The Japanese government has unveiled a draft framework for a benchmark-based carbon allowance allocation for power plants under its green transformation emissions trading scheme (GX ETS), setting the benchmark by fuel type to help mitigate the immediate impact on the industry and ensure stable electricity supplies.
A working group under the trade and industry ministry Meti on 10 October proposed to use a benchmark based on each fuel, in the categories of coal, natural gas/city gas and oil/others, to determine the amount of emissions allowance that can be obtained for free in the compliance carbon market, which is set to begin operating in the April 2026-March 2027 fiscal year.
The allocation of free emission allowances for power plants will be based on average power generation over the three fiscal years to 2025-26, multiplied by a benchmark carbon intensity.
Tokyo plans to adopt a benchmark by fuel only for free allowances, before it introduces an auction system from 2033-34. But it will gradually reduce the use of a benchmark carbon intensity based on fuel type from 2029-30, and instead increase the use of a benchmark linked to a weighted average of overall thermal power and its emissions. Meti also aims to reduce the carbon intensity benchmark annually to promote continued emissions cuts.
The working group will also continue discussing the issue of co-firing with non-fossil fuels, such as hydrogen, ammonia, biomass and wastes, if the clean fuel makes up the majority share of co-firing. It will also have to determine how to calculate allowances for the power and other industry sectors that utilise carbon capture and storage technology.
The proposed rule would provide relief to coal-fired power plant operators, as they would have a higher free allowance than those for LNG-fed plants. This latest draft framework is in line with a request by the Federation of Electric Power Companies of Japan (FEPC). The FEPC insisted last month that the benchmark should be decided by fuel type, as going strictly by carbon intensity would cause increases in power prices and curb investments to maintain power plants. It could be also challenging to swiftly shift to LNG from coal given the timeline of developments, it added.
