China's carbon credit market takes off

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A wide swathe of global companies are seeking to establish a foothold in China's domestic carbon market according to a recent article from S&P Global.

The report suggests that mining and minerals producers, commodity trading houses and oil and gas majors are “not only looking to safeguard their extensive domestic supply chains but are also hedging against tightening global emissions regulations.” Investing in carbon credit projects under China’s domestic carbon credit market, known as the China Certified Emission Reduction (CCER) program, is emerging as an attractive opportunity for many companies with carbon intensive operations in China:

“Several international businesses with Chinese subsidiaries that have previously dabbled in the local carbon market have shown interest in expanding their presence, while others have been making inquiries to understand China's carbon markets to hedge risks or participate when needed.

Mining companies and commodity trading houses with offices in Singapore said that their Chinese customers were also seeking guidance on trading and managing carbon assets, as these global companies possess more experience in carbon trading and reducing supply chain emissions than their Chinese counterparts.

Energy companies like Shell and BP, along with commodity traders like Vitol, have already set up local carbon desks to invest in CCER projects and credits, with others following suit. This contrasts with the shrinking carbon trading teams in other parts of the world.”

Carbon credit market gets a reboot

The CCER program was re-launched on 22nd January 2024. The previous scheme was originally launched in 2012 but was suspended in March 2017 due to a lack of trading activity and to give time for the authorities to develop the regulations further.

CCER certificates are generated through emission reduction activities that are certified by the Chinese government. CCER projects will initially focus on afforestation, solar thermal power, offshore wind power, and mangrove creation. The Ministry of Ecology and Environment (MEE), which oversees the CCER program, is consulting on a further two methodologies: coal mine methane and energy-efficient streetlights in road tunnels. Further methodologies are expected to cover carbon capture, utilisation and storage (CCUS) and hydrogen projects.

The CCER market permits any enterprise to voluntarily buy CCERs to demonstrate that they have helped fund a particular carbon project. The very first CCER transaction involved the China National Offshore Oil Corporation, the country’s largest offshore oil and gas producer. In late January it purchased 0.25 Mt CO2e of CCER afforestation credits, mainly around the area known as the Great Green Wall of China.¹

The majority of the demand for CCERs is expected to be for domestic compliance purposes. Emitters under China’s domestic emissions trading scheme (ETS) are allowed to cover up to 5% of their obligation with carbon credits generated under the CCER program. Although the ETS currently covers around 40% of Chinese emissions (the power generation sector), that share is expected to rise sharply, increasing the potential size of CCER compliance demand (see A battle for global carbon pricing supremacy is brewing: Why you need to pay more attention to China's carbon market).

Earlier in September it was announced that China’s ETS will expand to cover steel, cement, and aluminium by the end of 2024. Together with power generation the three carbon intensive sectors will account for ~60% of the country’s emissions. Assuming participants used CCERs to their fullest extent it would equate to a carbon credit market of close to 340 Mt CO2 per annum, and that’s excluding demand from other sources.