Urban Low-Carbon Leadership and State Rescaling: Tokyo’s Cap-and-Trade System

1. Introduction

As cities assume increasing responsibility for climate mitigation, an important question is whether subnational carbon markets can function as effective instruments of urban decarbonization. Over the past two decades, urban governments have expanded their involvement in climate governance through regulatory standards, energy-efficiency programs, and participation in transnational policy networks. Yet market-based mechanisms—particularly emissions trading systems (ETSs)—have typically been designed and implemented at national or supranational scales. This raises a fundamental question for urban governance: can carbon markets operate effectively when adapted to the institutional, economic, and spatial conditions of cities?

This article addresses that question by examining the institutional development and performance of the Tokyo Cap-and-Trade System (TCTS), the world’s first mandatory city-level emissions trading program. Implemented by the Tokyo Metropolitan Government (TMG) in 2010, the system regulates greenhouse-gas emissions from large commercial and industrial facilities within the metropolitan area. While the scheme has attracted international attention as a pioneering example of urban climate policy, it has rarely been analysed within broader debates on subnational carbon governance. By situating Tokyo’s experience within these debates, the article explores how global policy instruments such as emissions trading are translated and adapted within urban governance contexts.

Japan provides a particularly revealing setting for examining this issue. Historically, the country’s climate and energy policy has been shaped primarily through national industrial-policy frameworks administered by the Ministry of Economy, Trade and Industry (METI), especially through its Agency for Natural Resources and Energy (ANRE). Reflecting its growth-oriented mandate, METI has generally sought to incorporate emissions constraints within broader programs promoting energy efficiency and industrial productivity rather than establishing stand-alone carbon markets. The 1998 revision of the Energy Conservation Law illustrates this approach. Under the revised legislation, large energy users—defined as facilities consuming at least 3,000 kilolitres of crude-oil equivalent annually—were required to submit regular reports detailing their energy consumption, conservation measures, and medium-term efficiency plans (METI 2012). These reporting requirements created a nationwide monitoring framework centred on efficiency improvements rather than carbon pricing.

Tokyo’s climate policies emerged partly from the opportunities created by this national framework. Officials in the Tokyo Metropolitan Government’s Bureau of Environment (BOE) recognized that the national reporting system provided both a regulatory precedent and an administrative infrastructure for more ambitious metropolitan-level initiatives. By adapting the existing reporting regime, Tokyo developed its own facility-level monitoring system and began exploring stronger regulatory mechanisms to reduce emissions from large buildings and industrial facilities. As Takao (2014) notes, this institutional foundation enabled the metropolitan government to move beyond national policy frameworks and experiment with new forms of climate governance.

The eventual creation of the TCTS was therefore not the result of direct policy transfer but rather of institutional layering and translation. The concept of emissions trading—first proposed by economists such as Dale (1968) and later implemented in the United States to control sulfur dioxide emissions—entered global climate governance with the establishment of the European Union Emissions Trading System (EU ETS) in 2005. During the early 2000s, academic researchers and environmental policy experts in Japan began discussing these developments with Tokyo officials. Workshops, policy discussions, and collaborative research projects introduced BOE policymakers to the possibilities of emissions trading while also highlighting the institutional constraints associated with adopting foreign policy models (Takao 2014).

These interactions illustrate processes that policy-mobility scholars describe as the circulation and reinterpretation of policy ideas across jurisdictions (McCann and Ward 2015). Rather than being transferred wholesale, policy instruments are typically reshaped through local experimentation and institutional adaptation. Cities have become particularly important arenas for such processes because many climate-policy challenges—energy consumption in buildings, transportation systems, and urban infrastructure—are inherently metropolitan in scale (Collier 1997; Betsill and Bulkeley 2007). As a result, urban governments increasingly function as laboratories where global environmental policy ideas are tested, modified, and reconfigured.

