China's domestic voluntary carbon market reboot to shake up global offsets trade

A widely anticipated relaunch of China's domestic voluntary carbon mechanism called the China Certified Emission Reduction program is expected to impact global voluntary credits trading, disrupt prices and reshuffle supply and demand of offsets in the country.

Domestic market participants have shown strong preference for a government-backed program that would have more credibility, meet pent-up demand in the voluntary carbon sector and one that is likely to see a raft of government incentives to boost uptake.

The relaunch of new project registrations under CCER after a six-year hiatus would also accompany policy signals on how China plans to position its carbon markets globally. This should include clarity around cross-border carbon trading under the Paris Agreement, and how CCERs and voluntary carbon market credits can be exported under the Article 6 framework.

China is the biggest carbon credit supplier in the global VCM. In the first quarter, it accounted for 20.8% of total voluntary carbon credit issuances of 68 million mtCO2e, according to Abhijeet Thakkar, carbon analyst with S&P Global Commodity Insights. The data is based on four main international standard setting bodies -- Verra, Gold Standard, American Carbon Registry and Climate Action Reserve.

This volume reflects demand from China-based project developers that shifted to international certifiers as domestic registrations had stalled. The trend could now reverse and market participants also expect new CCERs to be priced significantly higher than VCM credits, driving project developers to the domestic registry.

China's environment ministry launched in March a public consultation seeking revisions to existing methodologies and the introduction of new ones to generate CCERs, signaling an imminent reboot. China-based traders and analysts expect CCERs to reopen in the second half of the year, with the most conservative estimate at "no later than early next year."

Meanwhile, strong demand for older CCER credits has seen them trade at a premium to the national compliance carbon market.

Demand for CCERs from the compliance market alone is significant. Currently, compliance entities can use CCERs to offset 5% of their annual emissions obligations that total more than 4 billion mtCO2e. This translates into over 200 million mtCO2e of annual CCER demand, equivalent to at least 50% of annual global VCM trade volumes in past years.

Cross-border trading uncertainties

China is not expected to impose the kind of export moratoriums on carbon credits seen in Indonesia and Papua New Guinea, although it could position CCERs as a strong competitor to VCM credits, market participants said.

Regulators now have the authority to certify which carbon credits from projects hosted by their country can be exported and the ones to be used for the fulfilment of climate targets under the UN Paris Agreement framework, called Nationally Determined Contributions. These certified credits for exports are called corresponding adjustment or CA credits.

Countries in the Asia-Pacific region like Japan and Australia plan to certify carbon credits issued from domestic carbon registries as CA credits, and there is a likelihood that Beijing would prefer CCERs to be certified for cross-border trading as well. This would give CCERs a clear advantage over VCM credits.

There is little chance for regulators to certify international VCMs issued from China-based projects as CA credits, Kathy Hung, CEO of Beijing-based consultancy Timing Carbon, said at the Carbon Forward Asia 2023 conference in Singapore early May.

China is likely to enable CCERs for corresponding adjustments, foreseeing the demand growth, Neo Lin, co-founder and CEO of Beijing-based project developer QYH, said at the same conference. He, however, added that the government is still evolving its strategy regarding carbon credit exports.

Quality, integrity, incentives

Domestic private sector offset buyers have expressed confidence that the regulator's move to exclude projects with questionable additionality, such as renewable energy and nature-based avoidance credits, would boost the quality of CCERs and mitigate risk of reputational damage.

Instead, afforestation projects, small-scale renewables and household devices are likely to be prioritized in the new CCER program, Timing Carbon's Hung said. Utility-scale renewables projects, which were plentiful in the old CCER, are likely to be abandoned in the new system, she said.

"The additionality does not exist, and the baselines change a lot," she said. This would curb revenues to renewable projects from both VCM and domestic carbon markets, but divert them to higher quality projects that really need the financing, she added.

Both Hung and Lin said assuring data accuracy, transparency and justifying additionality -- meaning the emissions reductions would not have happened in the absence of the project -- are crucial challenges in China's CCER reform.

The government is also boosting infrastructure and trading platforms to boost CCER expansion. Beijing Green Exchange will host the national trading platform for CCER and target to become an international trading hub in the long term.

Meanwhile, China's regulator is shaping the southern island province of Hainan into a global free trade hub.

Hainan International Carbon Emissions Exchange is working with Singapore's state investment company Temasek Holdings and the Singapore Exchange to internationalize China's carbon assets, an HICEE official said in April at a Shanghai-based carbon forum.