One step closer to re-launching the China Certified Emission Reduction Scheme

After a six-year hiatus in the trading of voluntary emission reduction under the China Certified Emission Reduction Scheme (CCER), China’s voluntary carbon market has made another step towards the relaunch of CCER. Following multiple positive signals from both regulatory authorities and established exchanges earlier this year, the Ministry of Ecology and Environment of the People’s Republic of China (MEE) and the State Administration for Market Regulation (SAMR) jointly issued on 7 July 2023 a consultation paper titled “Measures for the Administration of Greenhouse Gas Voluntary Emission Reduction Trading (for Trial Implementation)” (the Administrative Measures) , which would be expected to replace the previous set of rules governing CCER (Article 46).

Background

Initially launched in June 2012, CCER was suspended in March 2017 due to low trading volumes and a perceived lack of standardisation in carbon project methodologies and verification. In 2018, MEE was established to take over the role of the National Development and Reform Commission in respect of, among other things, the supervision of CCER.

The launch of China’s national emission trading system (ETS) in July 2021 rekindled the chance for re-launching CCER. 2023 witnessed further movements indicating the potential for re-launch: in March, MEE issued a public consultation seeking proposed methodologies in respect of greenhouse gas (GHG) reduction projects; and in May, the director of Climate Change Department of MEE signaled to journalists the intention to re-launch CCER during the course of this year.

The new rules in the draft Administrative Measures demonstrate the regulatory authorities’ resolve in improving the credibility of CCER and put the re-launch of the scheme formally on track.

Notable Features

Eligibility requirements and excluded projects

Under the current draft Administrative Measures, only legal entities and other organisations legally registered in China may apply for project registration and legal persons, other organisations and individuals which “meet the relevant national regulatory requirements” may participate in trading (Article 4).

Voluntary GHG reduction or removal projects shall be authentic, “non-repetitive” (i.e., the project does not participate in other GHG reduction or removal trading schemes and will not give rise to double counting or double claiming of the carbon credits generated under such project) and “additional” (i.e., the GHG reduction or removal benefits of a project exceed its baseline scenario determined by the relevant methodology). We also expect “additionality” to capture that the project would only go forward because of the extra financing provided by the proceeds of carbon credit sales, though the relevant definition in the Administrative Measures doesn’t specify as such. Finally, GHG reductions or removals generated from such projects shall be "measurable”, “traceable” and “verifiable” (Article 3).

The Administrative Measures also take into account the continuity of CCER despite the suspension. A GHG reduction or removal project may be registered if it is (a) developed after 13 June 2012 (the initial date of establishment of CCER); and (b) conducive to carbon reduction/avoidance or carbon removal/sequestration. Examples given include renewable energy, forestry carbon sinks, methane emission reduction and energy conservation and efficiency projects (Article 8). Any GHG reduction or removal amounts which had been filed prior to 14 March 2017 (the date of the suspension) shall still be registered (without the need for re-certification) and can be used in accordance with the relevant rules and regulations (Article 45). Otherwise, the GHG reduction or removal amount shall be generated after 22 September 2020 and within 5 years following the date of project registration (Article 15).

Any project which (i) is for the purpose of fulfilling regulatory obligations to reduce or remove GHG or otherwise required by national policy; (ii) participates in the national or sub-national ETS; or (iii) is not “non-repetitive” cannot be registered under CCER (Article 9).

Centralised approach and enhanced monitoring

In comparison to the previous set of rules, the Administrative Measures adopt a more centralised and unified approach at all stages of the project.

From the get-go, MEE is responsible for organising the formulation of methodologies (Article 7) which serve as the basis for approval, verification and certification of all GHG reduction or removal projects under CCER. Instead of the “filing-based” system for certification and registration of GHG reduction or removal projects previously, the new procedures require certification from third-party review and certification institutions approved by both MEE and SAMR.

The Administrative Measures also provide for the establishment of a unified trading system (expected to be the Beijing Green Exchange) and a unified registration system for the certified carbon credits traded. This would be a major change from the previous trading method under CCER which was primarily based on bilateral “over-the-counter” trades. Matters such as the registration, holdings, transfers, cancellation and retirement of the certified carbon credits traded under CCER will be registered in the registration system and the system records will be final (Articles 22 and 24).

Additional rules for the purposes of supervision and monitoring are also introduced to preserve and enhance market integrity, such as: mechanics for random inspections and joint supervision structure under multiple regulatory authorities (Articles 31 and 32). Furthermore, the Administrative Measures also require each project owner to fulfill disclosure obligations in relation to records and information of GHG reduction or removal projects and the respective volumes (Article 36).

Looking forward

With China’s pledge to have peak carbon emissions by 2030 and to become carbon neutral by 2060, the revamp and re-launch of CCER is yet another exciting development in sustainable finance in China.

The draft Administrative Measures provide market participants with a regulatory framework under which more detailed rules are in the making: cross-border voluntary carbon credits trading (Article 26) and usage and potential interaction with China’s national ETS (Answer 3 under MEE Q&A) are two examples of what we should look out for. The expectation is that the revamped CCER will become more mature and more transparent as more granular rules develop under this framework domestically. It remains to be seen if and when CCER will venture into unchartered waters in the global carbon market.

The deadline for responding to the consultation is 6 August 2023.

(With special thanks to Jenny Wong, Jane Jin and Rachel Xu for their contribution to this blog.)