Done right, China’s new voluntary carbon credit market can be a game changer

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China’s voluntary carbon market is poised to be a game changer, advancing regional endeavours to reach net-zero targets. As whispers of a relaunch echo through the carbon trading circle, the market response has been nothing short of exuberant. 

Known as the China Certified Emission Reduction (CCER) scheme, the carbon credit system has the potential to become the world’s most influential carbon offset standard, thanks to the robust backing of the national Emissions Trading Scheme (ETS) – the globe’s largest mandatory carbon market covering around 4 billion tonnes of emissions. 

Credits bought under the voluntary CCER scheme can be used to offset up to 5 per cent of any emissions that exceed ETS targets, presenting the tantalising prospect of meeting an annual carbon offset demand of 200 million tonnes.

But a reboot of China’s voluntary carbon scheme will find not just a regional “carbon boom” but also heightened international scrutiny. As the integrity and quality of voluntary credits increasingly come under the spotlight, there will be new expectations for the Chinese scheme.

If China can manage to revamp its voluntary carbon credit scheme into an internationally acclaimed, high-quality emissions reduction mechanism, it will become pivotal to global carbon trading.

With more Asian countries pledging to achieve carbon neutrality by mid-century, the carbon market has emerged as a highly sought-after investment opportunity. New trading platforms and related domestic initiatives have sprouted in Hong Kong, Singapore, Thailand and Malaysia, positioning them as Asia’s potential trading hubs for voluntary carbon market credits.

This should not be a race to the bottom but a tussle for the top. Whoever provides the best standards will attract the most actively engaged market participants.

The CCER scheme was first introduced in 2012 by the National Development and Reform Commission as China’s key low-carbon incentive policy. But by March 2017, with low trading levels and a lack of standardisation in carbon audits, the NDRC had ceased approval of new CCER projects.

Subsequently, climate-related responsibilities fell to the Ministry of Ecology and Environment, which was tasked with reforming the CCER mechanism.

The CCER market, as it stood, lags behind the upgraded international carbon offset practices. In evaluating the quality of carbon credits, “additionality” is the most important criterion – carbon emission cuts are considered “additional” if they would not have taken place without the incentive of carbon credits.

Before the 2017 suspension, most of the CCER credits issued came from hydropower, solar power and wind power projects. But these are seen as lacking in “additionality” now because renewable energies have become profitable or at least have become part of countries’ Nationally Determined Contributions.

Transparency was also a concern. The registry, for example, showed carbon emissions of at least 52.83 million tonnes from CCER projects while the Ministry of Ecology and Environment’s figure is 77 million tonnes. Furthermore, the CCER system was directly managed by the Chinese government, which meant a governance structure that probably limited its flexibility and adaptability to the international market.

Despite lingering problems, the temptation of a quick profit from carbon credits beckons. Some companies have been going around rural China signing up “forestry contracts” with local governments, promising future riches with the development of carbon sinks.

Cases of deception have emerged with contracts reportedly binding local governments to massive compensation clauses if the carbon sink project fails, and even a case of pyramid-selling such contracts with no intention of ever fulfilling them. This is particularly worrying as many of the potential carbon sinks are in poor areas.

There is little public discourse about such forestry projects and carbon sinks, and market participants may not fully understand the risks. Even at Verra, the world’s biggest carbon certifier, a recent investigation found that over 90 per cent of their rainforest offset credits failed to represent real emission cuts. And in a world of rapid climate change, a wildfire could destroy a carbon sink overnight.

I think China’s Ministry of Ecology and Environment should adopt a more progressive view in reforming its CCER carbon credit mechanism.

Most of the CCER scheme’s methodologies were inherited from “ clean development mechanisms”, a framework defined in the Kyoto Protocol to finance carbon reduction projects globally. But it should be updated to align with international standards, such as the core carbon principles developed by the Integrity Council for the Voluntary Carbon Market. This entails an emphasis on “additionality” and an assessment of reversal risks to ensure permanent carbon cuts.

The internationalisation of China’s voluntary carbon market can be achieved through two primary approaches.

One is to make CCER carbon credits compliant with global schemes such as the carbon offsetting and reduction scheme for international aviation or CORSIA. Another is to extend the CCER scheme to projects beyond China’s borders. Both approaches require a prevention of double accounting, as stipulated by the Paris Agreement Article 6.4.

This means developing methodologies and project approval procedures that align with international standards, establishing a connection between the CCER registry and national registries, and facilitating seamless coordination among stakeholders. Only by implementing these measures can China’s voluntary carbon market make a substantive contribution to global efforts to cut carbon emissions.

Zhibin Chen is a senior manager for carbon markets and pricing at adelphi, a Berlin-based think tank. His work focuses on international and national climate policy, particularly carbon pricing policies

Source: https://www.scmp.com/comment/opinion/article/3236347/done-right-chinas-new-voluntary-carbon-credit-market-can-be-game-changer