Equating Value across Borders: Carbon Credits and Japan’s Joint Crediting Mechanism (JCM) Explained

The Japanese carbon market is gradually developing, taking a cautious approach compared to more established markets like those in Europe and the US. As Japan works towards its 2030 emission reduction targets, companies are increasingly engaging in carbon crediting and emissions trading. The Green Transformation – Emission Trading System (GX-ETS) and the Joint Crediting Mechanism (JCM) play pivotal roles in Japan’s carbon reduction efforts. JCM, in particular, allows Japanese companies to implement decarbonization projects in developing countries, generating carbon credits that contribute to Japan’s national targets. This article explores the intricacies of the JCM, the motivations for companies and partner countries, and the challenges and opportunities presented by this scheme

Overview of the Japanese Carbon Market

The national Japanese carbon market is nascent when compared to the well-established European or Californian carbon markets. The Japanese regulatory landscape takes a cautious and well indicated approach to market change. Carbon crediting and emissions trading are still in the nascent stage for implementation, but many companies are actively working to develop their green transformation roadmaps, action plans, and carbon credit reserves for their realization. Japanese companies similarly took a long while to begin declaring emission reduction targets and commitments with the Science Based Targets initiative, but once the trend was realized Japan has become one of the fastest countries to achieve widespread participation.

Setting goals and realizing them are two different hurdles, though. The difficulty is further compounded by shifting international trends away from ESG/Sustainability. While there is still widespread interest in carbon credits from an investment standpoint, there remains some debate over the necessity of meeting emission reduction targets. The GX focus of governmental policy helps to mitigate those debates in a gentle and supportive manner without harsh compliance regulations. The expected result is slower development of the carbon market with less negative impact on the overall economy.

A Beginner’s Introduction to Carbon Credits

The topic of carbon credits is on many peoples’ minds as we speed towards the global mid-term carbon reduction goals set for 2030. The Japanese government alone has pledged to reduce emissions by 46% as compared to their 2013 emissions. Many companies have set their own internal emission reduction goals in-line with the national reduction pathway. In an industrially focused country like Japan, however, scope 1 direct emissions can be particularly difficult to reduce. To meet their declared goals, therefore, corporations are looking for ways to count the reduction of others’ emissions towards their own targets. This is where the concept of “carbon credits” or “trading emissions” comes into play.

In theory, the amount of carbon (or the carbon equivalent of other greenhouse gases) that is prevented from being emitted can be traded to another company for use in “balancing” their carbon accounting. This idea has also been applied for counting the amount of carbon that absorbed from the atmosphere (and more recently the ocean) back into the earth’s crust. The former is called “avoided-emission credits” while the latter is termed “removed-emission credits”.

There are numerous methodologies for accrediting carbon credits in both categories. International accreditation methodologies like CDP Gold Standard and Verra are generally sold on voluntary carbon markets for corporate emission reduction self-reporting. For these voluntary credit methodologies, the purchaser must decide if they trust the methodology used to issue the credit as reliable and unlikely to be discredited later.

Compliance-based, or mandatory, carbon reduction requirements like the EU-ETS can specify which, if any, credits issued according to these methodologies may be used to meet emission targets. Jurisdictions and governments can also issue their own methodologies. They may restrict companies to only using credits issued according to these methods in order to maintain quality assurance of the credits.

The Japanese government has opted to take the later approach with their Green Transformation – Emission Trading System (GX-ETS) platform set to come fully online in October of this year. On this platform, only “Qualified Carbon Credits” and traded emission reductions may be used to offset emissions in excess of corporate targets. At present, domestic J-credits and internationally abated JCM credits are the main methods accepted as Qualified Carbon Credits. This means that J-credits, the domestic reduction carbon credit, and JCM credits, the international reduction carbon credit, are the key players in the emerging Japanese carbon credit ecosystem.

J-credits are issued through a series of domestic verification processes and can be issued for a variety of Japanese local emission reduction projects. They are publicly traded on the JPX Carbon Market and cannot be issued for overseas emissions reductions. The main method for counting overseas emission reductions towards domestic GX-ETS emission reduction targets is through JCM credits.

