EU moves to soften carbon price as Japan makes ETS mandatory

The European Commission tables proposal to boost supply of allowances in the first of many anticipated changes to EU ETS

The EU moved to loosen its carbon pricing rules this week, while Japan made its national system mandatory. 

The European Commission asked co-legislators on Wednesday for permission to intervene in the Emissions Trading System (ETS) to keep costs down for companies. 

It wants to boost the supply of carbon allowances circulating in the system by ditching the mechanism through which a certain number of credits currently get ‘cancelled’.  

That invalidation process was introduced to address an oversupply of allowances under the regime, and buoy prices, but the Commission says the objective has now been achieved. 

Removing the mechanism, it told European Parliament and Council, would “provide an essential liquidity buffer to manage future market tightness after the mid 2030s and beyond”. 

“This targeted amendment contributes to safeguarding the orderly, smooth and efficient operation of the EU ETS framework,” it added.

This is the first of a raft of changes expected to be proposed over coming months, as the EU’s flagship decarbonisation regulation undergoes a full review amid heated lobbying.   

Austria, Hungary and Poland are among the Member States campaigning for a dramatic overhaul of the framework, to cut costs for high-emitting businesses already grappling with record oil prices.  

Earlier this year, Italy called for the EU ETS to be suspended entirely. 

Such demands have been rejected by other Member States, including Denmark, Finland, Portugal, Spain and Sweden, who warn that weakening the EU ETS could discourage investors from supporting low-carbon technologies.

Luxembourg, Slovenia and the Netherlands are among those supporting targeted revisions, but insisting the upcoming review shouldn’t be used as cover to dismantle the regime.  

Elsewhere, Japan’s GX-ETS became mandatory on Wednesday.  

The regime has been voluntary since 2023, during which time more than 700 companies – representing more than half the country’s emissions – participated in it.   

Now, GX-ETS has entered a new, seven-year phase, in which it will be mandatory for an estimated 300-400 entities with annual emissions higher than 100,000 tonnes.  

Mirroring the EU ETS, Japan’s regime allocates free emissions to in-scope firms, and phases them down over time. However, it has built-in price limits, meaning companies won’t have to pay more than JPY 4,300 (€23.40) for an allowance. 

If the price drops below JPY 1,700 a reverse auction mechanism will kick in.  

The final baselines for the scheme are expected to be published later this year.