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China’s carbon offsets market makes cautious progress

Oslo, 17 February 2014

China’s Certified Emission Reduction (CCER) programme will generate credits that can be used to offset carbon emissions in the domestic pilot compliance markets. The National Development and Reform Commission (NDRC) will guide the development of this market by controlling approval of certain projects, leading to a much lower offsets supply than potentially available, according to Thomson Reuters Point Carbon, the leading provider of market intelligence, news, analysis and forecasting for the energy and environmental markets.

Given the limited time to the first compliance deadlines in mid-2014, the short-term supply will be tight. Thomson Reuters Point Carbon’s analysis forecasts that only currently-listed projects will be issued credits in time for the first surrender deadline for a total of 5 Mt CCERs.

According to Hongliang Chai, analyst at Thomson Reuters Point Carbon, “In our view the NDRC will exercise strict control over issuance, so that even eligible project types may never see issuance.” The NDRC has approved 177 methodologies for offset projects, including several that are not eligible in any of the world’s carbon markets:  HFC and N2O adipic acid projects. “If those projects were issued credits,” Chai continues, “it would not only jeopardize the fledgling offset market with massive credit inflow, but could also subject the Chinese government to unwanted international criticism, the opposite of what it seeks to achieve with its pilot carbon markets.”

Looking to the middle of 2016, the final compliance deadline for the pilot schemes, Thomson Reuters Point Carbon’s base case scenario forecasts cumulative CCER issuance of 200 Mt, which is higher than the estimated total offset limits from the seven pilot schemes and indicates an offset price of €1/t. This is more than twice the current CER price, offering sufficient financial incentive, according to Thomson Reuters Point Carbon analysts, for project developers to convert their projects from the CDM to the CCER platform in the coming years.

If the government decides to further tighten the issuance pipeline, the issued volume could be as low as 100 Mt through mid-2016 with corresponding prices from €1.50/t to €4/t, varying across pilot compliance markets. “In contrast, if the government approves large controversial projects, like HFCs, prices would quickly fall to just above the issuance cost and the issuance volume will depend largely on the emissions-to-cap gaps in the pilots.” concludes Chai.

Ends --

  • The National Development and Reform Commission (NDRC) – the central government body with authority over China’s carbon markets - approved in October 2011 seven regions to start designing pilot carbon emission trading schemes (ETS). The five operational pilots ­– Shenzhen, Shanghai, Beijing, Guangdong, and Tianjin – cover an estimated 700-800 million tonnes carbon emissions annually, and those five pilots have a total offset limit of 50-70 million tonnes. The offset limit may increase to 80-100 Mt after Hubei and Chongqing launch their markets this year.
  • The Chinese government has approved 177 eligible methodologies for its domestic offset programme, of which 173 come from existing CDM methodologies. The four non-CDM methodologies aim to reduce emissions from forestry and land use and were developed by domestic think-tanks.
  • The Clean Development Mechanism (CDM) is a mechanism for project-based emission reduction activities in developing countries. CERs are generated from projects that lead to certifiable emissions reductions that would otherwise not occur.
  • One Chinese Certified Emission Reduction (CCER) is equal to one tonne carbon dioxide equivalent reduced from the atmosphere and can be used in the Chinese domestic offset trading schemes.
  • Hydrofluorocarbons, or HFCs, are one of the six greenhouse gases, controlled in the Kyoto Protocol, are produced commercially and largely used in refrigeration and insulating foam. CDM projects that reduced the emissions of HFCs were eligible for compliance in the European carbon market until 2013 and are now banned.