In September 2024, China has issued several key policy documents to expand and gradually refine both its compliance carbon market and its voluntary emissions reduction mechanisms.
The Work Plan for Expanding the National Carbon Emissions Trading Market to Include the Cement, Steel, and Electrolytic Aluminium Industries released by the Chinese Ministry of Ecology and Environment (MEE) at the beginning of September 2024 has garnered widespread attention. The draft that has been put up for public consultation proposes the inclusion of high-emission sectors such as cement, iron and steel, as well as electrolytic aluminium into the national carbon trading system (referred to as national ETS), starting already in 2024. The three industries together emit around 3 Gt of CO2, or 20% of the national total, per year. Previously, the ETS only included emissions from the energy sector, which represent around 40% of China’s CO2 emissions. This move will greatly expand the market’s coverage to around 8 Gts of CO2, which make up 60% of China’s total emissions, according to the MEE.
It may also be seen as a policy response to the EU Carbon Border Adjustment Mechanism. With more industries participating, companies will have greater flexibility in trading emissions allowances, while the carbon price market mechanisms is expected to incentivise them to adopt more efficient production technologies and lower their emission. Increased participation is also expected to a more stable and transparent carbon pricing system. However, the new sectors will receive free allowances for their CO2 emissions at first and no cap on total allowances exists so far. While new industrial sectors will be added to China’s compliance carbon market, the allocation of emissions certificates will still be based on carbon intensity rather than on total emissions. Therefore the expansion is only expected to have a limited effect on decarbonizing production in the near- to mid-term. It will, however, drive the the establishment of a system of data collection as well as monitoring, reporting and verification of emissions of the affected sectors laying the foundation for more stringent regulation in the future.
To ensure the efficient operation of the carbon market, relevant technical standards are crucial. The release of Guidelines for Accounting and Reporting of Greenhouse Gas Emissions for Enterprises in the Cement Industry (CETS—AG—02.01—V01—2024) and three other technical standards provide guidance for greenhouse gas emission accounting in the cement industry. These guidelines establish detailed methodologies for calculating and reporting greenhouse gas emissions in the cement industry. The Guidelines are expected to create more robust, accurate and comparable data, thus enhancing the market’s credibility and transparency.
Next to these developments in the compliance carbon market, China is also advancing its voluntary emissions reduction mechanisms. The Notice on Coordinating the Renewable Energy Green Power Certificate and the Voluntary Emission Reduction Market issued together by the National Energy Administration (NEA) and the Ministry of Ecology and Environment (MEE), is a critical step in this direction. The Notice clarifies the environmental attributes of green electricity certificates (GEC) and voluntary emission reductions under the China Certified Emission Reduction (CCER) scheme. Key point in the Notice is the prohibition of double-claiming of benefits from GEC and CCER trading for renewable energy projects. Therefore, NEA and MEE have established an information-sharing mechanism connecting the registration platform of both systems ensuring timely exchange of information related on certification and trading for deep sea offshore wind power and solar-thermal power generation projects.
These policy updates indicate that China’s compliance and voluntary carbon market regulations are gradually becoming more mature and comprehensive. By expanding the compliance market’s coverage, issuing technical standards, and promoting the integration of GECs with the CCERs, China’s carbon market is expected to move toward greater transparency and efficiency in support of the country’s efforts to meet carbon peak and carbon neutrality goals.
