Carbon Markets, China

China gears up to lead VCM reform

Tianjiao Green Energy Photovoltaic Project in Ordos, China. Four methodologies have been approved under the country’s VCM: solar thermal power, forestation, mangrove cultivation, and grid-connected offshore wind projects. (Photo: Qilai Shen/Bloomberg)

Beijing is taking steps to bring its voluntary carbon market in line with Paris Agreement commitments

China is overhauling its voluntary carbon market to meet international standards, accelerating the government’s drive towards net zero climate targets and opening the door for cross-border trading opportunities.

Beijing’s ministry of ecology and environment relaunched the country’s VCM, known as China Certified Emissions Reduction, on January 22 with a stricter methodology and oversight regime, and a new centralised register and trading infrastructure for CCER voluntary credits.

CCER trading began in 2015 before being shelved by the government two years later, as misconduct issues and low trading volumes dogged the system. Experts reckon Beijing’s market reboot is more rigorous and calibrated for the post-Paris Agreement era.

“I think it’s very clear that Chinese policymakers are building the VCM to align with the upcoming final global framework [for carbon trading] and [Paris Agreement] Article 6 requirements,” says Yan Qin, lead analyst, carbon, at the London Stock Exchange Group.

A blueprint for “cooperative approaches” to national carbon reduction efforts was agreed at COP21 in Paris, including trading carbon credits across borders. However, negotiations are ongoing to refine the rules and foster the expansion of international carbon markets.

CCER credits under the revamped system are yet to be issued, pending state approval of domestic, third-party verification agencies for eligible projects but Qin thinks it will “only be a couple of months” before this happens. Until then, market participants will continue trading outstanding CCERs from the previous market regime

Four methodologies have been approved under the new VCM: forestation, mangrove cultivation, solar thermal power and grid-connected offshore wind projects. A decision on a second set of methodologies is in the pipeline and the government says these will be announced “in a timely manner” and on a rolling basis.

“Administrative measures” – introduced by China’s Ministry of Ecology and Environment, and State Administration for Market Regulation – will act as a rules-based foundation for the voluntary market and require all projects to meet authenticity, uniqueness and additionality criteria to achieve eligibility.

These criteria include requirements to publicise project design documents; achieve third-party validation and verification; and have an additional emissions reduction effect compared with the baseline scenario, which is determined by relevant methodologies.

Meeting international best practices

LSEG’s Qin says the rebooted voluntary market is “a big step forward” and better adapted to global climate governance. It’s “as important as China’s compliance market” in terms of helping Beijing to meet its climate goals, she says.

The International Energy Agency says China is striving to achieve carbon neutrality before 2060 and will depend in part on its domestic carbon markets to do this.

Polex Lam, managing director of Lianhe Green Development Company, a sustainable financial services provider based in Hong Kong, says: “The relaunch of China’s VCM will play a significant role in helping Beijing with its climate targets.”

This is because the VCM differs from the national emissions trading scheme regarding potential market reach and participation. While the ETS focuses on the power generation sector with a limited range of market participants, the voluntary market takes a “whole of society” approach by including individuals, companies and financial institutions. Nevertheless, compliance market emitters can use voluntary carbon credits to cover up to 5 per cent of their annual compliance obligations.

Under the government’s revamp, trading will occur on the centralised Beijing Green Exchange, making it easier for investors to transact. “The Beijing Green Exchange, which will host the trading platform for CCER credits, has issued rules for CCER trading and settlement, unifying the market instead of having several regional carbon trading markets as before,” says Lianhe’s Lam.

The Chinese authorities have also designed the new market to meet international standards. Under Article 13 of the Administrative Rules, eligible projects must also consider “adverse impacts on various aspects of sustainable development”, mirroring standards trialled by the United Nations and the Task Force on Scaling Voluntary Carbon Markets in pursuing high-integrity voluntary markets.

According to Lam, this demonstrates the steps being taken by Beijing to integrate its voluntary carbon market with global guidelines. “While the exact alignment with regional peers is yet to be seen, China’s efforts to strengthen its voluntary carbon market indicate a commitment to aligning with international best practices and standards,” he says.

Mechanisms for China to open up international trading in its voluntary carbon market are already in place. A memorandum of understanding signed between the Beijing Green Exchange and the Hong Kong Stock Exchange in November 2023 – “to explore cross-border sustainable development” and address the “demand generated from China’s shift to a low-carbon economy” – offers one such avenue.

The Hainan International Carbon Emissions Exchange will be another gateway for cross-border investment. Launched in early 2022, the exchange aims to connect China’s carbon markets with the world as part of the province’s push to become a commodities trading hub.

Financial interest

Financial institutions have already participated in the market. The new VCM’s first day of trading on January 22 saw a number of Chinese financial groups, including Citic Securities and Huatai Securities, initiate transactions. Experts think the increased participation of banks is also likely, particularly as secondary market liquidity develops over time.

“There is a growing interest in trading these instruments domestically and internationally. Banks and financial institutions have already begun participating or shown interest in these credits, which demonstrates their value and potential in the financial sector,” says Lam. “The increased participation from financial institutions and other market players [will boost] trading volume and liquidity.”

China’s rebooted VCM follows in the wake of a difficult 2023 for global voluntary carbon markets, in which credit quality was questioned by a range of observers and market participants, and international schemes were subject to heightened scrutiny.

Research from LSEG suggests that China’s new VCM could “to some extent revitalise the global voluntary carbon market”, given its size and the extent of Beijing’s climate goals, which include achieving peak emissions by 2030 and net zero by 2060.

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