Tokyo’s experience illustrates this dynamic particularly clearly. Policymakers quickly concluded that simply replicating overseas cap-and-trade models was neither feasible nor desirable. Tokyo’s economic structure differs significantly from the industrial economies that initially motivated emissions trading schemes. The metropolitan economy is dominated by the service sector, with commercial buildings rather than heavy industry accounting for the majority of energy consumption. Moreover, the administrative culture of Japanese local government—characterized by detailed reporting requirements and regulatory monitoring—favoured a compliance-oriented system rather than a purely market-driven mechanism.

The resulting TCTS reflects these institutional and economic conditions. Implemented in 2010, the system applies mandatory reduction targets to large facilities consuming at least 1,500 kilolitres of crude-oil equivalent annually. Approximately 1,300 facilities fall within the scheme, including about 1,100 commercial buildings and roughly 200 industrial establishments (BOE 2025_b). Together these facilities account for around 20 percent of Tokyo’s carbon dioxide emissions. The city’s broader emissions profile highlights the urban nature of the challenge: commercial activities account for about 41 percent of emissions, households for 32 percent, transportation for 17 percent, and industry for only 7 percent (BOE 2024_a).

One of the most distinctive features of the Tokyo system is its inclusion of indirect emissions from electricity consumption. Conventional emissions trading systems typically focus on direct fossil-fuel combustion, particularly in energy and industrial sectors. Tokyo’s system instead targets building-based energy use, recognizing that electricity demand from commercial and office buildings constitutes a major source of metropolitan emissions. This design reflects the highly electrified structure of Tokyo’s urban economy and the declining role of heavy industry within the metropolitan area.

At the same time, the TCTS differs from large-scale carbon markets such as the EU ETS or California’s cap-and-trade program. Rather than relying primarily on extensive trading among market participants, the Tokyo system combines regulatory reduction obligations with the possibility of credit trading among covered facilities. Credits are issued when facilities achieve reductions beyond their mandated targets, creating a hybrid mechanism that incorporates both regulatory oversight and market incentives. This design reflects Tokyo’s administrative emphasis on monitoring and verification while still introducing market-based flexibility within the compliance process.

Tokyo’s experience therefore raises broader questions about the institutional effectiveness of urban-scale carbon markets. While the system has achieved measurable emissions reductions among regulated facilities, it has also generated relatively modest trading activity compared with national or regional carbon markets. This outcome highlights the tension between regulatory and market logics within subnational climate governance. On the one hand, the system demonstrates that metropolitan governments can design innovative policy instruments that produce tangible mitigation outcomes. On the other hand, the localized nature of the scheme raises questions about the scalability and transferability of such institutional arrangements.

Against this background, the article examines how the Tokyo Cap-and-Trade System functions as an urban adaptation of emissions trading and what its experience reveals about the possibilities and limits of subnational carbon markets. Rather than evaluating the system solely in terms of aggregate emissions reductions, the analysis focuses on the institutional effectiveness of the scheme—specifically the extent to which it establishes credible reduction targets, generates functioning market mechanisms, and produces meaningful carbon price signals. By analysing these dimensions, the article seeks to contribute to broader debates on urban climate governance and the role of cities in developing innovative policy responses to climate change.

Tokyo’s experience suggests that cities can play a significant role in translating global climate-policy instruments into locally appropriate governance arrangements. At the same time, it also demonstrates that such policy innovations are shaped by the institutional and economic contexts in which they emerge. Understanding these dynamics is essential for assessing both the promise and the limitations of urban carbon markets as instruments of climate mitigation.

2. Method

To evaluate the effectiveness of the Tokyo Cap-and-Trade System (TCTS), this study adopts a functional-analytical framework grounded in the policy design literature on emissions trading. Rather than assessing effectiveness solely in terms of aggregate emissions outcomes—which may reflect broader economic or technological trends—the analysis focuses on whether the institutional architecture of the system performs the core functions expected of an effective carbon market. This approach follows scholarship emphasizing that the performance of emissions trading systems depends not only on observed emissions reductions but also on whether their design generates credible incentives for regulated actors to alter behaviour and invest in low-carbon technologies (Tietenberg 2006; Stavins 2007; Ellerman, Convery, and de Perthuis 2010).

