Carbon credits play a key role in Japan’s climate-change strategy, as it plans to support the development of carbon-reducing projects overseas and use the carbon credits against its domestic targets. And, for the first time, Japan is specifically promoting the use of nature-based projects. Its new stance could turn out to be a stimulus for nature-based developers internationally. In this blog post, we provide a high-level view of Japan’s approach to help investors assess potential opportunities and risks.
Putting the Joint Credit Mechanism to work
This initiative by Japan is centered on its Joint Credit Mechanism (JCM), which allows it to generate carbon credits in other countries. Japanese companies or the government can use, or “retire,” JCM credits to support progress toward their compliance or voluntary emissions-reduction targets.
In a policy plan published in late March 2024, Japan identified the development of forestry and agriculture projects under the JCM as a strategic priority for the first time. Behind these moves is a desire on the part of the Japanese government to boost supply of carbon credits issued through the JCM, and thereby ease the country’s decarbonization pathway.
So far, however, progress on getting the JCM working has been sluggish. Tokyo is targeting a cumulative supply of 100 Mt CO2e in JCM credits by 2030, but only 0.7 Mt CO2e of such credits (of any type) have been issued as of June 2024.
Japan is not alone in sending a positive signal to developers of nature-based projects in Southeast Asia and elsewhere. South Korea, for instance, established a new law earlier this year to support the private-sector implementation of REDD+ forestry projects overseas.
Using the Article 6 market
Since 2021, Japan has had a nationally determined contribution (NDC) target to reduce greenhouse-gas emissions by 46%, compared to 2013 levels, by 2030.
Article 6 of the 2015 Paris Agreement includes a mechanism by which one country can trade emissions-reduction credits from its own territory to another country that needs them to count toward its own NDC target. Once the Article 6 authorization process is in place, host countries will have the option to sell their share of the JCM credits they generate to Japan or other buyers. In other words, the nature-based turn of the JCM that is now underway could enable host countries to access conservation finance through the Article 6 market.
Agriculture remains fertile ground
The development of agricultural projects under the JCM was identified as a key initiative in the ASEAN-Japan Green Cooperation Plan, adopted by the respective agricultural ministers of those countries in October 2023. Since this strategy was launched, several JCM pilot projects have been announced in this sector.
In the first half of 2024, two Japanese project developers have established partnerships with provincial governments and local companies in Vietnam, with the objective of developing rice-based JCM projects in the country. Another rice-based JCM pilot has been implemented by a group of three Japanese companies in the Philippines.
In June, Japan published a draft JCM methodology for generating Article 6.2-eligible carbon credits from rice projects in the Philippines. It is preparing to propose a similar methodology for Vietnam soon. After these crediting standards have been approved by the country-level Joint Committees, the first JCM projects can be registered in the agriculture sector.
REDD+ dominates existing JCM supply
In December 2023, the first nature-based JCM credits were issued from the Prey Lang Wildlife Sanctuary, a REDD+ project in Cambodia. This issuance of 0.6 Mt CO2e credits was not only the first from this project type, but also the largest single JCM issuance to date. As of June 2024, credits from the Prey Lang project represent 83% of the cumulative supply of JCM credits. A smaller JCM-REDD+ project is currently under validation in Laos.
Japan has previously discussed the possibility of JCM-REDD+ implementation in its bilateral meetings with Indonesia, Kenya, Myanmar, the Philippines and Vietnam. Some of these discussions progressed to an advanced stage, but they appear to have lost momentum since 2018, without REDD+ guidance or methodologies being adopted.
Article 6 offers scope for JCM growth — and hard bargaining
Host countries’ interest in JCM-REDD+ could increase if their credits are validated for international trading under Article 6 of the Paris Agreement. Currently, host countries can only use them toward domestic mitigation targets. Therefore, the ability to monetize JCM issuance could provide a significant incentive for expanded host-country participation in the scheme.
Acknowledging this, Japan has included a commitment to “transition to the tradeable credit type mechanism at the earliest possible timing” in all its bilateral JCM agreements. Now that the Article 6 framework is taking shape, it is negotiating this transition with each of its bilateral partners.
So far, Japan has formalized the Article 6 authorization process in the JCM Rules of Implementation with only four countries (Georgia, Mongolia, Sri Lanka and Tunisia). For 25 bilateral partners, Japan still needs to establish or revise its JCM regulations in line with Article 6.
One thing to watch is that credit-sharing arrangements could emerge as a source of tension in these negotiations, as host countries seek to benefit from the Article 6 market by selling their share of the issuance.
Overall, only 5% of JCM credit issuance to date has been allocated to host countries. This reflects the fact that none of the credits from the Prey Lang REDD+ undertaking in Cambodia — again, the largest existing JCM project — have been allocated to the host country. Excluding the Prey Lang project, a third of all JCM credits have been allocated to host countries. However, there is significant variation across the partnerships, with host countries’ share of issuances ranging from nothing to 50%. The exhibit below presents the allocation of credits to the six partners that have issued the largest quantity of JCM credits to date.
Host country share of JCM credits for the six largest issuers
Developing countries are increasingly looking toward the international carbon market for conservation finance. For example, the Philippines has recently indicated it aims to sell nature-based credits to the Article 6 market. But as it stands, the global biodiversity financing gap remains unbridged. By facilitating investments into nature through the JCM and the emerging Article 6 market, Japan could play a significant role in addressing this problem.