Measures on the Administration of Voluntary emissions reduction Transactions will be Promulgated and the Volume of Emissions will be Examined Before Approval

After a long wait, the “Measures on the Administration of Voluntary Greenhouse Gas Emission Reduction Transactions In China (Interim)” (hereinafter referred to as: “Measures”) has reached the stage of being ready to be released.

At the “Inaugural Ceremony of the Beijing Green Finance Association and Green Finance Seminar” before the Spring Festival, Sun Cuihua, Deputy Director General of the Climate Change Department of the National Development and Reform Commission (NDRC) indicated that the text of the “Measures” had been completed and was being put to consultation and going through the report for approval preceedings. The “Measures” will be promulgated as soon as possible so that the emission reduction of voluntary emissions reduction projects can be fair and transparent, improving the appeal to buyers.

As understood by the journalist of  21st Century Business Herald, it is noteworthy that the “Measures” will solve the problem of there being a lack of a credit system in the voluntary emissions reduction market in China, and will also specify the products and locations for voluntary emissions reduction transactions, application procedures of new methodologies and accreditation procedures for the examination and certification organization’s (DOE) qualification.

It’s disapointing that the “Measures” do not describe the standards of voluntary emissions reductions and pricing rules.

Voluntary emissions reduction has always been confronted with an insufficient demand problem across the world. In 2009, the transaction volume in the global carbon market reached an equivalent 8.7 billion tons of carbon dioxide, of which the transaction volume of voluntary emissions reduction was less than 100 million tons (accounting for 1%). The transaction volume of voluntary emissions reductions was even less in China, and the transaction volume of voluntary emissions reduction in a medium-sized environment exchange was only about a few hundred thousand tons.

However, the transaction volume of voluntary emissions reduction is of great importance and can make preparations for a real carbon market of China. Chen Hongbo, a fellow associate researcher of the Institute for Urban and Environmental Studies of the Chinese Academy of Social Sciences, said: “The promulgation of the ‘Measures’ is an important step in accelerating the development of a domestic carbon market.”

Voluntary Emission Transactions with National Credit

The insiders said that, after the enactment of the “Measures”, the problem of a lack of a credit system in the voluntary emissions reduction market in China would be settled, and the “Measures” would specify the products and locations for voluntary emissions reduction transactions, application procedures of new methodologies and accreditation procedures for the examination and certification organization (DOE) qualification.

The key to establishing the voluntary emissions reduction market credit system lies in that all voluntary emissions reduction projects can be transacted in the exchanges of voluntary emissions reduction certified by the state, only after the National Development and Reform Commission (NDRC) examines, approves and signs them authorizing the emission reduction volume, and relevant information should also be recorded in the state register managed by the National Development and Reform Commission in a unified way.

An expert who has read the “Measures” told a journalist of 21st Century Business Herald: “The voluntary emissions reduction transactions carried out in any exchange authorized by the state will have national credit.”

The practice adopted in China is a world first. Up until now, no country in the world had established an institution to examine and authorize voluntary emissions reduction.

In addition, it was reported that the “Measures” also have product transaction provisions. Projects that apply for examination and authorization of emission reduction could either be those developed using methodology of the Clean Development Mechanism (CDM) approved by the UN or those developed in new methodologies approved by the National Development and Reform Commission.

It’s worthy noting that those projects approved by the National Development and Reform Commission but not registered with the Executive Board (EB) of UN CDM are also qualified to apply for voluntary emissions reduction.

This means that nearly 2000 Chinese projects remaining in suspense not registered with the EB may find new outlets. According to the latest statistics, the National Development and Reform Commission had approved 2888 CDM projects by January 27, 2011, of which only just over 1000 projects had been registered with UN EB.

As for the trading locations, the “Measures” provide that existing exchanges and planned new voluntary emissions reduction exchanges all need to submit materials to the National Development and Reform Commission for application if they intend to increase the transaction business of voluntary emissions reduction. The key criterion is that the registered capital should not below RMB 100 million.

This measure may be interpreted in that the state aims to prevent an upsurge of blind copying to construct carbon exchanges.

In addition, the National Development and Reform Commission will also approve new methodologies for voluntary emissions reduction, DOE qualifications, etc. NDRC plans to establish the review board of voluntary emissions reduction and it will approve new methodologies of the examination and certification organization (DOE) qualification, according to the opinions of the review board.

An expert said: “New methodologies will be local - suitable for China. Existing methodologies are basically from overseas and there are few local ones.”

The journalist of 21st Century Business Herald also learnt that the time line for submiting applications of voluntary emissions reduction projects to the NDRC is much shorter than that required to apply to the EB for registering CDM projects, and applications to the three international organizations for voluntary emissions reduction standards. The “Measures” set limits to the registration of voluntary emissions reduction projects and the assessment and authorization time of emission reductions volume.

Caspar Chiquet, Director of the Chinese Region of the South Pole Carbon Asset Management Ltd. (Switzerland) and one of the largest developers of voluntary emissions reduction projects in China, said: “It takes a minimum of over one year for a CDM project, from submitting the materials to the successful registration even if everything goes smoothly. At present, the application time and even the whole process of the three international voluntary emissions reduction standards have become increasingly similar to that of theCDM, so it will take at least one year.”

Can the Tax on Voluntary emissions reduction be Reduced?

Although the promulgation of the “Measures” would solve a number of problems, as revealed by relevant personnel, the “Measures” do not have any provisions on the standards for voluntary emissions reduction and pricing rules.