From this perspective, the effectiveness of the TCTS can be assessed through three interrelated dimensions widely identified in the literature as central to emissions trading performance: (1) the stringency and credibility of the emissions cap, (2) the efficiency and liquidity of the trading mechanism, and (3) the strength and predictability of the carbon price signal. Together, these dimensions capture the institutional conditions under which regulatory constraints are translated into market-based incentives for emissions reduction and technological change.

The first dimension—cap stringency—addresses the environmental integrity of the system. In cap-and-trade programs, the emissions cap establishes the level of aggregate emissions permitted within the regulated sector and thus determines the degree of scarcity in the market (Tietenberg 2006; Ellerman, Convery, and de Perthuis 2010). When the cap is sufficiently stringent, regulated entities must either reduce emissions or acquire additional allowances, creating a meaningful incentive for abatement. Conversely, an overly generous cap can produce surplus allowances that suppress prices and weaken behavioural change, as demonstrated in early phases of the European Union Emissions Trading System (Ellerman and Buchner 2007; Laing et al. 2013). Assessing cap stringency therefore requires attention not only to formal reduction targets but also to institutional design features—such as baseline selection, sectoral coverage, allocation rules, and compliance flexibility—that shape the effective tightness of the constraint.

The second dimension—market efficiency—examines whether the trading mechanism enables emissions reductions to occur at least cost. Economic analyses of emissions trading highlight that market exchange allows abatement to take place where marginal costs are lowest, thereby reducing the overall economic burden of compliance (Stavins 1995; Goulder and Schein 2013). Realizing this efficiency, however, depends on institutional arrangements that support market participation, facilitate price discovery, and minimize transaction costs (OECD 2021). The analysis therefore examines how the institutional design of the Tokyo market—including its reliance on bilateral trading, allowance banking provisions, and offset mechanisms—affects trading activity, participant engagement, and the overall liquidity of the system.

The third dimension—carbon price credibility—concerns the dynamic incentives generated by the market. Carbon pricing functions not only as a compliance cost but also as a signal shaping firms’ expectations about future regulatory conditions and investment risks (Newell, Pizer, and Raimi 2014; Aghion et al. 2016). Stable and sufficiently strong price signals can encourage firms to undertake long-term investments in energy efficiency and low-carbon innovation. Conversely, weak or volatile prices undermine the credibility of the system and reduce the likelihood that regulated actors will incorporate carbon costs into strategic decision-making. Evaluating this dimension therefore involves examining both the level and stability of carbon prices within the TCTS, as well as the institutional arrangements—or absence thereof—that influence supply–demand dynamics in the allowance market.

Taken together, these three dimensions—cap stringency, market efficiency, and price credibility—provide an integrated framework for evaluating the institutional performance of urban carbon markets. By focusing on how regulatory design interacts with market dynamics, the framework highlights the governance mechanisms through which subnational climate policies seek to mobilize private actors in pursuit of collective environmental goals.

Applying this framework to the Tokyo case allows the study to assess whether the TCTS operates as a credible market-based instrument for urban climate governance. Specifically, the analysis investigates whether the system’s combination of regulatory constraints and informational transparency generates meaningful incentives for emissions reduction, encourages market participation, and supports longer-term investment in low-carbon technologies within the urban built environment.

To this end, the study draws on documentary analysis of TMG policy documents, program guidelines, and official reports on the operation of the TCTS. Along with literature reviews, these sources are used to reconstruct the institutional design of the system and track the evolution of key regulatory parameters across compliance periods. In addition, publicly available data on emissions performance, allowance transactions, and carbon price levels are examined to evaluate the functioning of the market across the three analytical dimensions identified above.

This functional-analytical approach is particularly appropriate for the Tokyo case for two reasons. First, the TCTS represents a subnational climate policy implemented within a complex urban economic environment, where emissions trajectories are influenced by multiple external variables. Evaluating institutional performance therefore provides a more reliable basis for assessing policy effectiveness than attempting to attribute emissions reductions directly to the program. Second, Tokyo’s system combines regulatory mandates with market mechanisms and informational governance tools, making it necessary to analyse how these institutional components interact to shape behavioural incentives.

