China’s carbon offset program, the China Certified Emission Reductions (CCER) scheme, is making waves after its official ceremonial relaunch in late January. With the anticipated announcement of its qualified verification bodies coming up in March, developments are moving fast after seven years in which the scheme idled. We explain the background and current status of the CCER program, including why it is characterized as “voluntary”, taking a look at carbon market implications of its relaunch. In our view, the overall lack of liquidity that has permeated the CCER market throughout the program’s dormancy will persist in the long term, and the much-hyped “internationalization” of CCERs will occur slowly at best, with the units being ineligible for supplying global voluntary buyers anytime soon.
Official descriptions of the CCER at the relaunch ceremony on 22 January characterized the program as China’s voluntary carbon market, even though its main purpose is to supply compliance units for entities subject to China’s mandatory intensity-based emission trading system (ETS) run by its Ministry of Ecology and Environment (MEE). With recent increased attention on the global Voluntary Carbon Market (VCM, see our data and analysis of it here), in which companies or individuals not covered by a mandatory cap-and-trade program choose to buy credits to meet voluntary green “net zero” or “carbon neutral” claims, the title of voluntary for the CCER scheme mixed apples and oranges for many global carbon market stakeholders.
However, the confusion is largely a matter of semantics. Like many ETS, China’s national one (as well as its many regional emission trading programs, most of which have been around for a decade) allows emitters to use offsets or carbon credits (the CCERs) to account for a portion of their compliance obligation. If power plants emit more than the allowable amount of greenhouse gas per unit of output in a given compliance period, they must purchase extra units to cover the excess – those units may be CCERs rather than allowances, but only up to 5% of the remaining compliance obligations. Since emitters are not required to use offsets, buying CCERs is a voluntary act. Allowing covered entities the option to use offsets, which are typically cheaper than allowances or per-tonne carbon charges, is a flexibility mechanism offered by regulators of many carbon pricing systems worldwide – including ETS in North America and South Korea as well as Chile’s carbon tax. Covered entities may choose to use the flexibility option.
Beyond semantics, CCERS are also intended to be voluntary carbon market units in the sense more familiar to stakeholders: Chinese corporate entities not covered by the ETS that wish to offset a portion of their emissions (possibly in preparation for compliance, as the scheme currently covers only electricity generators but is set to expand to other industries) may purchase CCERs to meet their green claims. Indeed, the first CCER transaction after the official launch was made by China National Offshore Oil Corporation (CNOOC) – the company is not an electricity generator subject to a compliance obligation under the national ETS (yet), but acquired 250,000 credits to offset some of its emissions as reported by Chinese media. Chinese businesses may also purchase CCERs for “retail offsetting” purposes (such as making an event carbon neutral or lowering the carbon footprint of a product) in the same way they use VCRs from Verra or credits from Gold Standard, etc. The CCER trading platform is currently hosted by the China Beijing Green Exchange (CBGEX). The CCER registry is managed by the National Center for Climate Change Strategy and International Cooperation (NCSC), a government body under the MEE.
Given the sheer size of China’s compliance market in terms of coverage, the relative portion of CCER demand from non-compliance voluntary buyers is negligible, and is likely to remain so going forward. Chinese electricity generators emit over five billion tonnes CO2 per year, so the CCER demand created by letting them offset even only 5% of their surplus emissions is huge – it renders the demand from Chinese firms lowering their carbon footprint through CCER purchases insignificant.
This is especially true because post-relaunch CCERs will be available to domestic emitters only at first, whereas the bulk of demand for carbon credits on the current voluntary market comes from non-Chinese corporate entities. Possibly for this reason, the Chinese government has mentioned “internationalizing” CCERs, which would imply CCER purchases by foreign entities. That in turn is tricky because CCERs represent emission reduction that has taken place in China, and is therefore being counted toward China’s target under the Paris Agreement. Depending on the claim that is made about the CCER by its buyer (another government, or a private entity), double counting and/or double crediting could be involved – counting an emission reduction that is already being counted toward a country’s Paris target is forbidden under Article 6 of the Paris Agreement – see explanations of Article 6 here and here.
Another reason CCERs are considered “voluntary” units is their history under the Clean Development Mechanism (CDM) of the now-expired Kyoto Protocol. The CDM was essentially a global offsetting system, with rich countries that had compliance obligations under the Kyoto Protocol buying units of emission reduction achieved by projects in poor countries (including China) that did not have emission limits under Kyoto. These credits were called Certified Emission Reductions and were verified by UN-approved bodies and logged in a UN registry – those generated by projects in China are CCERs. Many CDM projects continue to generate CERs, but as buyer interest in those units tanked post-Kyoto, many of the projects’ owners have re-certified their methodologies to another program’s criteria (such as Verra or Gold Standard) thus being able to sell the resulting units as VCRs or Gold Standard credits in the voluntary market – these fetch higher prices. The number of CCER transactions petered out over the years, though the original projects continued to generate credits.
