Opening New Frontiers in the Evolving Carbon Credit Market Through a Full-Spectrum "Create, Connect, Use" Approach

To begin, what exactly are carbon credits?

Naito Recently, countries around the world have been working together toward the goal of achieving carbon neutrality. One mechanism attracting attention as a means to this end is the carbon credit. Companies, particularly large corporations, are increasingly expected to reduce their GHG emissions. However, not all companies are able to achieve their reduction targets through their own efforts alone. Carbon credits emerged as a mechanism to address this challenge: the amount of GHG reduced or absorbed by a third party is quantified as "one credit per ton of CO2," allowing companies to trade those reductions to make up for any shortfall in their own targets. These tradable units are known as "carbon credits."

Could you briefly explain the overall structure of the carbon credit business?

Naito The carbon credit market consists of parties that "generate" credits: sellers that generate credits through initiatives such as introducing energy-efficient equipment, deploying renewable energy or implementing appropriate forest management practices, and parties that "Use" credits, namely buyers.

Between them are intermediaries that "connect" the two sides and facilitate sound transactions. Transaction prices are not fixed; they fluctuate depending on factors such as the "quality" of the credit, including how it was generated and whether stable future generation can be expected, as well as the format in which the transaction takes place.

Kinoshita Carbon credit transactions can broadly be divided into two categories depending on their purpose: "voluntary" initiatives and "compliance" initiatives.

Voluntary credits are used by companies pursuing carbon neutrality on their own initiative. The primary transaction format in this space is over-the-counter (OTC) trading, in which sellers and buyers negotiate directly. Because participation is voluntary, considerable importance is placed on the quality of the credit itself and the story behind it: how the credit was generated and what kind of value it represents.

Credits used for compliance purposes, by contrast, are used to meet obligations under regulatory systems such as emissions trading schemes (GX-ETS)*1. In these cases, transactions are typically conducted through open exchanges overseen by government authorities, where buy and sell orders are matched in a transparent marketplace. Because credits used within regulatory systems must meet high standards of fairness and reliability, it's essential to have a well-structured market with clearly defined trading rules and pricing mechanisms that allow all participants to engage with confidence.

Why have carbon credits gained so much momentum in Japan in recent years?

Kinoshita The key reason is that the Japanese government began fully implementing GX-ETS in fiscal 2026. Under the system, companies that reduce emissions beyond their targets through their own efforts can sell surplus allowances. Conversely, companies that fail to meet their reduction targets are required to purchase allowances to cover the shortfall. While similar government-led systems have long existed in places such as the EU and South Korea, this is the first time such a framework has been rolled out nationally in Japan.

The system applies to roughly 300–400 companies, the majority of which are large corporations. Combined, these companies account for around 60% of Japan’s total emissions, meaning the system is likely to have a significant environmental and economic impact.

What position does Sumitomo Corporation occupy within the carbon credit industry?

Kinoshita I would say we are involved across all aspects of the market: generating, connecting and using credits. On the generation side, we are promoting projects such as mangrove reforestation in regions including Asia and Africa to meet growing demand for voluntary credits. At the same time, we are developing JCM projects to respond to anticipated customer demand under GX-ETS, thereby contributing to the generation of carbon credits. On the connecting side, we act not only as an intermediary in OTC transactions but are also deeply involved in market-based trading, including efforts to enhance liquidity in the carbon credit market established by the Tokyo Stock Exchange in 2023. On the utilization side, we support dozens of major companies in their use of carbon credits.

More specifically, what role does Sumitomo Corporation play in OTC (voluntary) transactions?

Kinoshita Our aim is to become a top-tier provider of high-quality, nature-based voluntary credits. There are clear differences in the quality of carbon credits, and those differences have a major impact on pricing and demand.

Where and how was the credit generated? How were the resulting reductions or removals measured and quantified? What additional value does the project generate? In a market where some credits lack transparency and the validity of their figures can't always be verified, credits that can be explained clearly and in detail are regarded as high quality. For example, projects that increase forest cover and thereby promote local biodiversity, or create employment through reforestation and forest management activities, are considered to offer significant co-benefits and therefore tend to command higher prices.

Sumitomo Corporation maintains a firm stance: we establish our own quality standards and do not handle credits that fail to meet them. We focus on credits that can be thoroughly explained and understood from multiple perspectives. We believe the trust we have earned in this emerging market stems from our deep understanding of carbon credits gained through direct involvement at project sites, as well as from the careful dialogue we maintain with both buyers and sellers. This includes supporting projects developed by other companies from the conceptual stage onward, and we take pride in that fact.

Turning next to market-based (compliance) trading, what role does Sumitomo Corporation play in this area?

As Japan's carbon credit market develops, what kind of social and economic impact do you expect it to have?

Naito Until now, many technologies and projects that contribute to reducing GHG emissions were recognized as "good for society," but failed to achieve commercialization, and thus were not directly linked to corporate growth or broader economic activity. However, the emerging market has made it possible to monetize these efforts more effectively, creating opportunities to accelerate the development of new technologies and businesses that previously struggled to gain traction.