Participants in China's carbon offset market see a potential comeback for the long-suspended national programme later this year, with a recent policy document shedding some light on how one of the world’s largest voluntary schemes will proceed in the Paris era.
Confidence in China’s offset market is returning, especially after a series of regulatory updates (https://carbon-pulse.com/211364/) announced by the Ministry of Ecology and Environment (MEE), which pave the foundation for the restart of the Chinese Certified Emissions Reductions (CCER) programme.
The ministry last week concluded public consultation on draft regulations for the scheme, one of the last pieces of the relaunch puzzle, which proposes tighter settings to ensure the quality of domestically issued carbon credits.
While the ministry is yet to finalise the rules and some details in the proposal may be adjusted based on public feedback, the latest policy document has triggered wide discussion among stakeholders in the market.
KEY CHANGES
CCER rules in the Paris era reflect changes in the regulatory mindset that have emerged over several years, and the operations of the national offset market are currently regulated by MEE rather than the National Development and Reform Commission (NDRC), according to Hongming Liu, a Beijing-based director of carbon market at the Chinese branch of US non-profit Environmental Defense Fund (EDF).
MEE now also has to take into consideration several key issues including corresponding adjustments – which didn’t really exist yet when the CCER scheme was mothballed in 2017 – and double counting, and has streamlined the administrative process to encourage the development of offsets at home, Liu told Carbon Pulse.
Trading of CCERs is currently fragmented as transactions are allowed in nine pilot markets, but the China Beijing Green Exchange will be the only platform (https://carbon-pulse.com/209827/) hosting the offset trading once the national programme resumes operations, a move that would concentrate and possibly help improve market liquidity.
“[Transactions are] scattered across different venues, and it can happen that credits from the same project are traded at different prices in multiple marketplaces, which is not conducive to making proper judgments on the market … But this won’t happen after a centralised marketplace [is set up], and the overall trading volume should increase,” said a Shanghai-based trader who asked to remain anonymous.
MEE’s latest policy draft also outlined timing requirements for offset project developers, requiring projects to be implemented after the launch of the CCER programme (June 13, 2020) and emissions reductions to be generated after the country announced its ‘dual carbon’ goals (Sep. 22, 2020).
Emissions reductions also have to be generated within five years prior to the application date for project registration, according to the document.
While the draft sets a relatively clear timeline for the development of new projects, it still awaits further regulatory updates to clarify how to tackle CCER projects that have already been registered, according to lawyers with Beijing-based Zhong Lun Law Firm.
“For the time being, we cannot completely exclude the risk that projects registered [before the relaunch] will not be able to generate revenues [from carbon credits] in practice if they are yet to register their emission reductions,” the lawyers said in an analysis posted on social media channel WeChat.
NEW METHODOLOGIES
On methodologies, the MEE is expected to prioritise the four project types highlighted in the draft for the CCER relaunch, including initiatives targeting renewable energy, forestry, methane reductions, and energy efficiency.
As MEE in March kicked off a call for offset methodology proposals, new standards and revisions to existing methodologies (https://carbon-pulse.com/197799/) are widely expected to be added to the national scheme, where the vast majority of arrangements were directly derived from the Clean Development Mechanism (CDM) almost two decades ago.
While the ministry is yet to clarify details on methodologies, some have estimated that the regulator will likely give priority to credits generated from nature-based solutions and small-scale renewable energy (https://carbon-pulse.com/201718/) as many of the regular renewable projects in China already operate on a commercial basis and may fail to meet additionality requirements.
“We guess [the methodology for] new forest plantation will be added to the forestry category, and animal effluent management projects will also be added for methane reductions,” a project developer told Carbon Pulse.
The government is expected to steadily increase the supply of CCERs, and the volume should be somewhat limited in the first place after the relaunch, the project developer added.
Some emerging project types, such as direct air capture (DAC), may be included in the future, but likely not in the first batch of methodologies to be published, EDF’s Liu noted.
NO MEANS NO
Another highlight of the policy draft is the clarification on projects that are prohibited from registration, such as those with emissions reduction obligations under the national or pilot carbon markets, according to Liu.
While China’s national ETS currently only covers the power sector, a few pilot markets have expanded their coverage to other emissions-intensive industries, such as steel and cement.
The MEE has also made it clear that emissions reductions from CCER projects should be ‘unique’ and cannot be double-counted.
However, the risk of double counting still needs to be further addressed, especially after China earlier this month expanded the scope (https://carbon-pulse.com/215253/) of the domestic Green Electricity Certificate (GEC) market to cover all types of renewable energy projects.
“It can be difficult to verify the uniqueness, especially given that GECs and CCERs are regulated by different government departments … It takes further negotiations and collaborative regulations among government bodies,” Liu added.
LINKAGE TO INTERNATIONAL MARKETS
Credits under the CCER scheme have been deemed eligible (https://carbon-pulse.com/190300/) in CORSIA’s pilot phase (2021-23), though it remains unclear whether airlines will be able to offset their emissions with CCERs in the following phases.
“Based on the new draft rules, the Chinese government is still considering submitting an application [for CORSIA eligibility] … the policy draft also leaves some room [for the international transaction and linkage] and more detailed rules are expected to come out later,” EDF’s Liu said.
The CCER market may also be open to more participants in the future once the scheme resumes operation, given that the latest draft only limits the scope of trading entities to “legal persons and other organisations registered in the territory” and does not explicitly exclude foreign investors.
That means international institutions registered in China may be allowed to participate in the CCER market, Liu said, adding that it still requires further clarification from the government.
IMPACT ON NATIONAL ETS
Another relevant issue is how the restart of the national offset programme will move the country’s compliance carbon market, which allows companies to use CCERs to compensate for up to 5% of their obligations.
Fewer than 10 million CCERs are currently available in the market, after regulated entities consumed around 32 million offsets during the first compliance period, according to data compiled by Minsheng Securities.
The upcoming CCER relaunch should have a negligible impact on the sentiment in the Chinese ETS during the current compliance period, given the limited lead time for offset project development, according to Yutong Song, an analyst with Refinitiv.
“The trading pattern for CEAs and CCERs [during the current period] is expected to be similar to the previous one, though the peak time for transactions may be earlier this year … the MEE has said it hopes that the compliance rate can reach 95% by 15 November and 100% by 31 December,” Song said.
However, the increased CCER supply could weigh on CEA prices, she noted.
文章来源：https://carbon-pulse.com/216288/
