In a pivotal move, China's Ministry of Ecology and Environment (MEE) has issued comprehensive guidelines, marking the renaissance of the domestic voluntary carbon market (VCM). The focal point of this resurgence is the revival of the China Certified Emission Reduction (CCER) system, which has been on pause for the past six years. The hiatus, since 2017, allowed the Chinese government to strengthen regulatory frameworks and refine the market's operational rules.
Natural scenery of Mount Huangshan, China.
China introduced its national compliance emissions trading system (ETS) in 2021. Covering over 40% of the nation's carbon emissions, mainly emanating from the power sector, this ETS is the largest of its kind globally. The CCER, integral to the VCM, is making a comeback after the first compliance period for China's ETS.
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The discontinuation of CCER in 2017 was rooted in challenges such as low trading volumes and inadequate carbon audit standards. With the establishment of China's national ETS, the revival of CCER gained momentum, aiming to rectify previous shortcomings and amplify efforts in carbon reduction.
Under the CCER framework, carbon emitters compensate credit-holding entities, such as renewable energy producers, fostering a voluntary carbon credit ecosystem within the national ETS. The MEE introduced new legislation earlier this year, approving four methodologies for CCER credit issuance. This regulatory green light paved the way for new projects and supplies to enter the market seamlessly.
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The reopening of China's VCM aligns strategically with the completion of the first compliance period for the national ETS. This move could potentially amplify supplies for companies in the compliance market, enabling them to leverage credits for emissions offsetting.
Since 2021, the compliance carbon price soared to a record $10.12 per metric tonne of CO2 equivalent on 18 August, surpassing the $10 mark for the first time. The surge is attributed to a combination of government policy tightening and resolution of compliance issues. Interestingly, this ETS price traded four to five times higher than international voluntary carbon prices.
The rising public awareness of environmental issues is becoming a catalyst for tangible policy changes and a shift in business approaches, particularly among state-owned enterprises. These entities are increasingly managing carbon assets strategically, treating them akin to physical assets.
However, industry experts speculate that the availability of government-backed CCER registry credits may impact voluntary carbon credit supplies from China in the international market. This shift might stem from a preference for government-backed credits, potentially commanding higher prices compared to VCM credits. Notably, nearly 21% of VCM credits issued globally in Q1 of 2023 originated from China, emphasising the nation's significant role in the international carbon credit market, according to S&P Global Commodity Insights.
The MEE's recent guidance outlines stringent criteria for projects to qualify for CCER credit generation. These include comprehensive and accurate emission reduction accounting, conservative estimations, transparent project information disclosure, and non-registration under other ETS. The approved methodologies cover diverse projects, from forestation and mangrove cultivation to solar thermal power and grid-connected offshore wind power projects.
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In terms of registration, trading, and settlement of CCER credits, the new rules provide an inclusive platform. No restrictions are imposed on who can participate, allowing businesses under the compliance carbon market, project developers, and other trading entities to engage in CCER credit transactions.
According to the Beijing Green Exchange, the exclusive platform managing all trading information, various forms of trading are facilitated, including listed transactions, block trades, and one-way bidding. To ensure market stability, price fluctuations are regulated, with changes limited to 10% above or below the base price for listed transactions and 30% for block trades.
Despite these advancements, there is currently no clear indication of how foreign investors can actively participate in China's domestic carbon markets. The guidelines emphasise that non-public trading is illegal, and strict measures are in place to prevent the disclosure of information related to CCER credits trading. Similar measures have been enacted by the host of the Chinese compliance carbon market to prevent any leaks of sensitive information.
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Although the official timeline for the CCER market's restart remains undisclosed by the MEE, the introduction of these measures signals the preparedness of the CCER market for a prompt relaunch. This proactive step aligns with China's commitment to mitigating its towering carbon emissions, contributing to global efforts towards sustainable environmental practices.
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