GX-ETS: Proposed Price Caps & Floors, Mid-to-Long-Term Outlook
This article is an automatically translated version of the original Japanese article. Please refer to the Japanese version for the most accurate information.
Source: Ministry of Economy, Trade and Industry (METI) "Proposed Levels of Price Caps and Floors in the Emissions Trading System" (Link)
Overview
The Ministry of Economy, Trade and Industry (METI) has presented a proposal for price caps and floors within the Emissions Trading System. This aims to enhance market price predictability and promote decarbonization investment in preparation for full-scale operation starting in FY2026. The proposal outlines a gradual increase in carbon prices over the medium to long term, while considering the risks of economic fluctuations.
Key Points
1. Objectives and Functions of Price Stabilization Measures
In the Emissions Trading System, price caps and floors are set to enhance market price predictability and promote decarbonization investment. This is expected to function as a "safety valve," enabling compliance during price surges and maintaining prices through reverse auctions or strengthened allocation standards during price declines.
2. Setting Price Caps and Floors for FY2026
For FY2026, the initial year of the system, a proposal has been presented to set the price floor at 1,700 yen/ton, based on energy-saving measure costs, and the price cap at 4,300 yen/ton, based on fuel switching costs. These figures were determined considering domestic emission reduction cost levels and international carbon price trends.
3. Price Increase Rate and Medium- to Long-Term Outlook from FY2027 Onwards
From FY2027 onwards, to boost incentives for upfront investment in decarbonization technologies, the price increase rate will be calculated by adding the annual inflation rate to a real price increase rate of 3%. This projects a price cap of 4,840 yen/ton and a price floor of 1,913 yen/ton by FY2030, encouraging behavioral changes towards GX through gradual price increases.
Details
1. Mechanism of Price Stabilization Measures
- Price Cap (Measures against Price Surges): If emission allowances are scarce and prices surge, compliance can be met by paying a predetermined price cap. This aims to curb excessive cost burdens on businesses and respond to economic shocks.
- Price Floor (Measures against Price Declines): If the market price falls below the price floor for a certain period, a reverse auction will be conducted to tighten the supply-demand balance of emission allowances and maintain the price. Strengthening allocation standards will also be considered in the future. From FY2033 onwards, a floor will be set for government auctions.
2. Rationale for Price Setting in FY2026
- Price Floor (1,700 yen/ton): Set with reference to current energy-saving measure costs. Based on the past average transaction price of energy-saving J-Credits (approx. 1,620 yen/ton), this level is intended to secure a minimum incentive for reduction investment.
- Price Cap (4,300 yen/ton): Assumed to be at a level between energy-saving costs and fuel switching costs. Specifically, it references the median fuel switching cost from coal-fired to LNG-fired power over the past 10 years (4,370 yen/ton), aiming to secure incentives for upfront investment while avoiding excessive surges.
3. Medium- to Long-Term Price Outlook (2026-2030)
From FY2027 onwards, the price caps and floors will be determined by combining a real price increase rate of 3% with the previous year's domestic corporate goods price index change rate (inflation rate). The specific outlook is as follows:
| Fiscal Year | Reference Upper Transaction Price [yen/t-CO2] (Price Cap) | Adjusted Reference Transaction Price [yen/t-CO2] (Price Floor) |
|---|---|---|
| 2026年度 | 4,300 | 1,700 |
| 2027年度 | 4,429 | 1,751 |
| 2028年度 | 4,562 | 1,804 |
| 2029年度 | 4,699 | 1,858 |
| 2030年度 | 4,840 | 1,913 |
4. Price Fluctuation Factors and Future System Design
- Factors Causing Price Surges: These include stagnation of fuel switching due to surging natural gas prices, a shortage of emission allowances accompanying economic expansion, and increased demand in anticipation of future system strengthening. Countermeasures being considered include setting price caps, adjusting allocation amounts according to activity levels, and restricting banking (storage of emission allowances).
- Factors Causing Price Declines: These include the generation of surplus emission allowances due to economic stagnation. Countermeasures suggested include setting price floors and adjusting allocation amounts according to activity levels.
- Future Considerations: Measures to restrict banking of emission allowances and the level of trading range limits in market transactions to prevent excessive price fluctuations in short periods are also scheduled for consideration from the next fiscal year onwards.
Summary
This proposed framework for price caps and floors in the Emissions Trading System is crucial for enhancing market predictability and reliably guiding corporate decarbonization investment. With specific price levels presented for full-scale operation in 2026 and a gradual price increase outlook until 2030, companies can more easily formulate their medium- to long-term GX strategies. Moving forward, effective system operation is anticipated, keeping in mind flexible reviews based on domestic and international economic trends and technological innovation.
Our Interpretation and Points of Discussion
The recently announced proposed price caps and floors appear to be set at a lower level compared to what carbon credit industry stakeholders had expected. Even for J-Credits within Japan, this price level would make forest credits considerably challenging in terms of profitability. For mid-season drainage projects in rice paddies, considering the recent surge in rice prices, the relative attractiveness of credit revenues could be perceived as limited.
While it is conceivable that the price could stick to the cap if demand expands to a certain extent, even at this price cap level, it is considered quite difficult to make projects, including overseas afforestation projects, economically viable.
Furthermore, if Emission Reductions do not proceed as expected in Japan, the utilization of CDR (Carbon Dioxide Removal) will be indispensable to achieve the NDC (Nationally Determined Contribution). However, there is a significant gap between the cost levels required for CDR and the price levels indicated in this proposal.
Even if current prices remain low, a clearer signal that price levels will be raised in the future would have been a more desirable design from the perspective of promoting investment in long-term carbon removal activities.