What is the Joint Crediting Mechanism?

The Joint Crediting Mechanism (JCM) is a system to quantitatively evaluate Japan’s contribution to GHG emission reductions and absorption achieved through the implementation of Japanese decarbonization technologies and methods in developing countries, and to use the resulting emission reductions to achieve Japan’s NDC (Nationally Determined Contribution) . To avoid double counting of carbon credits, the JCM program reports frequently to the UNFCCC according to Article 6 of the Paris Climate Agreement which regulates cross-border carbon crediting. JCM Credits are based upon international emission reductions, distinct from the domestic-reduction based J-credits. The Japanese government has declared a target of 100 million t-CO2e worth of JCM credits to be issued by 2030.

(source: JCM website)

JCM credits are issued for overseas emission reduction measures taken in one of a specified list of partner countries. There are currently 29 listed partner countries in which JCM credits may be issued. The list includes Tunisia, Georgia, Sri-Lanka, Azerbaijan, Mongolia, Bangladesh, Ethiopia, Kenya, Maldives, Vietnam, Laos, Indonesia, Costa Rica, Palau, Cambodia, Mexico, Saudi Arabia, Chile, Myanmar, Thailand, Philippines, Senegal, Moldova, Uzbekistan, Papua New Guinea, the United Arab Emirates, Kyrgyz, Ukraine, and Kazakhstan. The Japanese government plans to add at least one more country to this list in the next year or so. Many of these countries are still developing their industrial and economic standards compared to Japan. As such, the JCM program serves to promote the transfer of cutting-edge Japanese technology to the partner country, while counting the majority of reduced carbon emissions towards Japan’s NDC.

Map of JCM partner countries (as of July 2024)

Why are Japanese Companies Interested in JCM Projects?

Japanese companies can benefit from the JCM program in three main avenues: the installation of their technologies in other countries, the upgrading of their own or their suppliers’ capabilities, and the credits generated from the projects. The JCM program aims to accelerate the diffusion of superior decarbonization technologies, products, systems, services, and infrastructure and the implementation of mitigation activities, while simultaneously targeting the achievement of international bilateral NDCs. JCM projects provide an opportunity for corporations to both reduce emissions and disseminate their own technology. In some cases, this can mean upgrading an out-of-date factory due for replacements at any rate, and in some cases, it can mean distributing proprietary technologies internationally, promoting brand recognition and loyalty.

Beyond just technology distribution, Japanese companies can access specific subsidies for JCM projects to largely fund the technology investments. The allocation of resultant carbon credits is based upon financial investment, however, so for nationally funded projects the majority of the credits will go to the Japanese government rather than the companies themselves. Up until recently, government funding was the only option for launching a JCM project. However, due to lagging project issuances, high cost to the government, and delays resulting from complications with conducting Japanese governmental funded projects in a foreign country, the JCM program has been expanded to allow private companies to wholly fund JCM projects. While the Japanese government is still happy to provide logistical support and private companies are still expected to follow the established issuance process, this change in funding provisions means that the majority of the resultant credits are issued to Japanese private companies as opposed to the government.

JCM credits are utilized primarily in one of two manners. They can be retired internally by the corporation which undertook the emission reduction project to offset their own Japanese domestic emissions, or they can be sold by a project developer directly to another corporation so the purchasing corporation may retire the credits to offset their own emissions. Before the recent expansion of the JCM program to allow corporations to solely finance projects and therefore retain the majority of the issued credits, almost all credits issued went directly to offsetting Japan’s national emissions. The few that were issued to companies were mostly retired internally. There is currently no public trading platform for JCM credits and they are not sold upon the JPX Carbon Market. Instead, JCM credits that have been issued to each entity are registered on the JCM registry and can be traded privately without surcharge between any company that has a JCM account. As private JCM projects begin to generate large quantities of credits beyond what a company would use for internal offsets and GX-ETS reporting becomes stricter, perhaps a JCM trading platform will be developed.

