Japan’s Mandatory GX-ETS: What Companies Need to Do in FY2026

Japan’s mandatory emissions trading system ("GX-ETS") became fully operational from FY2026 under the amended GX Promotion Act.

For companies with significant CO₂ emissions in Japan, the first key compliance deadline is 30 September 2026. Covered companies should therefore confirm their status and prepare the required filings without delay.

1. Who is covered?

GX-ETS applies to business operators whose average annual direct CO₂ emissions over the preceding three fiscal years are at least 100,000 tCO₂.

For FY2026, the relevant period is FY2023 to FY2025. The threshold covers direct CO₂ emissions (broadly corresponding to Scope 1 CO₂ emissions) including emissions from fuel use and industrial processes and, in certain cases, transportation activities. Indirect emissions from purchased electricity, heat or steam (Scope 2) do not count towards the threshold.

As a general rule, the threshold is assessed for each business operator separately. Subsidiaries and affiliated companies are therefore treated as separate operators.

However, qualifying covered companies within the same corporate group may make joint filings where they have the required relationship, such as certain parent-subsidiary, affiliate or sister-company relationships, and carry out GX-related investments on an integrated basis.

Companies are responsible for determining each year whether they fall within the scope of the system.

2. What must covered companies do by 30 September 2026?

For FY2026, a covered company must:

• submit the required notification of its annual average emissions;

• submit a transition plan; and

• calculate and monitor its FY2026 direct CO₂ emissions.

  
  

The filings are made through the Emission Reporting & Management System ("ERMS"). Opening an ERMS account requires a G-Biz ID Prime or Member account, so companies that do not yet have the necessary access should complete this step in advance.

The transition plan must address, among other matters, the company’s direct and indirect CO₂ emissions, reduction targets through FY2030, planned investments and certain GX-related initiatives. The transition plan is an annual filing, and specified information will be published by the relevant authorities on a company-by-company basis.

Companies should therefore ensure that the information submitted is consistent with their existing sustainability disclosures and, where applicable, group-level climate commitments.

3. How does the allowance system work?

The government allocates emissions allowances to covered companies under prescribed methodologies. During the initial phase of the system, allocations are principally made free of charge, using benchmark methodologies for designated activities and historical emissions-based methodologies in other cases.

A company whose compliance position exceeds its allocated allowances may need to acquire additional allowances, while surplus allowances may be traded. Eligible J-Credits and JCM credits may also be used for compliance, subject to the applicable rules and a limit generally corresponding to 10% of actual emissions.

4. Special timetable for FY2026

The first year of the mandatory GX-ETS is subject to transitional arrangements.

Although covered companies must submit their annual average emissions notification and transition plan by 30 September 2026, the filing used as the basis for the FY2026 allowance allocation is exceptionally deferred until 2027.

As a result, the filings due in 2026 do not require verification by a registered verification body. However, FY2026 actual emissions and the figures used to determine allowance allocation will subsequently require such verification. METI therefore recommends that covered companies begin making arrangements with a registered verification body during FY2026.

For FY2026, the principal subsequent deadlines are:

• 30 September 2027: filing of the relevant allowance-calculation information and reporting of verified FY2026 emissions;

• by the end of November 2027: allocation of allowances and notification of the required allowance holding amount; and

• 31 January 2028: deadline for holding the required allowances.

  
  

Failure to hold the required amount may result in a statutory payment in respect of the shortfall.

5. What should companies do now?

Companies with significant operations or emissions in Japan should now:

• determine whether each Japanese entity meets the 100,000 tCO₂ threshold;

• consider whether joint filing within the corporate group may be available and appropriate;

• ensure that the necessary G-Biz ID and ERMS arrangements are in place;

• prepare the annual average emissions notification and transition plan ahead of 30 September 2026;

• review consistency with existing sustainability and climate-related disclosures; and

• begin preparing for the verification of FY2026 emissions and future allowance management.

  
  

GX-ETS implications should also be considered when planning mergers, corporate reorganisations, business transfers or significant changes to production activities, as specific rules apply to such transactions. METI has issued a dedicated manual addressing mergers, demergers and business transfers under the system.

Looking ahead

GX-ETS is one component of Japan’s broader carbon-pricing framework. The government also plans to introduce a fossil fuel levy from FY2028 and to begin the phased introduction of paid allowance auctions for the power generation sector from FY2033.

With the first GX-ETS filing deadline approaching on 30 September 2026, potentially covered companies should confirm their status and begin preparing the necessary filings.

This newsletter is intended to provide general information only and does not constitute legal advice.