The following section will evaluate the TCTS across the three dimensions of effectiveness. The discussion and concluding sections will synthesise these findings to assess the governance performance of the TCTS and its implications for urban carbon markets.

3. Results and Evaluation

This section evaluates the performance of the TCTS according to three core dimensions commonly used to assess emissions trading systems: cap stringency, market efficiency, and price credibility. These criteria capture whether the system imposes a meaningful emissions constraint, whether trading functions as an efficient cost-minimization mechanism, and whether the carbon price provides credible long-term signals for investment in emissions reductions. Examining the TCTS through these dimensions reveals a mixed picture: while the system has delivered substantial emissions reductions and achieved universal compliance, its market component has remained limited and the resulting price signal weak.

Implemented in 2010, the TCTS applies an aggregate emissions cap to major commercial and industrial facilities within the Tokyo Metropolitan Government’s jurisdiction.1 By combining mandatory reduction targets with tradable credits, the TCTS seeks to embed market-based logic within the city’s regulatory architecture and encourage participating firms to view carbon management as an integral component of corporate strategy.

Baseline emissions are determined through a grandfathering approach (Knight 2012; Schmidt and Heitzig 2014). Each covered facility calculates its baseline based on the average emissions from any three consecutive years between 2002 and 2007, allowing operators to choose the period most advantageous to their historical performance. This flexibility was intended to minimize administrative burden and to acknowledge firms that had already implemented early energy-efficiency improvements (Nishida, Hua, and Okamoto 2016; Roppongi, Suwa, and De Oliveria 2017). However, it also introduced heterogeneity in abatement obligations, reflecting a trade-off between fairness, political feasibility, and environmental stringency.

Conceptually, emissions trading systems can be divided into two principal design types: cap-and-trade (C&T) and baseline-and-credit (B&C). In cap-and-trade systems, allowances corresponding to the cap are allocated ex ante; firms trade these to achieve compliance. In baseline-and-credit systems, credits are generated ex post when entities reduce emissions below a designated baseline. The Tokyo scheme follows the latter approach—credits are issued retrospectively to facilities achieving reductions beyond their mandated targets (ICAP 2025; IEEJ 2021). This design emphasizes performance-based incentives, aligning with Tokyo’s administrative tradition of results monitoring and verification rather than pre-allocation of tradable rights.

3.1. Cap Stringency: Compliance Success with Ambiguous Causal Impact

The first dimension concerns the stringency and credibility of the emissions cap, which determines whether the regulatory constraint generates meaningful incentives for abatement. The TCTS requires large commercial and industrial facilities to reduce emissions relative to baseline levels by 6–8 percent during the first compliance period (2010–2014), 15–17 percent during the second (2015–2019), and 25–27 percent during the third (2020–2024) (BOE 2025_b). According to the Tokyo Metropolitan Government (TMG), all regulated facilities met their reduction obligations during both the first and second compliance periods, either through direct emissions abatement or by purchasing credits (BOE 2016; BOE 2022a). By fiscal year 2023, emissions from covered facilities had declined to 11.32 million tonnes of CO₂—approximately 31 percent below baseline levels (BOE 2025_a).

At face value, these outcomes suggest that the system has successfully imposed a binding cap and driven significant emissions reductions. However, assessing cap stringency requires examining whether these reductions can be causally attributed to the emissions trading mechanism itself. Evidence from empirical studies suggests that the relationship between the cap and observed reductions is less straightforward.

A critical contextual factor was the 2011 Great East Japan Earthquake and subsequent nuclear shutdown, which generated severe electricity shortages across Japan. In response, firms and households in Tokyo implemented extensive energy conservation measures, including reduced electricity consumption, operational adjustments, and accelerated efficiency upgrades (Kimura and Nishio 2015; Wakabayashi and Kimura 2018). These changes produced a rapid decline in energy use across the metropolitan economy.

