This week Japan begins trialling a carbon emissions trading scheme to incentivise companies and reach its climate goals.

A coloured line graph.

Japan, one of the seven biggest global emitters (mostly C02), is taking a step towards achieving its climate goals outlined in the Paris agreement and subsequent COP (Conference of Parties) climate meetings. It is doing so by introducing the trading of carbon credits on the Tokyo Stock Exchange.

Carbon trading offers companies and organisations financial incentives to cut their carbon emissions in return for carbon credits that they can use on the stock market. Every one tonne of carbon saved and not emitted will award one credit. 

The trial scheme which started on Thursday (22/09/2022) so far involves 145 companies with a plan to run until the end of January. On the first day of the trial, an estimated 620 credits were traded, meaning the involved organisations have already worked towards saving 620 tonnes of carbon emissions. If the trial is successful, then the plan is to roll out the full system by April next year. 

It is expected that the number of businesses showing interest in carbon trading could rise to 440 by early next year which would pave the way for a fully operational carbon trading system.

It’s worth noting that this is not an entirely new enterprise. Other countries such as China and the EU already have a thriving Carbon trading market, however, following the COP26 meeting in November 2021 a solid ambition to trade credits internationally is taking shape, with Japan being next in line to adopt this growing trade.

How does carbon trading really work?

Reducing emissions is one of the biggest challenges that the world currently faces. Many smaller companies will struggle to lower emissions through the cost associated in doing so, while bigger ones have no incentive. (I know…) 

The first step is to bring in targets or limits to the amount of carbon that you are allowed to emit into the environment. With limits in place, companies that successfully lower their emissions below the threshold will receive credits for each tonne of carbon not emitted. Those that are currently above the limit will be fined an amount for every tonne of carbon they are over. 

The fact that each credit is worth one tonne of carbon is important. 

Those that receive these credits can sell them on the stock market where other organisations can buy them. 

Why would they need to do that?

Those that buy these credits are given additional capacity to emit carbon above the limit. One credit is equal to one tonne of additional carbon allowance. This means there can be substantial profit to be made by lowering emissions and selling credits, while big emitters would have to continually pay, also giving them an incentive to cut their emissions too.

Nathan