As indicated in our previous analyst update, over 170 out of the 200 CCER methodologies used to generate credits from Chinese projects are derived from the framework of the CDM. Most were for conventional projects like renewable energy and energy efficiency – only five projects involved agriculture/forestry. According to data provided by the China Emissions Exchange (Guangzhou), the CCER program had endorsed 2871 validated projects, issuing above 70 million CCERs during the time it ran from 2012-2017.
Due to the lack of transactions and lack of methodology standardization, the Chinese government decided to suspend applications for new CCER projects and methodologies in March 2017 – this “froze” the program, as it became dormant without issuance of new credits. The remaining CCERs have largely been “used up” in the seven years since then, with about ten million remaining in circulation currently according to Beijing News Zero Carbon Research Institute.
The entities using those “old” CCERs are primarily emitters covered by China’s eight pilot ETS, all of which allow for offset use in one form or another. They all count CCERs as compliance units in addition to their respective allowances, but most also have local credits generated by projects in their province/municipality that count only toward the compliance obligation of entities participating in that region’s ETS. CCERs are thus “universal” offsets common to all the pilots, whereas each pilot has local offsets that cannot be used in other regions.
Another place CCERs were in principle “used” is the global aviation emission reduction scheme of the International Civil Aviation Organisation known as CORSIA (see our recent analysis of CORSIA here), under which air carriers buy carbon credits to offset their emissions from international flights. CCERs were recognised as Eligible Emissions Units (EEUs) under CORSIA’s pilot phase (2021-2023), but would have had to be recommended by the program’s Technical Advisory Body (TAB) after a re-assessment to count as eligible thereafter. The Chinese government did not even apply for such a re-assessment, and CCERs were not recommended as eligible by the TAB. In a document published in November 2023 that explains all the carbon credit standards eligible for becoming EEUs to offset airlines’ emissions in CORSIA’s first phase (2024-2026), CCERs are not listed.
When the government hit the “pause” button on CCERs in 2017, few expected the overhaul of the program to take seven years. A primary factor in the delay was China’s major institutional reform of 2018, in which competencies of major government ministries and departments were redistributed, see Figure 1. CCERs and indeed most of China’s climate change policy were under the purview of the National Development and Reform Commission (NDRC), but the institutional reform transferred climate change and carbon emission reduction responsibilities to the MEE. The new competency and correlating changes in bureaucratic structure drew out the timeline for completing preparation work for the CCER relaunch (see our previous analyst update for further details). No new units have been issued for over seven years.
Following its release of the “Management Measures for Voluntary Greenhouse Gases Emission Reduction Trading (Trial)” (hereafter referred to as Management Measures), the policy document outlining the fundamental framework of the offset program in October 2023, the MEE on 16 November issued a series of supplementary rules, providing further guidelines for the registration and trading of new offset projects.
Compared to the “old” CCER scheme, the revamp introduced stricter rules for project and credit registrations: these now require involvement of third-party verification bodies and data publication more in line with offset programs of other ETS and global voluntary carbon credit standards.
On 27 December 2023, the State Administration for Market Regulation released implementation rules for the validation and verification of new offset projects. On 19 January, 2024, China’s Certification and Accreditation Administration issued a call for applications from eligible third-party verifiers of carbon credit projects by February. The Administration is reviewing these, and is set to select and release the first batch of qualified verifiers in March. This first batch will consist of four verifiers for energy-associated projects and five other institutions for forestry and other carbon sink types.
The four methodologies selected by the MEE to generate CCERs so far are:
| Textbox 1: Offset methodologies in detail |
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| Regulators deem grid-connected solar thermal power and offshore wind projects eligible to generate credits despite the fact that China’s current photovoltaic and wind power development are fast, large-scale, and partially state-funded – this typically renders such projects ineligible as sources of offsets, since they are not additional to the Chinese power sector’s business as usual trajectory (i.e., they would be built without carbon finance, so they are not offsetting anything). Regulators justify these projects’ additionality for carbon credit purposes because solar thermal power generation projects are few and far between in China. According to the New Beijing News Zero Carbon Research Institute, so far less than ten grid-connected solar thermal power projects have been completed, with only a few dozen approved for construction. |
| Similarly, buildout of grid-connected offshore wind power pales in comparison to onshore wind given its higher technical requirements and upfront costs for operation management. These obstacles render those project types additional because they involve going beyond “business as usual” power sector development for China, according to regulators. |
| The two carbon sink methodologies reflect societal preferences for projects involving nature restoration, as these offer co-benefits beyond carbon reduction such as biodiversity. Forests are already the focus of many voluntary offset projects in China, and are considered to be crucial in achieving carbon neutrality goals. |
| Mangrove swamps have a higher per-hectare carbon storage potential than most other ecosystems, and are also popular for being the “blue carbon” category of offset sources with their marine component. Thus, they are, like afforestation, a project type for which there is significant societal demand in China and in the global voluntary market. However, the volumes this type of project can generate are limited given the small amount of mangrove ecosystem restoration potential in China. |
Already before the official ceremony in early 2024, the impending CCER relaunch incentivized CCER transactions across the nine trading platforms (the pilots and the national ETS). In 2023, a total of 14 million CCERs changed hands – an increase of 75% compared to the 2022 volume. Transactions occurring during the last quarter of 2023 account for around 70% of the CCER traded volume throughout 2023. Although transaction volumes for all compliance units typically increase significantly in the last quarter of a compliance year for an ETS, and the final compliance deadline for China’s national ETS was 31 December 2023, we can rule out this factor as a cause for the surge in offset activity due to the relative timelines involved. China’s initial compliance deadline for the national ETS was 15 September 2023, with a mid-November semi-final deadline that represented the last chance to hand in compliance units for most Chinese covered emitters. The national allowance market thus witnessed its highest activity level during October, with over 93 million CEAs changing hands, accounting for nearly 44% of the transacted CEAs in 2023 – see Figure 2. The surge in offset transactions, on the other hand, occurred in November and December following the two major CCER program revamp announcements in late October and mid-November, respectively – see Figure 3.
