ANALYSIS: Japan 'bucks the trend' with carbon credits key components of its climate goals
Quantum Commodity Intelligence – The use of carbon credits as a tool to help meet corporate greenhouse gas (GHG) emissions goals has become increasingly controversial in recent years as several 'scandals' have raised questions over the validity of some types of offsets.
The controversy has led several prominent companies, for example Australian telecommunications giant Telstra, to announce that they are stepping away from using credits to meet carbon targets.
However, in Japan the use of carbon credits, particularly those generated by the country's J-Credit offset scheme, is increasingly being adopted by companies of all sizes to help them address emissions and fall in line with government climate goals.
The country aims to cut its GHG emissions 46% below 2013 levels by the end of the decade and reach carbon neutrality by 2050, with carbon credits one of the mechanisms it aims to utilise to meet these goals.
Under the J-Credit scheme, which the Ministry of Economy, Trade and Industry has operated since 2013, the government certifies the amount of greenhouse gas emissions reduced or removed through efforts to introduce a range of activities.
The credits are eligible under the country's GX League emissions trading scheme, which kicked off in April last year, to also help Japan meet its climate change goals.
And a number of Japanese companies, such as ByWill, E-Dash and Asuene, have been set up looking to help compatriot firms measure and cut GHG emissions, while others have invested in their own projects or in other carbon credit schemes in Japan.
For example, in 2022 Kansai Airports announced it had so-called J-Blue Credits certified and issued under a system that is separate from the J-Credit initiative and is managed by the Japan Blue Economy Technology Research Association.
And just last week, Sanwa Company, which sells home appliances and building materials, said it had received J-Credits to help cut GHG emissions from its business activities that are "unavoidable".
Forest credits
The company said the credits came from a forest project developed by Tajima Sanyo in the southern region of Oita. Sanwa noted that it had bought J-Credits equivalent to 2,000 tonnes of carbon dioxide (tCO2e), which dwarfs its current emissions of 181tCO2e. However, it had made the larger purchase in the expectation of emissions growth from business expansion.
Each week sees similar announcements out of Japan, with environmental consultancy ByWill being very vocal in its aims to help companies decarbonise in all of the country's 47 prefectures.
On July 11, the company said it expects to conclude carbon credit contracts totalling 155,000 tCO2e in 2024, more than four times the volume it secured in 2023. The credits will come from deals as the result of company referrals by partners, such as financial institutions; customer introductions are now in excess of 1,000, it said.
In the first half of 2024, the consultancy concluded contracts for carbon credits under the J-Credit scheme to reduce or absorb 42,032 tCO2e. Separately, on the same day, ByWill said it had signed an agreement with Nagano Forestry Association, after an introduction by Hachijuni Bank, to develop forest management J-Credit projects in Nagano prefecture. The project is expected to deliver more than 19,000 J-Credits over an eight-year period. This deal is similar to many the company has struck with organisations companies, towns, cities and regions across Japan.
It is also involved in a novel carbon credit initiative by providing J-Credits to Hiroshima Bank linked to the private placement of seven green bonds.
Under the products, Hiroshima Bank buys carbon credits within 0.20% of the issue amount of the private placement bonds, and offsets the greenhouse gas emissions from electricity use at art and cultural facilities under the jurisdiction of Hiroshima Prefecture and City. ByWill recently sold J-Credits totalling 228tCO2e generated by solar power projects to the bank, of which 114tCO2e went to the prefecture and city.
ByWill is not the only company in this space, with cloud-based carbon platform E-Dash also making deals with local and municipal governments. On July 11, the firm said it had been contracted by Yamanashi prefecture, located southwest of Tokyo, to support 40 SMEs in 'visualising' and reducing scopes 1 (direct) and 2 (indirect from electricity use) GHG emissions using its platform.
E-Dash, which is backed by Japanese trading house Mitsui & Co, has signed similar agreements this year with Kochi and Kanagawa prefectures in May and the city of Tsubame in Niigata prefecture in June.
The agreement in Tsubame will see E-Dash support initially 50 SMEs in their efforts to calculate and reduce their Scope 1 and 2 emissions. Emission reductions could be achieved through installation of energy-saving equipment, solar panels, as well as the use of non-fossil fuel certificates and carbon credits.
Net zero
The collaboration between E-Dash and Tsubame under the name 'Tsubame Decarbonisation Challenge' follows the city's decision in 2022 to set a net zero goal to be reached by 2050.
Decarbonising industrial emissions in Tsubame, a city with a population of 77,000, takes priority as it is home to about 1,800 manufacturing companies including many metal processing firms, accounting for the lion's share of the city's carbon footprint. E-Dash has also been commissioned for a second year by Miyazaki prefecture and will work with 70 companies, having worked with about 50 last year, on GHG measurement and reduction.
E-Dash offers a range of services as well as measuring GHG emissions, including a marketplace for buying and selling carbon credits. The E-Dash Carbon Offset platform first launched in July 2022, in partnership with US company Patch Technologies, offering international carbon credits and expanded to include J-Credits in May last year.
The company is also collaborating with another large Japanese trading house, Marubeni Corporation, and Nishi-Nippon City Bank on a finance product to help local companies in their decarbonisation efforts, including the use of carbon credits. The "Forestrike" impact loan, launched in May, is another product to support the country's 2050 carbon neutral plans.
Forestrike is described as a "decarbonisation action all-in-one package financing product that includes visualisation of GHG emissions, support for design and achievement, and voluntary carbon offsetting," according to the three companies.
A minimum of JPY100 million ($637,000) is available with a loan period of more than three years. Forestrike also covers calculation of Scope 1 and 2 emissions, followed by support to cut GHG emissions based on key performance indicators including monitoring for at least three fiscal years. A portion of the GHG emissions are to be offset using carbon credits supplied by Marubeni.
SMEs are also the target of government plans to digitise J-Credit monitoring, reporting and verification (MRV) systems to improve the efficiency of MRV, as well as other operations.
The Ministry of Environment opened a call for applications on July 4 that should lead to the "actual operation of the support system using the blockchain system", building on demonstration projects implemented last year that issued credits digitally and resulted in a revision to J-Credit system documentation.
"We are pleased to announce that we have started recruiting businesses that we can build MRV support systems using blockchain systems for solar power generation methodologies," the ministry said in a press release. The aim is to simplify the J-Credit authentication process and reduce costs for participants in line with an October 2021 cabinet decision to promote digitisation.
Demand drivers
"The various procedures at each stage of the J-Credit system, from project registration to credit trading, are costly and time-consuming for SMEs and households with limited manpower, and it is difficult for them to participate independently as the amount of credits issued is small for their own reduction activities," MoE said. Interested parties have until July 25 to apply.
And demand for carbon credits in Japan could increase further, if a call by a 244-member coalition of businesses and environmental organisations is taken on board by the government when it comes to set updated GHG targets under the Paris Agreement.
Earlier this month, the Japan Climate Leaders Partnership called for the government to set at least a 75% reduction goal for 2035 in an updated Nationally Determined Contribution that has to be submitted to the UN next year. The partnership called for more renewables, among other things, as well as "predictable" carbon prices consistent with the Paris 1.5° Celsius temperature target and to have carbon pricing integrated fairly throughout Japan's economy.