Different standards exist in the present voluntary emissions reduction market. According to statistics, there are 14 types of international standards for voluntary emissions reduction. Because the purchasers of voluntary emissions reduction transactions are mostly companies and institutions from developed countries, the standards used are mainly foreign ones. Chiquet told the reporter of 21st Century Business Herald that the three international voluntary emissions reduction standards currently widely used in China include VCS, Gold Standard and Social Carbon and the three organizations for voluntary emissions reduction standards were all international NGOs.

China also has its own local voluntary emissions reduction standards. China Beijing Environment Exchange and Shanghai Environment and Energy Exchange have both developed their own standards.

Should local standards or foreign standards, or both local and foreign standards be adopted in the end? The “Measures” do not give any explaination.

An executive of the China Beijing Environment Exchange told the journalist of 21st Century Business Herald: “according to my own understanding, the ‘Measures’ treat all standards equally. It would not appear that local standards will enjoy priority after the promulgation of the ‘Measures’ and greater efforts should be made for local standards to be applied in more projects.” It is reported that no voluntary project has adopted the Panda Standard of thd China Beijing Environment Exchange.

In addition, the “Measures” do not provide any description of the pricing rules.

In fact, the price and standard of voluntary emissions reduction are closely related. The prices of emission reduction for different standards are significantly different. The higher the price; the stricter the standard. It is reported that, among the voluntary emissions reduction standards in the world, Gold Standard is the stricteste and accordingly the price of voluntary emissions reduction is the highest.

The lack of pricing rules will influence the selection of project owners. After the promulgation of the “Measures”, project owners may submit the applications of voluntary emissions reduction projects to the National Development and Reform Commission (NDRC) and trade in China, but if the pricing rules are not specified, they may rather spare no effort to continue to apply to UN EB for registering CDM projects.

Additionally, the essence of voluntary emissions reduction lies in that the buyers are not legally obligated to reduce emissions so making contributions to protecting the environment is voluntary, so “total emission control” will not be enforced. This results in the low level demand for voluntary emissions reduction.

If the “Measures” make it clear that voluntary emissions reduction examined and authorized by NDRC can be used to offset the carbon emission of enterprises, the demand for voluntary emissions reduction will be higher.

For instance, at the end of last year, quite a number of provinces and cities adopted the method of “power cuts to limit consumption” to make a dash to meet the energy reduction objectives of the “11th Five-year Plan”, and as a result, many enterprises had to buy diesel oil. Not only did carbon emissions increase, but also the cost was higher. If enterprises can have their carbon emission offset through purchasing voluntary emissions reductions, that is, market approaches are used to realize energy conservation and emissions reduction, it will be more effective than administrative measures and the cost will be much lower.

However, this market approach requires matching corresponding penalty systems. In the EU, the fine rate for emissions of greenhouse gases exceeding the index is EUR 100/t, and this has compelled many enterprises to reach their emission reduction objectives using market approaches.

Chen Hongbo believes that the government should provide some incentives, such as subsidy and tax allowances to enterprises engaged in voluntary emissions reduction.

It is the provision of incentives that have contributed to the 56% participation rate of voluntary emissions reduction of industries in the China Taiwan region. Li Chienming, an assistant professor of Taipei University, believes that the Taiwan Government will provide subsidies for the investment in enterprises through equipment and reduce energy taxation or carbon tax.

In addition, the most important supportting incentive is that enterprises engaged in voluntary emissions reduction may receive quota-based grants of carbon emission permits on the carbon emissions reduced by them before the time when the Taiwan Region will enforce the “total emission control and trading” system in the future.

Carbon Markets may Sprout in China

The “Measures” provide that the voluntary emissions reduction transactions should be carried out by exchanges certified by the state, this is beneficial to the improvement of business for these exchanges. But the exchanges do not believe that voluntary emissions reduction transactions will increase by a wide margin.

“The voluntary emissions reduction transactions will not take a dominant position in carbon trading. There are many sellers of voluntary emissions reduction, but there are only a few buyers,” expressed by an exchange executive.

The executive believes that the voluntary emissions reduction transactions might have a “drilling” effect, driving the construction of the carbon market system. Although China is constructing exchanges across the country, there are no regulations or rules regarding carbon trading. After being promulgated, the “Measures” will be the first.

The policy signal is that China will establish a carbon emission market in the “12th Five-year Plan” period has become clear. At the “Inaugural Ceremony of the Beijing Green Finance Association and Green Finance Seminar”, Sun Cuihua said: “Now, we believe that the most important tool and means to cope with climate change and reduce the emissions of greenhouse gasses in an effective way is to establish a national carbon emission market. And we will vigorously drive forward the construction, based on the spirit of the Fifth Plenary Session of the Seventeenth CPC Central Committee.”

Sun Cuihua also pointed out that we would encourage and support qualified regions and industries to explore carbon emissions trading.

In fact, some pilot low-carbon provinces and cities can hardly wait to establish a carbon emission trading market. Lin Yaojun, Director of the Office of Resources Conservation and Environmental Climate of the Development and Reform Commission of Guangdong Province earlier assured a journalist of 21st Century Business Herald that works relating to the construction of a carbon emissions trading market had been written into the “Program of Guangdong Province for Implementing the Works of the National Pilot Low-carbon Province” and had been approved by the provincial government and submitted to the NDRC for examination and approval.

But a national carbon emissions trading market under “total emission control” will still take a long time. Sun Cuihua said: “At present, the general policy backdrop for “total emission control” is not available yet. The Fifth Plenary Session of the Seventeenth CPC Central Committee has set out to explore total emission control for energy.”　 (Source: 21st Century Business Herald)