Japan's Green Transformation (GX) policy faces first real test
When green spending commitments are not what they seem
Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! 🏭.
Carbon Risk contributes 1% of its revenue to Stripe Climate, helping to scale permanent carbon removal technologies. Thankyou to all the subscribers that support Carbon Risk.
Policymakers in Europe, California and other jurisdictions with ambitious carbon markets are pivoting towards a 'cap-and-invest' model whereby long-established auction revenues are increasingly being earmarked for industrial decarbonisation.
Japan has taken the opposite approach: carrot first, stick later.
In February 2024 the Japanese government issued the first tranche of its GX Transition Bonds, valued at ¥1.6 trillion (€15 billion). The bonds, the first of their kind to be issued by a sovereign state, are part of the broader ¥150 trillion (€800 billion) 10-year GX Strategy unveiled in early 2023.
So far the program has raised €21.5 billion, accounting for almost two-thirds of global transition bond issuance. Around half of the proceeds from the bond sale are supposed to be invested in transforming industrial structures and energy efficiency measures, one-third spent on expanding clean energy, while the remainder diverted to resource efficiency and carbon capture and storage (CCS) technologies.
In theory at least, a carbon-linked bond should help to bolster trust in the Japanese government’s commitment to net zero. In turn this should give power producers, manufacturers, and transportation companies greater confidence to invest, enabling them to access finance on more favourable terms (see Carbon market vigilantes: The case for carbon-linked bonds).
Here comes the stick
On 1st April 2026, Phase 2 of Japan's Green Transformation Emissions Trading System (GX-ETS) kicked off. A key milestone in the development of carbon markets in Asia, following in the carbon footprints of South Korea and China.
Firms with Scope 1 emissions of at least 100,000 tonnes are required to record their emissions, submitting their calculations and emission reduction targets by September 2027. Approximately 300 to 400 companies, covering 60% of Japan's annual 1 Gt CO2 emissions, will be subject to compliance requirements.