Emissions data illustrate the magnitude of this shock. As Figure 1 shows, emissions from regulated facilities declined sharply in the year following the disaster, falling from a 13 percent reduction in 2010 to a 22 percent reduction in 2011 relative to baseline levels (BOE 2019). This abrupt decline was largely driven by widespread electricity-saving initiatives during the post-disaster energy crisis, as nuclear plant shutdowns created severe power shortages. For instance, the proportion of facilities adopting lighting-related conservation measures increased from 27 percent in 2009 to 63 percent in 2011 (Ohno 2017, 15). By 2012, both emissions levels and the rate of new energy-saving installations had stabilized—suggesting that the 2011 earthquake functioned as a critical juncture that reconfigured energy behaviour and policy orientation, rather than as a product of the cap-and-trade system itself.

Econometric analyses comparing regulated and non-regulated facilities reinforce this interpretation. Studies find no statistically significant difference in energy consumption trends between facilities subject to the TCTS and those outside the system (Abe and Arimura 2022; Wakabayashi and Kimura 2018). In some cases, non-covered facilities achieved comparable or greater reductions in energy use, suggesting that broader socio-technical dynamics—including energy price fluctuations, technological diffusion, and post-disaster conservation behaviour—played a major role in shaping emissions trajectories.

Taken together, these findings indicate that the TCTS cap has been credible but only moderately binding. Compliance has been universal, demonstrating the effectiveness of the regulatory framework. Yet the available evidence suggests that much of the observed emissions decline reflects structural changes in energy use rather than scarcity created by the cap itself. In this sense, the cap has functioned less as a strict constraint and more as an institutional mechanism that formalizes and consolidates existing conservation trends within Tokyo’s regulatory framework.

3.2. Market Efficiency: Limited Trading and Predominant Internal Abatement

The second dimension concerns market efficiency, defined as the extent to which trading allows emissions reductions to occur where they are cheapest. In a well-functioning cap-and-trade system, firms with lower abatement costs reduce emissions beyond their obligations and sell surplus allowances to firms facing higher costs. Active trading therefore minimizes overall compliance costs while revealing information about marginal abatement costs.

Evidence from the TCTS indicates that trading activity has remained modest and episodic, suggesting that the market has played a limited role in determining compliance strategies. Most regulated facilities have satisfied their reduction obligations through internal abatement measures rather than credit purchases. According to TMG data, 91 percent of facilities in the first compliance period, 85 percent in the second, and an estimated 79 percent in the third achieved compliance primarily through internal reductions (BOE 2016; BOE 2022_a; BOE 2024_b).

As Figure 2 indicates, the proportion of facilities engaging in credit transactions has increased gradually but remains relatively small. Approximately 9 percent of facilities relied on trading during the first compliance period, rising to 15 percent in the second and an estimated 21 percent in the third (BOE 2024 _b; BOE 2025 _b). However, these figures include intra-corporate transfers among affiliated facilities, which formally count as trading but do not constitute genuine market exchanges.

As a result, trading activity tends to concentrate near compliance deadlines rather than occurring continuously throughout the compliance cycle. This pattern indicates that firms use trading primarily as a compliance safety valve rather than as a routine tool for cost optimization.

Further evidence of limited market efficiency can be seen in the imbalance between credit issuance and trading volumes. During the first compliance period, approximately 10.27 million tonnes of surplus credits were issued but only 0.19 million tonnes were traded (BOE 2016). In the second period, issuance increased to 11.83 million tonnes, yet trading volumes rose only marginally to 0.79 million tonnes (BOE 2022_a). The persistence of large credit surpluses indicates that most participants could meet their reduction obligations at relatively low cost without relying on the market. Many facilities banked credits accumulated during earlier periods, generating an oversupply that has carried forward into subsequent compliance phases (BOE 2019).2

Institutional design has also constrained the development of an active trading market. Unlike some other emissions trading systems, the TCTS does not operate a centralized exchange or clearinghouse. Transactions occur through bilateral negotiations or intermediaries, often without public disclosure of prices. While this arrangement was intended to reduce administrative complexity and accommodate Japan’s corporatist business environment, it has also limited market transparency and liquidity.

