Research Report · August 2026 In collaboration with Asset Impact

The Promise Already Made:
Japan's GX ETS

The Carbon Price Backed by a Spending Commitment

Japan's GX-ETS became mandatory in April 2026, covering around 600 companies above the 100,000 tCO₂ threshold. The system currently distributes all allowances free of charge. It is designed, however, to generate revenues to repay a share of the $120bn in Transition Bonds already issued. Free allocation must fall. The phase-out is not a policy risk. It is a commitment already made.

60%
of NIKKEI 225 emissions priced under GX-ETS
2.3m
allowance demand from a single utility in 2029
>60%
of EBITDA at risk at the most exposed firms
$7.4bn
projected annual compliance costs for emitters by 2040

About this report

Working with Asset Impact, Transition Metrics built the first bottom-up market model of Japan's GX-ETS. We filled the gaps in current legislation and projected exposure through 2040, translating the regulatory framework into firm-level financial impact across sectors.

This free report sets out our methodology, results, and recommendations.

Who should read this

Regulators

Assess the effect of the GX-ETS on competitiveness and identify distributional consequences across sectors.

Energy-intensive firms

Quantify GX-ETS exposure on earnings, plan for the free allocation phase-out, and benchmark against sector peers.

Investors

Identify which holdings face material EBITDA erosion as free allocation falls, and where relative pricing power creates opportunity.

Key findings

  • Near-term earnings impact is limited. Firms with significant capacity expansions since 2024 are the exception: they face compliance demand earlier than sector peers.
  • Free allocation must fall. The GX-ETS is structurally linked to Transition Bond repayment. Revenue must be generated; that requires paid allowances. The timeline is not optional.
  • Carbon-inefficient firms carry the most risk. They face higher allowance needs than peers and lack the pricing power to pass costs through. The combination is damaging.
  • Funding mechanisms are open now. Firms that decarbonise early and access transition finance will be better positioned as free allocation contracts. Waiting is not neutral.
Japan's Transition Bonds pre-commit the government to a future where carbon revenues must be generated. For covered firms, the free allocation phase-out is not a policy risk. It is a promise already made.

Access the full report

The full report includes firm-level modelling across key NIKKEI 225 constituents, scenario analysis across free allocation phase-out paths, and a quantification of EBITDA at risk through 2040. Complete the form to receive it.