The Japanese government has finalized an outline for carbon dioxide emissions trading to be fully introduced in the country in fiscal 2026. Under the initiative, CO2 emissions allowed per year will be capped for each company. Any extra emissions will be set off by purchasing carbon credits from other companies. If firms cannot make up for their emissions through trading, they will have to pay fees to the national government.

To achieve a decarbonized society, Japan must make this system an effective one that encourages companies to change their behavior.

If companies fail to reduce their CO2 emissions, they will have to bear heavy costs. Meanwhile, if companies can curb their emissions, they can anticipate profits from selling their surplus carbon credits to other firms. It is expected that this initiative will encourage the development of decarbonization technology.

Companies emitting 100,000 metric tons or more of CO2 per year will be required to join the new framework. Around 300 to 400 firms, including power, steel and auto companies, are expected to be subject to the scheme, covering roughly 60% of CO2 emissions throughout the country. The government referenced precedents in Europe and South Korea in formulating this system.

The emissions trading market has already been set up at the Tokyo Stock Exchange. However, whether to join the market or set certain caps for emissions amounts is left up to each company. As firms are not obligated to purchase other businesses' surplus carbon credits, the system has its own limits in encouraging greenhouse gas emissions reductions.

If the system becomes binding, it will work more effectively in reducing carbon emissions. Yet challenges lie ahead.

First, there is this issue of how to set the upper limits for emissions for each company in a fair and transparent manner. If the thresholds are too harsh, the emissions trading prices will surge, putting strains on corporate performances. On the other hand, if the criteria are too lenient, it may end up stalling investments in decarbonization efforts.

The government has explained that it will "give consideration to securing export competitiveness," with Japanese steel and auto industries in mind. Yet if the government overly prioritizes the circumstances faced by corporations, it may hinder the progress of emissions reductions.

We also need to take into account that the companies which have strived more actively to address the issue have less room for additional emissions reductions.

In South Korea, frustrations erupted over the fact that specific companies were given preferential treatment when a similar initiative was first introduced in 2015, leading to court battles. We must draw lessons from this.

To ensure fairness, it is essential to get a grasp of each company's past emissions, yet no method to assess those records has been established. It is an urgent task to develop an environment to facilitate this.

If the cost for cutting back on carbon emissions is shifted to product prices, consumers will face those burdens. It is also crucial to win public understanding toward such a mechanism.

The Japanese government has pledged internationally to make carbon emissions virtually zero in 2050. The government is urged to make the new initiative one leading to this goal.