As they are either retired by the company developing the JCM project or are sold directly to another company to retire for their own emissions offset, pricing of JCM credits can vary greatly and is rarely publicly disclosed. Given that JCM credits can be used similarly to J-credits in the GX-ETS, whose pricing is publicly disclosed, it is expected that JCM credits will likely follow similar pricing patterns as J-credits, though there is more opportunity for negotiation as they are not sold on a public market. As carbon pricing and carbon trading become a reality in Japan, more companies are investing in JCM projects to reap the credit rewards and more Japanese companies are looking to create large scale JCM projects.

Why do Partner Countries Approve JCM Projects?

Japanese companies can derive clear benefits from JCM projects, but why should partner countries approve the projects at all? Partner countries give almost all of the generated carbon credits to Japan, but instead, partner countries benefit from the subsidized technologies and knowhow that the Japanese cooperation brings. This can significantly help a partner country to accelerate their industry transition to a low-carbon future.

JCM projects require the companies establishing the projects to demonstrate how Japan contributes to the greenhouse gas emissions reduction/sequestration and sustainable development of the partner country. The requirements for what can be considered as contributing to the partner country is set by each individual partner country and is often targeted to the unique needs of the partner. For example, in the Philippines, the need for widespread reliable energy access is specifically mentioned but this may not be a focus of another partner country.

Overall, projects are required to demonstrate how they contribute to the conditional targets for the Nationally Determined Contribution (NDC) of each partner country. Developers should ensure that the project fits the declared objectives and desired technological pathways of the partner country. These points should be made clearly in the Project Information Note and Project Design Document required as part of the credit issuance and project application process.

Most JCM projects up until this point are focused on facilities such as factories, hotels or schools with very specific technologies introduced and carbon savings made through “avoided-emissions”. These targeted projects tend to have scaling limitations and result in less carbon savings overall. To meet the 100 million t-CO2e reduction goal of the JCM program by 2030 and to ensure sufficient return on investment for private JCM projects the approved methodologies are expanding to include more “removed-emissions” crediting methodologies such as regenerative agriculture and clean cookstove projects. These solutions can have a much wider impact on local social needs in addition to providing scalable emission reduction. These social impacts can be tailored to address the partner country’s needs – resulting in additional benefits.

Conclusion

The sale of carbon credits is inherently about balancing the values of diverse stakeholders. For corporate executives dependent upon quarterly returns, carbon trading offers an opportunity to capitalize on business development investments. For governments who have staked their credibility on meeting emission reduction goals, it allows them to incentivize achievement of those goals in a manner understood by the emitters – monetary and regulatory. For all of us living in the world affected by climate change, it gives us an idea of what efforts are being made to mitigate the negative affects we are feeling and allows us to encourage the continuation and amplification of these efforts. The JCM program expands upon that idea to its next logical step. JCM credits equate the values of the Japanese government – emission reductions – with the values of partner countries – technological development beneficial to society – and create a mutually beneficial result.

No crediting program is perfectly designed. Many methodologies have come under scrutiny for over-crediting, negative add-on effects, out-of-touch project design by a foreign entity, poor local administered locally, etc. JCM credits are not immune to these potential issues, especially as the program expands to include more “removed-emissions” methodologies, but as the approval and issuance process brings together diverse stakeholders (Japanese, partner country, and corporate) each with unique value priorities it is more likely that a beneficial result can be achieved. In the end, that is the goal of Environmental, Sustainability, and Governance (ESG) and Diversity, Equity and Inclusion (DEI) initiatives as a whole – achieving the best possible result by balancing the values of all the stakeholders not just those we already understand.

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More information

• JCM website
• Recent Developments of the Joint Crediting Mechanism (November 2023) – Government of Japan
• JCM Project Development Guide for Privately Funded Projects (March 2024) – Ministry of Environment, Ministry of Economy, Trade and Industry, Ministry of Foreign Affairs, Ministry of Agriculture, Forestry and Fisheries (Japanese only)