A strong carbon price is increasingly viewed as a critical tool for decarbonising hard-to-abate sectors such as aviation. Europe has taken the lead, and other markets are gradually following suit. Japan is now preparing to join them.
Following the introduction of a carbon tax for all fossil fuels in 2012, Japan is now preparing to move its emissions trading scheme, the GX-ETS, into a mandatory phase from April 2026. Around 300 to 400 companies with more than 100,000 tonnes of annual CO2 emissions will have to comply, including airlines, resulting in approximately 60% of Japan’s CO2 emissions being covered by the scheme.
To gain clarity into the evolution of the GX-ETS and its relevance to airlines, Ishka SAVi speaks with the Institute of Energy Economics, Japan (IEEJ), a leading think tank in energy supporting the Japanese government through its recent GX-ETS reform.
Japan’s GX-ETS: How does it compare to the EU ETS?
| EU ETS | GX-ETS | |
|---|---|---|
| Introduction | 2005 (2012 for airlines) | First phase, voluntary 2024 – 2025. Moving to a second mandatory phase from 2026. |
| Geographic coverage | Current: Intra-EEA flights, flights to/from Switzerland (Swiss ETS and EU ETS linkage), and flights to UK (UK ETS covers flights from UK to EU). Under consideration: Ending the 'stop-the-clock' mechanism, which would result in EU ETS applying to all flight departures from EEA countries from 2027. | Japanese domestic flights |
| Airlines covered | Operators for flights within the geographic scope and >10,000 tonnes of annual CO2 emissions or >243 flights per three consecutive four-month periods | Operators with >100,000 tonnes of annual CO2 emissions across their domestic operations |
| GHG covered (across all sectors) | CO2, N2O, HFCs, PFCs | CO2 |
| Free allowance allocation | Benchmarking based on the average emissions per tonne-kilometre reported by operators in 2010, with a starting free allocation in 2012 of around 85% of emissions. However, free allocation is currently being phased out, and will be fully phased out by 2026. | To be determined. |
| Price of allowances | Set by supply and demand. Recent pricing has been around €75/tCO2 ($87/tCO2). | Set by supply and demand, but a legal price floor and ceiling will apply. Values to be determined. |
| Use of carbon credits | Currently not allowed, but a 2026 review of the EU ETS could clarify if and when carbon removals can be incorporated. | Allowed for up to 10% of an operator's annual emissions. |
| Start of mandatory compliance | 2005 (2012 for airlines) | 2026 |
| Source: Ishka research, IEEJ, ICAP | ||
The GX-ETS was introduced in 2023 in its initial voluntary phase and will move into a mandatory phase next year. It will only cover emissions within Japan, limiting aviation coverage to domestic flights. However, that should still cover a large part of Japan’s total aviation emissions. The country has one of the largest domestic aviation markets in the world, representing approximately 1.1% of all global ASKs in 2023, almost 70% of all ASKs from flight departures out of Japanese airports (based on OAG data).
For companies covered by the scheme, the reporting process would be similar to the EU ETS. “The company needs to report the average of the previous three years’ emissions, if it exceeds 100,000 tonnes of CO2. They also need to apply for free allowances for the next fiscal year,” explains Toshiyuki Sakamoto, IEEJ board member and director in charge of its Climate Change & Energy Efficiency Unit.
As part of the reporting effort, companies need to go through third-party verification, and once the regulator determines a company’s emissions obligations, emitters will need to surrender allowances to match that obligation. The first free allowance allocation will cover two years (FY2026 and FY2027) but will be annualised thereafter.
A key difference with the EU ETS is that the price of allowances, while also determined by supply and demand, will be subject to a price floor and price ceiling set by the government. “If the allowance price goes up to this upper price, the government would allow companies to pay that specified upper limit price for compliance purposes,” Sakamoto explains. “If the market price goes below the lower limit price, then the government would conduct reverse auctioning to take back excessive allowances from the market.”
The price limits for the next five to ten years are expected to be announced before the beginning of each fiscal year.
Free allowances available, but proportion unknown
Free allowances will be “allocated on a company-on-company basis,” taking into account sectoral benchmarks for industrial installations such as, Sakamoto explains citing the steel sector, the type of furnace. The specific formulae are still being decided for aviation and shipping sectors by the Ministry of Land, Infrastructure, Transport and Tourism (MLIT). Sakamoto points out that discussions are more advanced for industrial sectors than for transportation. “I would expect it would take some time [for MLIT] to come up with a specific benchmark formula for aviation,” he shared. The first meeting of MLIT’s GX-ETS council taking industry input to explore benchmarking options took place at the end of August.
During that meeting, the Scheduled Airlines Association of Japan requested in a presentation (in Japanese, see final slide: 6. 排出枠の割当方式に関しての基本的な考え方) that a benchmarking method for aviation “reflects the [emissions] reduction efforts made to date” and uses an emissions intensity baseline. The association also called for consistency with Japan’s climate plans, which targets a 16% CO2 intensity reduction for aviation by FY2030 compared with FY2013.
The association also asked for the GX-ETS focus to remain domestic, asking the ministry to give “full consideration” to the coverage of international flights by CORSIA.
