Upon completing the various necessary preparations, the Tokyo Stock Exchange launched a Carbon Credit Market that opened for trading on October 11, 2023, playing its part as an exchange towards greenhouse gas reduction.
Following the “GX League Basic Concept” announced by the Ministry of Economy, Trade and Industry (METI) in February 2022, TSE agreed to implement the “Technical Demonstration Project for Carbon Credit Market” commissioned by METI, and conducted trial trading from September 22, 2022 through January 31, 2023.
Thereafter, the Cabinet of Japan approved “the Basic Policy for the Realization of GX“ on February 7, 2023, which includes “the realization and implementation of the Pro-Growth Carbon Pricing Concept”. The “carbon emissions trading system (GX-ETS)” is part of the system designed for carbon pricing.
GX-ETS started on a trial basis in FY2023 and a full-scale operation is scheduled to start in FY2026. In preparation for the full-scale launch, tighter regulations (e.g. guidelines, supervision, obligations to comply) are expected to be considered, such as mandatory third-party certification, in order to verify the government-set goals of carbon reduction. Also, the market design calls for a price range based on a combination of an upper limit and lower limit. One of the factors to determine such price range was designated as the “transaction price of the carbon credit market targeted for launch in FY2023.”
The establishment of the TSE Carbon Credit Market is in line with this policy and is the first step towards realizing efficient greenhouse gas reduction in society.
“J-credits” are traded on the TSE Carbon Credit Market. Under the J-Credit Scheme, the government certifies as a credit the difference in the amount of greenhouse gas emissions (such as CO2) reduced or removed by introducing energy-saving devices, using renewable energy, increasing absorption by managing forests adequately and other projects, versus the amount emitted in the case such a project is not implemented. This corresponds to the so-called Baseline and Credit Approach for emissions trading.
The use of J-credits is to be reported in line with the “Act on Promotion of Global Warming Countermeasures” and the “Energy Efficiency Act”, and is also designated as a means to achieve the GX-ETS goals. It is expected that the main J-credit originators will be small and mid-sized companies, farmers, forest owners, local governments, etc., while the major buyers will be large corporations.
J-credit trading used to be limited to over-the-counter trading or government tenders, but now, participants can also trade them on the TSE market. Trading specifications are as shown in the below “TSE Carbon Credit Market Specs” (table 1). Regarding the trading method, TSE decided to opt for a call auction system (one morning session and one afternoon session) instead of continuous trading as is the case in its securities market. This is to enhance the chances to match bids and offers, considering the current levels of J-credits being created and in circulation. Carbon credit prices are determined once every morning and afternoon session.
The only type of order available are limit orders (no market orders) since trading activities might be low at first, and to also avoid any erroneous orders and excessive price fluctuation.
Although the minimum bidding amount for government tender is 1,000 ton-CO2, the trading unit is set at 1 ton-CO2 per contract to attract various market participants and to enhance the chances to match bids and offers.
The settlement day for the carbon credit market is set 5 business days after the execution date (T+5), though it is T+2 for the stock market. The reasons for this are that some businesses may be inexperienced in the settlement duties when participating in a market directly and, keeping the function of the current J-credit recording system in mind, T+5 is considered the shortest period of time that is practically possible.
Table 1: TSE Carbon Credit Market Specifications
Status of Participants and Transactions
243 participants had registered as of market launch on December 6, 2023, surpassing by 60 the maximum number of 183 participants during the trial period. A breakdown by type of business is shown in table 2. Participants from the power and gas industry increased significantly, followed by the finance/insurance industry and the commercial industry. Also, it seems that the interest from renewable energy companies, large volume generators and financial service firms has grown since the trial period.
Table 2: Number of Participants by Business Category
Trading status as of December 19. 2023 is shown in table 3. As was the case during the trial period, there were contract executed for J-Credit Energy Efficiency, J-Credit Renewable Energy (Electric Power) and J-Credit Forest Sink. Moreover, trading was mostly centered around J-Credit Energy Efficiency and J-Credit Renewable Energy (Electric Power), continuing the trend from the trial period. In addition, the daily average trading volume increased to 1,571 tons from 166 tons during the trial period (before the Government sold the J-Credits in its possession in the market).
Table 3: Trading Status After Market Launch
Aggregation Period : Oct. 11. 2023 ~ Dec. 19. 2023