India and Japan's Blueprint for Sustainable Growth

In a move to expedite decarbonization efforts while reducing clean energy costs in India, Japan and India are finalizing a Joint Crediting Mechanism (JCM). This bilateral framework will enable both nations to exchange emission reduction credits, supporting Japan in fulfilling its climate commitments.

Japan's goal of achieving net-zero by 2050 and India's 45% emissions reduction target by 2030 highlight the natural partnership between the two countries in decarbonization and economic growth. Japanese companies are increasingly interested in entering the Indian market as a relocation destination for production bases or as an investment opportunity. Therefore, this article explores the potential of partnerships in the carbon market sector.

What is the Joint Credit Mechanism?

Under the JCM, Japanese companies will invest in and deploy advanced carbon reduction technologies in India. In return, Japan will receive carbon credits that can offset its emissions or be traded within its national carbon market. The initiative falls under Article 6.2 of the Paris Agreement, which ensures internationally recognized and verifiable emissions reductions.

Once finalized, carbon credits will be officially registered and tracked. Joint committees will be formed to oversee project implementation and to verify credit issuance through the formulation of a detailed report.

Consequently, this mechanism will assist both countries in meeting their nationally determined contributions (NDCs) under the Paris framework. A wide range of sectors, including solar thermal energy, green hydrogen, and sustainable aviation fuel (SAF), are expected to benefit from JCM investments.

A Proven Model for International Cooperation

Originally initiated by Japan, the JCM facilitates the transfer of technical expertise and climate-friendly technologies from developed to developing countries. Developed nations benefit by outsourcing their emissions reductions, often at a lower cost. Meanwhile, this supports sustainable development in host countries. It helps mobilize international finance, alleviating the cost burden for the recipient country.

Currently, Japan has established similar agreements with 11 other countries, including Indonesia, Kenya, and Vietnam.

India and Japan had been discussing a JCM partnership since 2014. In 2023, a $600 million fund was jointly launched by India's quasi-sovereign wealth fund, the National Investment and Infrastructure Fund (NIIF), and the Japan Bank for International Cooperation (JBIC) to invest in sustainable projects. JBIC contributed 51% of that total, while the remainder came from India.

The fund aimed to invest in sustainable projects in areas such as e-mobility, renewable energy, and waste management. Other key initiatives, such as the Perform, Achieve, and Trade (PAT) scheme, have facilitated a long-standing India-Japan collaboration in energy efficiency. This partnership has reduced 10 million tons of CO2 emissions, saved 25 million tons of oil equivalent energy, and generated $10 billion in investments.

Prime Minister Shigeru Ishiba (second from left) and Indian PM Narendra Modi (third from left) attend a working lunch at the G7 and Outreach Partners Meeting. Climate was a big topic at the meeting. June 18, 2025 (Courtesy of the Government of Canada)

What are the Benefits?

For a country like India, which is vulnerable to climate change, adopting clean technologies is both essential and urgent. Achieving low or zero carbon emissions necessitates access to these technologies. However, such technologies often come with high upfront costs. This may exceed what the governments of developing countries can currently fund. They are typically expensive or not widely available.

For example, generating electricity from coal is cheaper than using green hydrogen or solar thermal power, despite the environmental cost. In this context, Japan's role becomes critical. It helps to equalize the cost of clean energy with conventional, polluting sources by subsidizing these technologies. Today, problems such as a severed supply chain, amid an unstable global situation, have aligned both countries' efforts and broader climate ambitions to build effective carbon markets.

A Strategic and Economic Game-Changer

Coal continues to dominate India's power mix due to its lower capital costs. However, with Japanese subsidies, alternatives such as energy storage systems and solar thermal plants could become economically viable, thereby accelerating India's energy transition. It has the potential to transform India's energy sector by improving the competitiveness and affordability of renewable energy technologies.

Beyond emissions cuts and costs, the JCM has the potential to generate jobs in both nations by fostering investments in low-carbon technologies. Furthermore, it promises to drive economic growth by creating skilled jobs. India can strategically channel these funds into underdeveloped clean energy sectors, leveraging Japanese expertise to expedite its transition to a low-carbon economy. This aligns with India's dual goals of sustainable development and economic expansion. Meanwhile, Japanese companies gain access to a rapidly growing market for clean technologies.

The initiative is likely to strengthen India-Japan strategic ties, complementing their collaboration in infrastructure, defense, and economic security. It also counterbalances China's growing regional influence, having a ripple effect on different domains of collaboration. However, the ultimate goal is for India to adopt and scale these technologies independently, making JCM a high-stakes and high-impact partnership.

India Fields Itself

India is poised to introduce its long-awaited carbon market by 2026. The market for the sale and purchase of carbon credits does not currently exist in our country. Under this program, those who use fossil fuels or emit carbon would have to buy carbon credits, while those who use power from non-fossil sources would receive carbon credits that they can sell in the market.

The introduction of carbon credits should incentivize manufacturers to adopt green energy solutions, reducing carbon emissions and enhancing compliance with global regulations. India's strong potential in green hydrogen, energy efficiency, waste management, and biogas reaffirms Japan's commitment to supporting these initiatives.

Major Roadblocks

There have been significant roadblocks to warming India-Japan relations in the climate domain. Negotiations with India have been ongoing since 2014, highlighting the complexity of such high-stakes climate agreements. Challenges also remain in ensuring that emissions reductions are not double-counted. This will be crucial to upholding the mechanism's credibility and preventing any compromise of its integrity.

Additionally, there is a concern that Japan might use the JCM to delay more decisive domestic climate actions. Critics argue that developed countries should prioritize cutting emissions at home first, as it feeds into domestic political debate on climate. However, supporters of the mechanism contend that international cooperation through frameworks like the JCM facilitates faster and more cost-effective global progress toward climate goals.

Long-term sustainability is another critical issue. India must ultimately develop the capability to adopt and scale these technologies independently. This will require not only funding but also knowledge transfer, training, and the development of infrastructure.

Without such capacity-building, the JCM risks becoming a short-term fix rather than a foundation for lasting transformation. India must cultivate the ability to sustain and expand these technologies over time.

Toward a Model Partnership

India is the world's third-largest GHG emitter, primarily due to its coal and industrial activities. Similar JCM partnerships, such as those in Vietnam, have already achieved measurable CO2 reductions in key sectors. A similar trajectory can be expected for India by targeting high-emission areas with solutions like sustainable aviation fuel and green hydrogen. Although the exact emissions reduction targets under the India-Japan JCM have yet to be disclosed, the potential is significant.

The Japan-India JCM could serve as a global blueprint for climate cooperation if implemented effectively. It has the potential to reduce the cost of climate action, accelerate technology transfer, and strengthen diplomatic ties. This should help both nations move closer to their climate goals.

Technological options include the potential of green ammonia, hydrogen, and solar energy in industrial transformation. Carbon dioxide removal technologies are also highlighted as important. There is a need for technology transfer, financing, and strategic partnerships to boost sustainability efforts.

Both nations are committed to climate action. Through innovative technologies and strong policy frameworks, they can create mutually beneficial pathways toward decarbonization. Japan's approach to carbon markets aligns well with India's sustainability goals. Its commitment to strengthening investment ties with India through the JCM framework, which promotes energy security and a low-carbon future, is well-timed.

By aligning sustainability objectives with strategic interests, this partnership can show how developed and developing countries can collaborate meaningfully to address one of the most significant challenges of our time.

Author: Varuna Shankar