Survey evidence illustrates the consequences of this institutional design. Nearly half of regulated firms report practical obstacles to trading, including uncertainty about market prices and difficulty identifying trading partners (BOE 2022_b).3 Without transparent price discovery mechanisms, the market cannot function as an effective platform for cost optimization.

Overall, the evidence suggests that the TCTS trading system operates primarily as a compliance mechanism embedded within an administrative regulatory regime, rather than as a fully developed market for carbon allowances.

3.3. Price Credibility: Oversupply and Weak Carbon Price Signals

The third dimension concerns price credibility, which refers to whether the carbon price generated by the system provides a reliable signal for long-term investment in emissions reductions. In emissions trading systems, price credibility depends on scarcity in the allowance market as well as transparent mechanisms for price discovery.

In the Tokyo system, persistent allowance surpluses have substantially weakened price signals. At the start of the program, market observers estimated credit prices at approximately ¥10,000–¥15,000 per tonne, levels broadly comparable to early prices in the European Union Emissions Trading System (ICAP 2025). Over time, however, the accumulation of unused credits significantly reduced market scarcity.

By 2025, estimated credit prices had fallen to approximately ¥600 per tonne (ICAP 2025). This dramatic decline reflects what scholars describe as a structural imbalance within cap-and-trade systems: when emissions reductions are achieved more cheaply than expected, surplus allowances accumulate and prices fall (Neuhoff et al. 2012; Dimos et al. 2020).

Weak price signals have implications for the types of mitigation strategies adopted by regulated firms. Data on reported mitigation measures indicate that the most common actions involve low-cost operational adjustments. Including reported plans for fiscal years 2023 and 2024, the largest category of actions falls under the operation and management of lighting systems. As indicated in Table 1, these measures represent approximately 22 percent (2,051) of all actions taken or planned and typically involve upgrading lighting equipment, turning off unused lights, and reducing standby power consumption (BOE 2025_b, 12). These measures are inexpensive and easily implemented but deliver relatively modest emissions reductions.

More capital-intensive investments—such as installing high-efficiency heat-source equipment—are less common despite offering greater emissions reduction potential. In fact, high-efficiency heat-source equipment installations, though representing only about 4 percent (375) of all measures, deliver over 11 percent of total emissions reductions (BOE 2025_b). This disparity indicates that firms tend to prioritize low-cost, operational adjustments with short payback periods—such as efficiency improvements in lighting or building management systems—rather than undertake capital-intensive upgrades, suggesting that the carbon price signal has not been sufficiently strong or predictable to incentivize long-term abatement investments.

The limited credibility of the price signal therefore constrains the system’s ability to stimulate deeper structural transformations in energy use. Without expectations of sustained or increasing carbon prices, firms have little incentive to undertake long-term investments in advanced low-carbon technologies or major organizational changes.

3.4. Interpreting Effectiveness in a Hybrid Governance System

Taken together, the evidence across the three evaluation dimensions suggests that the TCTS has produced significant emissions reductions but through mechanisms that extend beyond the operation of a carbon market. The system’s cap has been credible and administratively enforceable, yet its effective stringency has been moderated by external shocks and broader energy efficiency trends. Trading activity has remained limited, reflecting the dominance of internal abatement strategies and institutional features that constrain market liquidity. As a result, the carbon price generated by the system has remained weak and has provided limited incentives for long-term investment.

These findings point to the hybrid nature of Tokyo’s climate governance framework. Rather than functioning as a purely market-based instrument, the TCTS operates within a broader policy assemblage that includes energy-efficiency regulations, corporate reporting requirements, benchmarking systems, and administrative guidance. Instruments such as the Tokyo Climate Change Action Plan System and the Checklist of Measures provide detailed information on energy use and mitigation opportunities, enabling regulators to identify efficiency improvements and disseminate best practices across sectors.

