The draft New Measure aims to enhance the environmental integrity of China’s carbon market by introducing new requirements for project registration and credit issuance.
China is preparing to relaunch its carbon credits program, the Chinese Certified Emission Reduction (CCER) Scheme, after suspending the program for over six years. On July 7, 2023, the Ministry of Ecology and Environment (MEE) and the State Administration for Market Regulation (SAMR) of the People’s Republic of China jointly released the draft Measure for the Administration of Voluntary Emission Reduction Trading (the New Measure).
The public consultation for the draft New Measure ended on August 6, 2023, and on September 15, 2023, the MEE ministry conference reviewed and passed the New Measure in principle. The formal release is expected to happen in October 2023, upon which the New Measure would replace the previous set of rules and become the governing law of the CCER Scheme.
Together with the national emission trading scheme (the China ETS) launched two years ago, the CCER Scheme represents China’s continuous efforts towards adopting market-based mechanisms for achieving its climate pledges (peaking emissions before 2030 and reaching carbon neutrality before 2060).[i]
How the CCER Scheme Works
The CCER Scheme governs the creation, transaction, and use of CCER credits under the China ETS. Entities that are obliged to surrender Chinese carbon emission allowances (CEAs) under the China ETS may elect to use up to 5% of CCER credits to satisfy such compliance obligations. The CCER credits may also be used in China’s provincial pilot emission trading schemes.
Project Criteria and Liability Regime
Under the New Measure, a project owner is required to be a China-registered legal person or organization to apply for project registration and CCER registration.
A project is eligible for registration if:
- its construction began after June 13, 2012, which was the implementation date of the CCER Scheme;
- it results in greenhouse gases avoidance, reduction, or removal; and
- it generates emission reduction or removals that are real, additional, and with no double-counting.
Projects cannot be registered under the CCER Scheme if they:
- legal obligation to reduce or remove greenhouse gases;
- are under the management of national or regional emission quotas in the China ETS; or
- involve double-counting.
The CCER Registry may revoke project registration and ban the project owner from registering new projects for three years if it finds fraud or misrepresentation in the project’s application. CCER credits generated by fraudulent projects are prohibited from trading. The project owner must timely retire all fraudulent credits as requested by the CCER Registry, and must pay a fine between RMB10,000 to RMB50,000 (approximately US$1,370 to US$6,850). If the project owner fails to retire the fraudulent credits in time as requested, it will be fined RMB50,000 to RMB100,000 (approximately US$6,850 to US$13,700) and banned indefinitely from applying for another project registration or CCER credit issuance.
Supporting Infrastructures: The CCER Registry and Trading Exchange
The MEE will establish a CCER Registry to process the application of registration and revocation of CCER projects, as well as registration, issuance, transfer, and retirement of CCER credits. The CCER Registry must keep records of CCER credits ownership and status in its system.
The MEE will also establish a CCER Trading Exchange, a unified system to streamline the trading and settling of CCER credits. Under the New Measure, one must be a China-registered legal person or organization, or an individual to participate in trading CCER credits and other derivatives, either on the CCER Trading Exchange, over-the-counter, or in auctions. The CCER Registry and the CCER Trading Exchange will each formulate their own policies and rules, with shall be filed to the MEE for record.
The Revolutionary Review-and-Register Approach
Instead of the filling-based approach that was used previously, the New Measure sets up a review-and-register approach to enhance environmental integrity of China’s carbon market. Under the new approach, a project owner first has to prepare a project design document and submit such document to a Review and Verification Institution, which is an independent and accredited third-party verification body, for initial review. Simultaneously, the project must go through a 20-day public consultation process. Afterward, if qualified, the project may be registered in the CCER Registry.
For CCER credit quantification and issuance, the project owner has to prepare a quantification report and submit it to a second Review and Verification Institution for verification. Similar to the project design document, the quantification report must also go through a 20-day public consultation process. Afterward, the project owner may request credit issuance from the CCER Registry, and the CCER Registry will process the request within 10 days.
Under the New Measure, a Review and Verification Institution must be accredited under the supervision of MEE and SAMR and must have certain facilities, eligible staff, stable financial support, suitable insurance, technical abilities, and good corporate social credit scores. One single Review and Verification Institution cannot serve during both the project review and registration period and the credit quantification and verification period. Thus, each project needs to hire at least two Review and Verification Institutions, which will enhance the environmental integrity of the CCER credits.
Methodology Development
Under the New Measure, the MEE will take the lead in formulating and publishing a series of methodologies, which will serve as the basis for generating CCER credits under the CCER Scheme. This procedure is different from the international voluntary market approach by which project owners can take the lead in developing methodologies to be adopted by voluntary carbon registries.
Industry Observations
The CCER Scheme was initially launched in June 2012 by the National Development and Reform Commission upon the release of the interim Measures for the Administration of Voluntary Emission Reduction Trading, and later suspended in March 2017 due to low trading volume, lack of market standards, and market suspicion about its environmental integrity. Before the suspension, the main types of CCER projects registered in the CCER Scheme included renewable energy, afforestation/reforestation, and methane utilization. As of the suspension in 2017, there were a total of 2,856 reviewed projects. Of these, 1,047 projects were successfully registered, and 287 projects were further issued credits, with wind power, photovoltaics, rural biogas utilization, and water power taking up nearly 83%.
In the past six years, though the CCER Scheme was suspended such that new project listing was prohibited, CCER credits generated from projects that were listed before the suspension are still eligible for trading. The overall trading volume of CCER reached 175.33 million tons in 2021, and slipped back to 7.96 million tons in 2022, mainly because the China ETS did not have a compliance deadline in 2022. In the first compliance cycle from January 1, 2021 to December 31, 2021 of the China ETS, covered entities submitted a total of approximately 32.73 million tons of CCER credits.
Parties can also take a security interest in CCER credits. The Supreme People’s Court of China clarifies that CCER credits can be used as a guarantee, and the guarantor can exercise the right in accordance with relevant legal provisions.
Looking Forward
Market participants have long awaited the return of the CCER Scheme. Following the release of the New Measure, we expect that the restarted CCER scheme will further activate and expand China’s carbon market. Nonetheless, some remaining questions need to be clarified. For instance, international investors are wondering whether CCER credits can be exported with corresponding adjustments, as required under Article 6 of the Paris Agreement. The New Measure is silent on this issue. Similarly, individual participants are eligible to trade carbon instruments under the New Measure along with legal persons and other organizations, but the prerequisite of “complying with relevant national regulations” is still vague. We expect detailed explanations through further legislation.
The authors would like to thank Yuxuan Chen for her contribution to this blog post.
Endnotes
[i] Xi Jingping’s speech at the General Debate of the 76th Session of the UN General Assembly (September 21, 2021), see https://www.fmprc.gov.cn/mfa_eng/wjb_663304/zzjg_663340/gjs_665170/gjsxw_665172/202109/t20210923_9580159.html (last visited on September 21, 2023).
