Japan has put the first concrete design for GX-ETS allowance trading on the table. The proposal, presented in late August 2026, defines who will be allowed into the national carbon market beyond the companies legally required to participate, setting entry thresholds for non-compliance entities such as group companies of covered emitters and qualified market makers. For carbon traders, banks and industrials positioning around Asia’s newest compliance market, this is the document that turns the GX-ETS from an allocation exercise into a future trading venue, with an official launch of trading expected in the fall of 2027.
What the Proposal Actually Does
The GX-ETS entered its mandatory phase on April 1, 2026, covering companies with annual emissions of at least 100,000 tonnes of CO2 equivalent. What it still lacks is a functioning secondary market: allowances are being allocated, but the rules for who can buy, sell and intermediate them have not existed until now.
The new proposal fills that gap in two ways. First, it opens participation to entities related to covered emitters, specifically parent companies and subsidiaries of firms under compliance obligation. This matters for Japan’s industrial structure, where emissions and treasury functions often sit in different entities within the same group. Second, it admits market makers that meet minimum qualification requirements, creating a dedicated channel for professional liquidity providers rather than leaving price formation entirely to bilateral deals between emitters.
The design stops short of a fully open market. Entry thresholds for non-compliance entities mean access is conditional and screened, closer in spirit to the early years of the EU ETS or Korea’s ETS than to a commodity exchange open to all comers.
Why Market Access Rules Decide the Price
Who is allowed to trade determines how a carbon price behaves. A market restricted to covered emitters tends to trade thinly, with most participants buying only to cover a shortfall and few willing to carry positions. Adding group affiliates lets industrial conglomerates centralize their compliance trading, which concentrates volume but can also internalize it. Adding market makers is the step that typically converts a surrender mechanism into a price signal, because someone is finally paid to quote both sides.
The stakes are visible in the expectations already forming. Japanese emitters surveyed in early August were targeting an allowance price in a range of JPY 1,700 to 3,000 per tonne of CO2 equivalent, roughly $11 to $19. Tokyo Gas is expected to face the highest carbon costs among Japanese utilities, estimated at JPY 14 to 18 billion, about $85 to 110 million, through fiscal year 2030. Numbers of that size justify exactly the kind of intermediation the proposal is designed to attract.
The Run-Up to Fall 2027
The timeline now has three fixed points. Phase 2 of the GX-ETS began in April 2026 with the mandatory threshold in force. The trading design proposal of late August 2026 opens the rule-writing phase for market participation. Trading itself is expected to launch officially in the fall of 2027, giving participants roughly a year to prepare once the rules are finalized.
Several design questions remain open in parallel. Banking of allowances into future years is under government examination with a view to fiscal 2027 rules, and allocation clarity is still limited: demand in the first months of the mandatory phase has been muted precisely because companies do not yet know their final allowance positions. The GX League, the voluntary predecessor that ran from fiscal 2023 and gathered more than 700 companies accounting for around 60 percent of Japan’s emissions, provides the participant base, but voluntary trading volumes under it were modest.
What It Means for Market Participants
For covered industrials, the proposal signals that compliance trading can be organized at group level: treasury or trading subsidiaries will likely be able to hold and manage positions on behalf of emitting affiliates, which changes how procurement and risk policies should be drafted over the next twelve months.
For traders, banks and market makers, the qualification thresholds are the document to watch. Japan is deliberately inviting professional intermediaries in before trading starts, rather than retrofitting them later. That is an opportunity to shape market infrastructure early, but it comes with screening requirements whose stringency will decide how competitive the market-making business becomes.
For offset developers, a liquid GX-ETS allowance market would sharpen the price benchmark against which eligible domestic credits are valued. The scheme’s treatment of offsets remains conservative, and clearer allowance prices would make that conservatism easier to quantify.
What to Watch
Three things will determine whether the fall 2027 launch produces a real market. First, the final qualification criteria for market makers and group entities: tight thresholds would replicate the thin liquidity of the voluntary phase under a mandatory label. Second, the banking decision for fiscal 2027, which determines whether allowances are a one-year compliance instrument or a store of value worth holding. Third, allocation disclosure: until emitters know their free allocation, most will stay on the sidelines regardless of how elegant the trading rules are.