Information disclosure and peer learning have played particularly important roles in shaping corporate behaviour. The Tokyo Metropolitan Government regularly publishes case studies, energy benchmarks, and performance comparisons, which reduce uncertainty and encourage firms to adopt proven efficiency measures (Nishida, Hua, and Okamoto 2016; Roppongi, Suwa, and De Oliveria 2017). Through these mechanisms, the regulatory system promotes organizational learning and gradual technological upgrading even in the absence of strong carbon price incentives.

In this context, the effectiveness of the TCTS lies not solely in the operation of a carbon market but in its integration within a broader governance framework that combines regulatory oversight, information disclosure, and incremental policy learning. The system therefore represents a distinctive model of administratively embedded carbon governance, in which market elements complement rather than replace traditional forms of bureaucratic coordination.

4. Discussion

A systematic evaluation of the Tokyo Cap-and-Trade System (TCTS) across the three analytical dimensions of cap stringency, market efficiency, and price credibility yields three principal findings. First, the emissions cap has proven administratively credible but only moderately binding. Regulated facilities have consistently met reduction obligations and aggregate emissions have declined substantially, yet much of this decline appears attributable to broader energy-efficiency improvements and post-2011 electricity conservation rather than scarcity generated by the cap itself. The cap therefore functions more as a compliance benchmark that consolidates ongoing efficiency practices than as a stringent constraint that compels widespread structural abatement.

Second, the trading mechanism has played only a limited role in allocating compliance costs. Most facilities have relied primarily on internal abatement measures, while trading volumes remain modest, episodic, and in some cases composed of intra-corporate transfers. These patterns suggest that the system operates less as an active carbon market than as an administratively structured compliance framework in which trading serves as a supplementary flexibility mechanism rather than the central driver of emissions reductions.

Third, the resulting carbon price has lacked credibility as a long-term investment signal. Persistent allowance surpluses and thin trading have kept credit prices low and relatively stable, reducing incentives for capital-intensive decarbonization. Instead, firms have tended to prioritise low-cost operational adjustments and incremental efficiency measures. Taken together, these findings indicate that the effectiveness of the TCTS derives less from the dynamics of a price-driven carbon market than from its capacity to institutionalise conservation practices and coordinate organisational behaviour within a regulated administrative framework.

Viewed from a governance perspective, the TCTS therefore represents a hybrid institutional form in which market mechanisms are embedded within a broader regulatory architecture. The system’s durability and policy influence stem not from the autonomous operation of trading markets but from its integration with complementary policy instruments and institutional networks. Building codes, energy-efficiency reporting requirements, subsidy programs, and corporate environmental commitments all interact with the cap-and-trade framework, reinforcing incentives for emissions reduction through multiple channels. In this sense, the TCTS functions as part of a wider governance assemblage that combines regulatory authority, administrative guidance, and selective market instruments.

This pattern illustrates how metropolitan governments can reinterpret globally circulating policy models through local institutional contexts. Rather than reproducing a textbook carbon market, Tokyo’s Bureau of Environment translated the cap-and-trade concept into a regulatory form compatible with Japan’s administrative traditions and corporate governance structures. Such institutional translation reflects broader dynamics identified in the literature on policy mobility and urban climate governance, where subnational authorities adapt global policy templates to fit locally embedded regulatory ecologies (Bulkeley, Castán Broto, and Edwards 2014; McCann and Ward 2015; Gordon and Johnson 2017). Tokyo thus demonstrates how market-oriented climate instruments can operate effectively even when market exchange itself remains limited, provided that they are embedded within supportive administrative and organisational infrastructures.

These findings also suggest directions for future research. Because multiple contextual factors—including technological upgrading, weather variation, and macroeconomic conditions—affect emissions trajectories, further empirical work is needed to isolate the causal contribution of the TCTS itself. Facility-level longitudinal datasets combined with counterfactual modelling could clarify whether the scheme generated additional emissions reductions or primarily codified existing conservation trends. Comparative analysis with other subnational emissions-trading systems, such as those in Seoul or Guangdong, would also help illuminate how institutional translation and policy mobility shape the functioning of urban carbon markets.

