Carbon Trading in China – New Regulations and a Consideration of Potential Weaknesses, Innovations and Fuzzy Edges

The podcast starts with an examination of the new regulations, which issued measures for the administration of greenhouse gas voluntary emission reduction trading, effectively ending China’s suspension of voluntary carbon markets, which had been in place since 2017.

Notwithstanding the difference between National Emissions Trading Scheme (ETS) and China’s Certified Emissions Reductions (CCER), the two systems are related to each other by design, and the legacy CCERs that were duly filed with the National Regulatory Agency prior to 14 March 2017, will be allowed to offset carbon emission quotas in ETS until the end of 2024.

What is currently unclear, however, is how much of the emission allowances of key emitters can be offset by CCERs in the future. Article 29 of the Order No 19, issued by the Ministry of Ecology and Environment in 2021, imposed a cap – a key emitter may use CCERs to offset the surrender of emissions allowances, but the offset shall not exceed 5% of the emissions allowances to be surrendered. It is not clear whether this cap will be increased going forward, although there is reason to believe that it will be, in the wake of the growth of voluntary markets.

Greenwashing is on everyone’s mind in the context of carbon trading. The six-year suspension of CCERs in China was partly driven by concerns around the quality of the data that underpins carbon trading. The focus at a regulatory level is to introduce institutional strengths, and Hong discusses three guardrails are worth noting in this regard.

Idle Fish (owned by Alibaba) is China’s largest e-commerce market devoted to trading in second-hand goods, and has its eye on carbon accounting, which is part of the infrastructure of carbon trading. Hong examines how Idle Fish is working with the Beijing Green Exchange to develop models to quantify CO₂ emissions that one can save when buying second-hand products, based on the calculation of the emissions generated in the raw material and production process. Idle Fish expects to serve over 1 billion users by 2030, driving a carbon reduction volume exceeding 55 million tons.

Emission allowances, especially carbon credits traded on voluntary markets such as CCERs, have fuzzy edges in their conceptual configuration. Hong questions how one would book transactions of carbon trading in financial records, noting that the treatment of CCERs in accounting remains unclear, as does how VAT should be applied to trading of emission allowances or carbon projects in general.

If accounting and tax treatment are the fuzzy edges of China’s carbon trading at the moment, cross-border trading and financial derivatives are remote peripherals.

Hong notes that considering international carbon trading post-Glasgow Climate Pact and in the wake of the reintroduction of CCERs, more robust enabling rules from the foreign exchange regulator will be needed to facilitate the much larger volume of cross-border trading.

He concludes by summarising that he chooses not to dwell on the front and centre of the much-celebrated renewal of carbon trading in China, but rather puts the spotlight on a few borderline issues, such as accounting, tax and foreign exchange, which a truly vibrant carbon market must reckon with.