China’s voluntary carbon market could burst back into life

China’s voluntary carbon market could burst back into life

The following article is an extract from Trove Research’s China country profile, available to subscribers.  These country profiles describe the opportunities and risks for developing and trading carbon credits in 15 of the largest carbon credit markets.

China’s voluntary carbon market could burst back into life

The Beijing Green Exchange announced in February 2023 that it has completed the registration and trading platforms for China Certified Emission Reductions (CCER) credits. Once the platforms have been approved, the CCER scheme will relaunch, giving an urgently needed breath of life to the Chinese carbon market.

With no new projects started since the scheme was suspended in 2017, the existing supply of CCERs has been almost completely drained by the national ETS. As international credits are not eligible for China’s ETS, Chinese project developers could shift their focus away from international registries and towards meeting the growing domestic demand.

The market is awaiting the confirmation of key details, such as the full list of eligible project types and methodologies. In the meantime, here is what we know.

Demand for CCERs has surged

The first iteration of the CCER scheme, launched in 2012, was designed for the Kyoto Protocol’s Clean Development Mechanism and traded on regional pilot ETS platforms.  However, the programme never really got off the ground; prices and demand remained low, and the quality of the credits was questioned. Of the 80 million CCERs generated, only 32 million were sold between 2012 and 2017.

In March 2017, the National Development and Reform Commission (NDRC) suspended all new applications and registrations in the national register, citing low trading volume and the lack of methodological standardisation. Voluntary projects have continued to trade though, through the regional pilot platforms, but it remains unclear how many will be eligible for the new centralised registry. On the national level, no new projects have been approved since 2017.  The launch of the national compliance market in July 2021 has catalysed a new source of demand for CCERs, even though the ETS currently only covers the power sector.

The primary trading units on the ETS are Carbon Emission Allowances (CEAs), allocated by the government free of charge. In October 2021, the Ministry of Ecology and Environment (MEE) announced that companies would be allowed to offset up to 5% of their requirements with CCERs, and the remaining stock of CCER credits from the national registry was released into the market. By the end of the compliance cycle on 30 December 2021, the existing supply of CCERs had nearly been exhausted in two months.

Due to the lack of supply, the weekly trading volume of CCERs has fallen, to just 57,000 units in February 2023, pushing up the price of the remaining credits. The diminishing liquidity is pressuring regulators to accelerate the reboot of the voluntary scheme.

If China goes through with its plans to expand its ETS coverage to eight high-emission sectors demand for CCERs could increase substantially. Based on Trove Research’s proprietary demand forecast model, annual CCER retirements in the national ETS could reach over 100 Mt CO2e by 2026 with further growth in the 2030s.

The Chinese carbon market will be inward-looking for now

These projections will take time to bear fruit.  Trove Research data indicates that since the suspension of the CCER scheme in March 2017, China-based projects have issued approximately 200 MtCO2e of credits through international registries. This represents approximately 10% of global issuance. However, once the CCER scheme is operational again, Chinese project developers are likely to have less interest in international registries, preferring to sell into the domestic market.

At the same time, CCERs remain largely ineligible for international trade. Although the ICAO confirmed that CCERs are eligible in the current CORSIA compliance cycle, nine project types are excluded, and the credits must be issued from projects that started crediting after 2016. Given that no new projects have been approved since March 2017, the number of eligible projects is small.

In the longer term the new CCER programme could become more international. The prospect of a ‘Belt and Road’ carbon market has been suggested by Chinese carbon market experts. Moreover, methodological refinements are expected to improve the quality standards for CCERs, which could boost international demand for Chinese voluntary credits.

Renewables likely to be out of the picture

Throughout the Kyoto and pre-2017 era, China was one of the main global suppliers of carbon credits, in particular from renewable energy projects.  Many of these have been questioned on their additionality, and this road now looks to have come to an end.

Most existing renewable projects will not be eligible for the relaunched CCER scheme. As the profitability of renewables increases, these projects are less likely to meet the additionality criteria of carbon credit methodologies. Although the Chinese government has confirmed that new CCERs will still be issued from renewable projects. we expect that eligible renewable energy methodologies will focus more on small-scale or experimental, such as local microgrids.

Methane and forestry likely to be key sources of carbon credits

Nature-based methodologies will take the spotlight in the relaunched CCER scheme, reflecting a step change from the Kyoto Protocol to the Paris Agreement. The Chinese government has stated that methane utilisation and forestry will be core sectors.

China refrained from signing the Global Methane Pledge at COP27, but it committed in 2022 to develop a comprehensive methane mitigation strategy by 2030. The MEE has announced that the national strategy will incorporate market mechanisms, and the only project type confirmed to be eligible for CCERs so far is coalbed methane utilisation. Other methane project types, including in the agricultural sector, are expected to be eligible too.

Although technical requirements have not been published, the eligibility of forest carbon sinks is almost certain. As a result, several provinces have released their own methodologies and targets. In January 2023, Sichuan province announced plans to develop 30 carbon sink projects covering over 600,000 hectares of forest by 2025.

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