More broadly, evaluating subnational cap-and-trade systems requires analytical approaches that move beyond aggregate emissions outcomes to examine how policy instruments operate within complex governance environments. The Tokyo case underscores that the effectiveness of urban climate policy often depends less on the formal design of market mechanisms than on their interaction with administrative capacity, regulatory traditions, and organisational networks. Understanding these relational dynamics is essential for explaining why similar policy instruments divergent outcomes across jurisdictions.

Therefore, this systematic evaluations of a city-level emissions trading scheme using a clearly specified analytical framework shows that strong emissions outcomes do not necessarily imply the presence of a robust carbon market, but demonstrates that the TCTS operates less as a classical price-driven trading scheme than as an administratively embedded governance instrument that coordinates corporate behaviour and formalizes energy-efficiency practices. This finding challenges the assumption that market liquidity and price volatility are the primary indicators of policy effectiveness. It helps to advance the concept of institutional translation in urban climate governance, showing how metropolitan authorities adapt globally circulating policy models to fit local administrative structures and regulatory traditions. These insights highlight the importance of examining how market-based climate instruments function within broader governance assemblages rather than evaluating them solely through the lens of economic market performance.

5. Conclusion

Tokyo’s Cap-and-Trade System occupies a distinctive position in the global landscape of climate governance. It demonstrates that subnational governments can design and implement complex climate policy instruments even within national policy environments that remain cautious toward carbon pricing. The Tokyo case thus offers an important empirical window into how metropolitan governments can mobilise regulatory authority, administrative capacity and local policy entrepreneurship to advance low-carbon transitions.

Evaluating the system solely against the ideal type of a fully competitive carbon market would overlook its broader governance significance. The Tokyo experience illustrates that emissions trading systems can operate effectively as hybrid governance instruments that combine regulatory authority with limited market mechanisms. Through mandatory reporting, benchmarking, public disclosure and targeted guidance from the Bureau of Environment, the TCTS has institutionalised a culture of emissions management among large urban facilities. In this sense, its most important contribution may lie less in price formation than in administrative coordination and behavioural change within the urban economy.

The Tokyo case also highlights the growing importance of cities as laboratories of climate governance. In contexts where national governments remain constrained by political economy considerations or industrial policy priorities, metropolitan authorities may be better positioned to experiment with policy innovation. Tokyo’s policy entrepreneurship—drawing on national energy-reporting frameworks while adapting them to urban governance structures—demonstrates how subnational governments can creatively repurpose existing institutions to pursue climate objectives. Similar dynamics are now visible in other major cities across East Asia, Europe and North America, suggesting that subnational experimentation may increasingly shape the evolution of climate policy.

For the broader literature on subnational climate governance, three implications emerge. First, the effectiveness of urban emissions trading systems should be assessed not only through market metrics but also through their capacity to reorganise administrative practices and corporate behaviour. Second, institutional design choices—particularly baseline allocation methods and compliance flexibility—play a decisive role in determining whether emissions trading functions primarily as a regulatory instrument or as a market mechanism. Third, the political and administrative capacities of metropolitan governments can enable policy innovation even within nationally constrained climate policy environments.

Ultimately, the Tokyo Cap-and-Trade System represents both an achievement and a limitation of contemporary urban climate governance. It demonstrates that subnational governments can mobilise credible regulatory instruments to reduce emissions within large metropolitan economies. At the same time, its modest market dynamics reveal the structural difficulty of generating strong carbon price signals in politically cautious policy environments. As cities around the world search for pathways toward deep decarbonisation, the Tokyo experience suggests that the future of urban climate policy may lie not in pure market design but in hybrid governance architectures that blend regulatory oversight, administrative coordination and selective market incentives.

Future research could therefore fruitfully explore the performative dimensions of this hybrid market: how the very idea of trading—rather than the act of exchange itself—operates as a legitimizing technology of governance, signalling Tokyo’s participation in global climate regimes while retaining a distinctively bureaucratic mode of regulation. Comparative analysis with other subnational trading systems, such as Seoul’s ETS or California’s Cap-and-Trade Program, could shed light on how different institutional configurations of market-making reflect variations in state capacity, business networks, and political culture across urban contexts.