FEATURE: Japan opens domestic emissions trading scheme to overseas CDRs from some project types

Quantum Commodity Intelligence – Japan is to allow carbon dioxide removals (CDRs) credits from four project types, including overseas developments, in its GX League emissions trading scheme (ETS), having previously only allowed offsets from the country's J-Credit and Joint Crediting Mechanism (JCM) systems.

The government said that from April 22 the ETS will start accepting project registration applications for "other eligible carbon credits" for up to 5% of greenhouse gas emissions several new sectors. They are carbon capture, utilisation and storage (CCUS), coastal blue carbon, bioenergy with carbon capture and storage (BECCS), and direct air capture and carbon storage (DACCs), with other unnamed project types to be considered for future inclusion.

Eligible credits

For credits to be eligible they must be issued in "compliance with international standards" in terms of additionality, permanence and avoidance of double counting, or involve the government of Japan in the operation of the programme, according to documentation released with the announcement.

"This will be a catalyst for Japanese corporations to start thinking seriously about durable CDR and for foreign projects to consider the participation of Japanese investments/tech to get exclusive access to a new demand pool," said one Japan-based market source on social media who had been involved in a government working group on CDR usage.

The ETS is one of a raft of policy measures approved by Japan's Cabinet in February last year designed to put the country on the path to green transformation or GX in order to tackle climate change and energy security in the wake of Russia's 2022 invasion of Ukraine.

The GX League launched in April 2023, at the start of the Japan's financial year,  has been described as a voluntary-mandatory trading system, with participating companies – now over 700 – volunteering carbon targets in line with the government's 2030 goals.

Companies register an emissions reduction target for financial year 2030 and an interim goal for FY2025 against a base year that can be set from 2013 to 2021.

Companies wishing to use CDR credits must have a total investment of at least 20% in a project or they provide technologies or solutions to the project, such as operations and maintenance or monitoring, reporting and verification services.

Preference will be given to domestic projects, however, the country does not as yet have any methodologies for CDR projects from CCUS, BECCS or DACCS. However, there is a domestic blue carbon scheme in operation in Japan. J-Blue Credits are certified and issued under a scheme managed by the Japan Blue Economy Technology Research Association (JBE).

JBE, which was set up to conduct research and development of technologies and methods to promote projects that help conserve and regenerate coastal areas, set up the J-Blue Credit scheme in response to the Paris Agreement on climate change.

CDRs from J-Credits

Japan is also considering including CDR in its other domestic offset scheme, the J-Credit market, with recent meetings of the J-Credit Steering Committee having discussed establishing a new methodology class for removals.

The source said that Japan emits roughly 1.1 gigatonnes of carbon dioxide equivalent (tCO2e)a year, with about 600 million tCO2e from  current GX ETS participants. With the 5% cap this equates to about 30 million tCOe/y.

"This may sound small but still five times larger than the existing transaction volumes of durable CDR," the source said. "Note this rule applies for phase one of the ETS and is still a voluntary requirement for the corporates to offset emissions as there are no penalty yet. However the compliance kicks in 2026 and I imagine the existing rules will set a base line for the future compliance regulations," the source added.