Japan’s GX-ETS and Global Carbon Market Developments: What Businesses Need to Know

Japan’s climate change and carbon market framework is entering a significant new phase.

The country’s Green Transformation Emissions Trading System (GX-ETS) began full-scale operation on 1 April 2026, moving from the previous voluntary GX League framework to a legally binding regime. At the same time, carbon markets, climate-related disclosure requirements, greenwashing risks and climate litigation continue to develop internationally.

For businesses operating in Japan or across multiple jurisdictions, these developments increasingly affect not only environmental strategy, but also compliance, investment planning, corporate governance and supply-chain management.

Japan’s Evolving Climate Framework

Japan’s climate change regime now sits across several overlapping areas of legislation.

These include the GX Promotion Act, which establishes the GX-ETS, the Global Warming Countermeasures Act, which governs greenhouse gas emissions reporting and disclosure, and financial and commodities legislation that may become increasingly relevant to carbon-credit transactions.

Japan’s wider Green Transformation policy also links decarbonisation with industrial policy, energy security and economic growth. Current policy discussions include investment in areas such as green steel, hydrogen and next-generation solar technology, together with measures designed to stimulate demand for low-carbon products and encourage GX-related investment.

Who Is Covered by the GX-ETS?

The GX-ETS applies to businesses classified as Large Emitters.

These are operators whose average annual direct carbon dioxide emissions — broadly, Scope 1 emissions — have reached 100,000 tonnes or more during the most recent three fiscal years.

At present, the system focuses on direct CO2 emissions. It does not currently extend to indirect Scope 2 emissions from purchased electricity, heat or steam, or to broader Scope 3 supply-chain emissions.

For affected businesses, this creates a new compliance framework as well as a clearer carbon cost that may influence future investment decisions.

How Will Allowances Work?

Under the current framework, emissions allowances will generally be allocated to covered businesses free of charge, subject to required reporting.

For energy-intensive industries, allocations may be calculated using industry-specific benchmarks. Where appropriate benchmarks cannot easily be established, historical emissions may instead be used through a grandfathering approach.

Trading of GX-ETS allowances is currently scheduled to begin in autumn 2027 through the GX Acceleration Agency.

The system also includes both a reference maximum trading price and an adjustment standard trading price, intended to provide greater predictability for businesses and encourage investment in decarbonisation. For fiscal year 2026, these were set at JPY 4,300 per tonne and JPY 1,700 per tonne respectively, with a mechanism for gradual adjustment in later years.

The Role of Carbon Credits

GX-ETS participants may use certain carbon credits to offset part of their Scope 1 emissions.

Eligible credits currently include J-Credits and credits generated through Japan’s Joint Crediting Mechanism (JCM). However, their use is limited to approximately 10% of Scope 1 emissions, meaning businesses are still expected to achieve the majority of emissions reductions through their own activities.

Questions remain around the future treatment of voluntary carbon credits and the availability of sufficient J-Credits and JCM credits to meet potential demand. Possible supply constraints could become increasingly important as the market develops.

Greenwashing and Legal Risk

The growing use of carbon credits and environmental claims also brings increased legal and reputational risk.

Businesses trading emissions allowances or carbon credits, or advertising products and services by reference to environmental benefits, must consider Japanese laws governing misleading representations as well as applicable environmental claims guidance.

The legal position surrounding carbon-credit ownership, transfers and intermediaries is also continuing to develop. In parallel, questions are emerging around the extent to which directors’ duties may require climate-related risks to be considered as part of corporate decision-making.

For businesses, this means environmental claims increasingly need to be supported by reliable evidence and careful legal review.

Carbon Markets Are Developing Internationally

Japan’s reforms sit within a much broader shift in carbon-market regulation.

In Europe, the EU continues to develop the EU Emissions Trading System and its framework for meeting longer-term climate targets, including consideration of how high-quality international carbon credits may be used while maintaining environmental integrity.

The EU Carbon Border Adjustment Mechanism (CBAM) also moved into full implementation in 2026 for specified carbon-intensive goods. Further changes are being considered that could expand its scope and strengthen measures designed to prevent circumvention, potentially increasing emissions-data and supply-chain reporting requirements for companies exporting into the EU.

At the same time, voluntary carbon markets are placing greater emphasis on credit quality and market integrity.

Standards such as the Core Carbon Principles developed by the Integrity Council for the Voluntary Carbon Market and the CORSIA framework for international aviation are increasingly important in determining whether credits are regarded as high quality.

Climate Litigation Is Another Area to Watch

Climate change litigation is also broadening.

Recent cases and international developments increasingly connect climate obligations with corporate governance, human rights, health and biodiversity.

The analysis highlights a June 2026 French decision requiring TotalEnergies to address climate risks, including Scope 3 emissions, within its vigilance plan. The court did not impose specific measures such as cancelling new fossil-fuel projects or establishing legally binding emissions-reduction targets, but it required the company to revise its vigilance plan and provided for further judicial review.

More broadly, environmental litigation is increasingly examining the relationship between climate change, human health and biodiversity rather than treating each issue separately.

What Should Businesses Be Doing Now?

For companies operating in Japan, an immediate priority is understanding whether their emissions bring them within the scope of the GX-ETS and, if so, ensuring that reporting, governance and emissions-management processes are prepared for the new regime.

Businesses operating internationally should also consider the wider picture.

Carbon pricing, environmental claims, voluntary credits, supply-chain emissions and climate-related governance are becoming increasingly interconnected across jurisdictions.

As these frameworks mature, companies may need to consider not only whether they comply with individual rules, but whether their climate strategy, disclosures and carbon-market activities remain consistent across the jurisdictions in which they operate.

The direction of travel is increasingly clear: climate regulation is moving beyond standalone environmental compliance and becoming part of mainstream corporate, financial and strategic decision-making.

By Anderson Mori Tomotsune, Japan, a Transatlantic Law International Affiliated Firm. 

For further information or for any assistance please contact japan@transatlanticlaw.com

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