The CCER policy developments also helped incentivize investment activities. Since September 2023, many banks across China, including the Industrial Bank, have successively launched loan products and financial support tools for the development of new CCER projects. Shortly before the relaunch ceremony, on 16 January 2024, the Shanghai Pudong Development Bank issued a 10 million yuan medium-term capital loan to Shenzhen Shengshi Environmental Technology Co., Ltd., specifically for the development and approval of CCER projects.
However, in our view the overall lack of liquidity that has permeated the CCER market throughout the program’s dormancy will persist in the long term. With only four methodologies approved by the MEE so far, we foresee a limited unit supply in the future. According to the New Beijing News Zero Carbon Research Institute, these methodologies are unlikely to lead to issuance of a large volume of CCER credits, and it will take months if not years before even approved projects start being issued CCERs. Another reason liquidity will remain low also in the near term is that Chinese covered entities do not face another compliance deadline for almost two years. Compliance for the 2021-2022 period just finished, with covered entities surrendering the units needed to cover their emissions in those years by the end of 2023 with a near 100% compliance rate. The next deadline, by which covered entities must surrender units to cover emissions in 2023-2024, is highly likely to be set for the end of 2025. Transactions of any units (CEAs or CCERs) are down, as market participants have no need for them for nearly two years. However, the MEE announced in October 2023 that CCERs registered before March 2017 can only be used to offset emission allowances in China’s national carbon market until 31 December 2024. In other words, the aforementioned pool of about 10 million CCERs currently in circulation will expire at the end of this year. That makes for a run on the remaining CCER stockpile this year, with covered entities purchasing them to use before they become invalid. In other words, the invalidation creates an incentive for covered entities to buy and use as many of the remaining CCERs as they can by the end of 2024, even though they will not find out exactly how many compliance units they will actually need for the third compliance cycle until mid-2025 when that cycle’s allowance allocation is announced.
The 5% offset use limit will not be a factor here, as a mere 10 million CCERs spread out over the thousands of Chinese covered entities means none of them will come anywhere close to the offset limit. Already in the previous compliance cycle, covered entities collectively used 32.7 million CCERs toward compliance with their national ETS targets – more than three times the volume available now – and this equated to a mere 0.65% of their collective compliance obligations.
Drawing experiences from the original CCER program launch back in 2012, the MEE has taken a step-by-step approach to releasing eligible methodologies. The four it has deemed eligible so far are from a pool of over 360 methodologies submitted in March 2023, compared to about 200 methodologies that had been approved before the suspension.
As revealed during an MEE press conference in early 2024, methodologies that embrace high social expectations, embody few technical disputes, have guaranteed data quality as well as both social and ecological benefits will be prioritized to be approved next. With their large emission reduction potential and relatively easy MRV process, other carbon sink and methane emission reduction methodologies will likely be selected in the next batch. China’s new focus on reducing methane emissions is also in line with its methane plan released shortly before COP28.
As for the prospect of CCER “internationalization”, we do not foresee CCERs supplying the global carbon credit market in large quantities anytime soon. As per the current rules, CCER offset use remains domestic – despite discussions about global applicability, we have seen no clear policy signals from Chinese regulators indicating alignment of CCER standards with their global counterparts in e.g. the VCM. According to the 25 October 2023 notice, Chinese regulators aim to establish a unified national CCER registry and trading bodies to replace the interim functions of the NCSC and the CBGEX.
As the most important document clarifying the operation of the offset market after the relaunch, the Management Measures provide no further details regarding the prospect of CCER internationalization. CCERs will thus continue to be traded domestically and regulated by national authorities.
Veyt specialises in data, analysis, and insights for all significant low-carbon markets and renewable energy.
