: the Japanese government launched in 2018 a mechanism to certify renewable energy offered through suppliers participating in the country’s feed-in-tariff and make these certificates available for purchase by end users and other entities. Starting in 2020, facilities covered under the Tokyo ETS can obtain these certificates to lower their obligations under the ETS.
  • Individual “electricity menus” of suppliers count fully as reductions: currently, entities covered by the Tokyo ETS can reduce their compliance obligations through the purchase of low-carbon electricity. So far, however, the emissions associated with this electricity were calculated through a CO2 emissions factor pertaining to all electricity generated by the supplier, not the individual electricity “menu” purchased by the covered entity. Starting in 2020, emissions from purchases of low-carbon electricity will be calculated based on the individual electricity menu a covered entity purchases, as long as the supplier’s overall emissions factor meets a certain standard.
  • Abolishing the limit on reductions from low-carbon energy and giving additional credit for electricity with a higher ratio of renewables: currently, reductions of compliance obligations from the purchase of low-carbon energy are not counted in full using TMG’s formula. Rather, the reduction is calculated according to the formula and then multiplied by 0.5, meaning each reduction of annual emissions applied through procuring low-carbon energy is effectively cut in half. Starting 2020 the entirety of a reduction will count. Additionally, the Tokyo ETS will further augment reductions in compliance obligations when the power source has an overall ratio of renewable sources that exceeds 30%.

TMG announced that in order to continue encouraging actual emissions reductions, the use of offsets and the banking of allowances will remain limited to between consecutive compliance periods. The program aims for a 30% reduction below 2000 levels by 2030, with a fourth compliance period yet to be announced.