Editorial: Japanese Companies Must Show Commitment to Emissions Trading for a Carbon-Free Society

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The Japanese government will establish a new market where companies buy and sell greenhouse gas emission allowances. This new program must be transformed into an effective system in order to achieve the country’s goal of becoming “carbon neutral” by 2050.

Emissions trading is a method that promotes decarbonization by placing an economic burden on companies based on their amounts of emissions. A limited number of permits allowing the discharge of a specific amount of pollutants are allocated to each company, and companies whose emissions exceed their allowance buy permits from others who emit less pollutants to offset their carbon footprint.

Following the proposal of the Ministry of Economy, Trade and Industry, 440 companies, including mainly large companies, decided to participate in the initiative. A trial will be implemented from September, while full-fledged operations are expected to begin in fiscal year 2023. Discussions between the government and the private sector will take place to define the details of the business rules.

The biggest feature of the system is that companies have the ability to determine for themselves the amount of polluting emissions, as well as whether or not they will participate in the initiative. It also appears that even if companies exceed their emissions cap target, they will not be forced to buy carbon credits.

Many Japanese companies have already created emission reduction plans, and investors and consumers have also shown increased interest in climate change. Therefore, the government deemed it unnecessary to impose strict regulations. The decision was also likely taken out of consideration for the business community which opposes an increase in the burden.

However, if a large number of participating companies become complacent with their meager efforts, there will be no progress in reducing greenhouse gas emissions. If firms that set rigid goals are at a disadvantage, the market cannot be said to be fair.

Another emissions trading system that has been tested by the Ministry of the Environment and other agencies in the past had limited effectiveness because it allowed companies to set targets at their own discretion. In Europe and the United States, the government is heavily involved in setting emission caps.

To guarantee the transparency of exchanges, it is essential to have a function allowing a third party to assess the relevance of the emission ceilings. Specific reduction plans, as well as the development status of the necessary technology, among other information, must be disclosed for each industry, and a system to inspect them regularly is also required.

The debate on the carbon tax, designed to incentivize the reduction of carbon dioxide emissions, must be conducted immediately. Although it was at the center of tax reform debate last year, ruling parties, concerned about its impact on the economy, reversed its implementation.

Amid soaring resource prices, there has been an increasingly cautious outlook on carbon taxation. However, it also has the advantage of allowing investment in the development of technologies needed to reduce emissions. The government should consider introducing the carbon tax, while reviewing the current energy tax regime.

Countries around the world are competing to update a system that effectively reduces emissions while limiting negative effects on the economy. Avoiding short-term disadvantages will not survive this era of decarbonization. The levels of commitment of Japanese companies are in question.

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