Japan has long feared the introduction of a new carbon tax at the EU border, claiming that it could put its exports at a disadvantage. After all, Japan’s primary energy balance is dominated by fossil fuels. The introduction of the EU carbon tax system later this year, however, potentially looks like a boon rather than a bust for Japanese manufacturers.

Geopolitics have brought Japan and the EU closer together in recent years. In 2019, the two enacted one of the world’s largest free trade deals and have worked to synchronize energy and climate strategies in the face of supply disruptions caused by the war in Ukraine, among other challenges.

Still, one area where the two were expected to clash was over carbon pricing. The EU was one of the world’s first to introduce a carbon price cap system, based on which this coming October the bloc will roll out a Carbon Border Adjustment Mechanism (CBAM) that will impact a number of specific products in carbon-intensive sectors. Japan, on the other hand, has lagged in development of domestic carbon markets and is yet to commit to a wholesale surcharge on CO2 emissions.

Instead, key policy and industry leaders on both sides are talking up increased mutual trade and collaboration as a result of CBAM. It seems as though Japan has several ways that it can use the new mechanism to its advantage.