Use of carbon credits
Another key difference with the EU ETS is that, in addition to allowances, companies covered by the GX-ETS will also be able to fulfil up to 10% of their emissions to comply with abatement obligations with carbon credits – J-Credits and credits from the Joint Crediting Mechanism (JCM).
J-Credits, a system operated by the Ministry of Environment (MOE) are traded at the Tokyo Stock Exchange. Under the J-Credit Scheme, the Japanese government certifies the amount of greenhouse gas emissions reduced or removed by sinks through energy-saving efforts, renewables, forest management, etc. Many of these credits are generated by publicly listed companies through their energy saving and offsetting efforts. Traded credits can currently be used as offsets or to meet other environmental targets. Since the start of trading in 2023, approximately 0.8 Mt of CO2e J-Credits have been traded, representing a limited volume.
JCM credits, on the other hand, are an international crediting mechanism operating under Article 6.2 of the Paris Agreement, similar to CORSIA Eligible Emissions Units (EEUs). MOE and METI operate the system, which is designed to allow Japan to achieve its national climate targets through GHG emissions reduction or removal credits from projects in partner countries. As of August 2025, the Japanese government had established JCM MoUs with 31 countries, but no credit had so far been issued under the system.
How many airlines could covered by the GX-ETS?
The GX-ETS annual applicability threshold of 100,000 tonnes of CO2 may be approximately ten times greater than the EU ETS, but Ishka expects most sizeable Japanese commercial airlines to still be included.
Based on 2024 emissions calculations by PACE, a small regional airline like Fuji Dream Airlines (total fleet of 15 Embraer E170s and E175s) would still surpass the 100,000 tonnes threshold. The country’s two largest airline groups, Japan Airlines and ANA Holdings, reported 9.07 Mt and 10.47 Mt of global CO2 emissions in FY2023, although their domestic flight emissions are likely to be less than half of that.
What are the cost implications for airlines?
Until the Japanese government sets its position on the free allowance allocation benchmark for aviation, cost expectations will remain speculative. However, taking into account the gradual ramp-up to full auctioning by other schemes, the cost should be relatively limited at the start. For perspective, under the EU ETS, which has applied to aviation since 2012, most allowances surrendered by airlines were still obtained through free allocation until 2023, when a gradual phase-out began.
The price floor and ceiling for GX-ETS allowances remains uncertain, with any estimates still “wild guesses,” Sakamoto notes. He adds, however, that under this year’s GX-ETS law amendment, METI told the National Diet it would consider both international ETS allowance upper and lower prices and the cost of J-Credits in setting those levels.
Since the beginning of trade at JPX, J-Credits averaged between JPY 2,600 ($17) and JPY 5,600 ($38) per tonne of CO2 depending on the type of credit, though these prices have risen recently. As for the upper and lower prices of allowances in other ETS systems, they vary vastly. However, if METI takes as a reference the world’s largest and most established ETS, the EU ETS, it would like at recent prices hovering around €75 per tonne ($87).
Could the GX-ETS make SAF more compelling?
The GX-ETS will give companies greater “predictability” over future emissions costs, Sakamoto notes, enabling them to plan investments for a cleaner trajectory. For airlines, the main abatement investment is expected to be SAF, though the precise cost savings under GX-ETS remain unclear.
What is clear is that proceeds from allowance sales – alongside energy taxes – will be used to repay the JPY 20 trillion ($133 billion) the Japanese government plans to raise through GX bonds by 2032. “GX” refers to Green Transformation, with the funds earmarked for initiatives in 16 priority fields for emissions reduction. SAF is among these, meaning part of GX-ETS revenues from auctioning for the power sector will be directed toward aviation decarbonisation.
The Ishka View
The GX-ETS has the potential to create sizeable carbon compliance costs for Japanese airlines, much like Europe’s ETS systems. However, the expectations by close observers point to a progressive ramp-up of compliance costs, with companies including airlines heavily aided by generous free allowance allocations at the start, as well as moderate price ceilings relative to carbon prices in Europe. As an energy-intensive industry with thin margins, airlines are not typically happy with increases in their overall energy costs, be it jet fuel prices, or carbon prices. However, unlike in Europe where the sector has for years complained that it does not receive enough reinvestment from EU ETS revenues, Japan has taken a markedly different approach. Japan’s government borrowing for decarbonisation, including for SAF support, is likely to yield benefits before airlines begin to face significant operational cost increases from rising GX-ETS obligations.
As a final note, and in addition to the GX-ETS, it is worth noting that from FY 2028 Japan will introduce a new carbon surcharge on imported or domestically produced fossil fuels. This surcharge will be based on the carbon intensity of fuel, with different bands of gCO2/MJ taxed differently. Based on Ishka’s calculations, assuming a conventional jet fuel emissions intensity baseline of 89gCO2e/MJ, this surcharge could be as little as $40 per tonne, but could rise to around $160 per tonne for jet fuel with an intensity of 95gCO2e/MJ. In parallel, both future GX-ETS costs and the new carbon surcharge should, in theory, help bridge part of the cost difference between conventional jet fuel and SAF.
