Nancy Sun: Analysis on the new Management Measures for VCER Trading

An Analysis on the Management Measures for Voluntary Greenhouse Gas Emission Reduction Trading (For Trial Implementation)

To further standardize nationwide voluntary greenhouse gas emission reduction trading (hereinafter referred to as "Emission Reduction Trading") and related activities, and to promote the realization of the carbon peaking and carbon neutrality goals, the Ministry of Ecology and Environment, in collaboration with the State Administration for Market Regulation, has revised the Interim Measures for the Management of Greenhouse Gas Voluntary Emission Reduction Trading (hereinafter referred to as the "Interim Measures"), leading to the Management Measures for Voluntary Greenhouse Gas Emission Reduction Trading (for Trial Implementation) (hereinafter referred to as the "Management Measures"). After a three-month period for soliciting comments, the final draft of the Management Measures was issued and officially implemented on October 19, 2023. Shortly afterwards, on October 24, the Ministry of Ecology and Environment issued the Notice on the Arrangement of Work in the National Greenhouse Gas Voluntary Emission Reduction Trading Market (hereinafter referred to as the "Notice"), which detailed some provisions of the Management Measures.

The Management Measures systematically standardize the overall framework and implementation process of Emission Reduction Trading. In addition to clearly defining general principles, the Management Measures detail the specific contents of each stage of the process, and provide guidance on the responsibilities of regulatory authorities and the conduct of trading entities, which marks the re-launch of Chinese Certified Emission Reductions (CCER). In terms of applicability, the Management Measures bring nitrogen trifluoride (NF3) under the regulated greenhouse gases for the first time, and explicitly include individuals as eligible trading entities. However, they do not provide regulations on cross-border trading, indicating a need for further legislative clarification.

01 Project Evaluation and Registration

1.1 Conditions for Emission Reduction ProjectsAccording to the Management Measures, Emission Reduction Projects applying for registration should mainly meet the following conditions, with an increased emphasis on uniqueness and additionality compared to the original Interim Measures:

• Demonstrating authenticity, uniqueness[1], and additionality[2];

• Falling within the fields that are supported by the project methodology published by the Ministry of Ecology and Environment;

• Commencing construction after November 8, 2012; and

• Not being mandated by laws, regulations, national policies, or included in national and local pilot carbon emission trading markets.

1.2 Project Evaluation and Publicity Process

In addition to the conditions for project application, the Management Measures also stipulate specific requirements that must be met during the project design, publicity, evaluation, and registration stages:

• Project Design: Project owners shall compile project design documents and commission evaluation and verification institutions for their assessment. Raw data and management records of such design documents shall be retained for at least ten years;

• Project Publicity: Project owners shall publicly display the project design documents and the names of the commissioned evaluation and verification institutions through the national unified CCER trading organization and trading system, for a duration of twenty days.

• Project Evaluation: Evaluation and verification institutions shall assess the project, issue an evaluation report and publish this report to the society. 

• Project Registration: Once the evaluation and verification institution issues the project evaluation report, owners shall apply for project registration with the registration institution. As per the Notice, until the establishment of registration and trading institutions, the National Center for Climate Change Strategy and International Cooperation (NCSC）shall undertake the registration, deregistration, and other functions for voluntary emission reduction projects and their emission reductions.

Furthermore, if registered greenhouse gas voluntary emission reduction projects face situations where the project owner ceases to exist or the project is no longer operated, the registration institution, after verification, shall deregister the project. Project owners can also voluntarily apply for deregistration for registered projects. However, once being deregistered, the project may not be re-applied for registration.

1.3 Transition between Old and New Emission Reduction Projects

According to the Management Measures, greenhouse gas voluntary emission reduction projects registered before March 14, 2017 shall be reapplied for project registration. However, the emission reductions already recorded can continue to be used under national regulations. Under the context of the Management Measures, previously registered projects might no longer meet the emission reduction project criteria. They shall be reapplied for project registration based on the criteria of "Authenticity, Uniqueness, and Additionality", project methodology, and related technical specifications.

02 Verification and Registration of Emission Reductions

Chapter 3 of the Management Measures provide regulations on the verification and registration of emission reductions. In general, it sets the following requirements for project emission reductions:

2.1 Timing of Emission Reduction Generation

The emission reductions should occur after September 22, 2020, which is the day China announced its "Dual Carbon" goals. Additionally, the emission reductions for each phase of project registration shall be within five years before its registration date. Hence, projects that started before these two milestones may suffer some emission reduction losses.

Additionally, the Notice stipulates that voluntary emission reductions verified and registered by the Ministry of Ecology and Environment before March 14, 2017, can be used to offset carbon emission quotas in the national carbon emissions trading market until December 31,2024. From January 1,2025, they will no longer be used in the national carbon emissions trading market for this purpose. The use of the national carbon emissions trading market is just one of the destinations for emission reductions. The inability to use them in the national carbon emissions trading market does not mean they are nullified. For example, they can still be used in local carbon markets, carbon neutrality, international mechanisms, and so on.

2.2 Emission Reduction Calculation Requirements

Project owners applying for emission reduction registration must prepare emission reduction calculation reports in accordance with the project methodology and other relevant technical specifications. They should also commission verification and inspection institutions to review these reductions. Notably, unlike the previous Interim Measures which allowed the same institution to calculate, verify, and inspect small-scale projects with annual emission reductions below 60,000 tons, the Management Measures stipulate that an institution performing emission reduction calculations cannot simultaneously be the project's verification agency. This helps prevent conflicts of interest.

Given the numerous project methodologies in practice, some of which are not suitable for CCER projects, Article 8 of the Management Measures state that the Ministry of Ecology and Environment shall be responsible for organizing the formulation and release of project methodologies. These serve as the basis for the voluntary emission reduction project evaluation, implementation, calculation, and verification in related fields. Accordingly, in March 2023, the Ministry issued a Letter on Publicly Soliciting Suggestions on the Methodology of Greenhouse Gas Voluntary Emission Reduction Projects, seeking public comments. The project methodology filing system in the Interim Measures has since ended, and the existing methodologies are no longer applicable.

2.3 Verification and Registration of Emission Reductions

Verification and inspection agencies shall verify the emission reduction calculation reports in accordance with national regulations, focusing on: (1) compliance with the project methodology and other relevant technical specifications; (2) the project's implementation in line with the project design document; and (3) the adherence of emission reduction calculations to the principle of reservation. After the verification, they shall produce an emission reduction verification report and upload it to the registration system, making it publicly available.

After the emission reduction verification report is issued, the project owner may apply to the registration authority for the registration of the project emission reduction. The emission reduction amount of the project applied for registration shall be consistent with the emission reduction amount determined in the emission reduction verification report. The registered emission reductions are termed “Verified Voluntary Emission Reductions”, measured in “tons of carbon dioxide equivalent (tCO2e)”.

03 Voluntary Emission Reduction Transactions

The Notice specifies that before the establishment of the registration and trading agencies, China Beijing Green Exchange will provide centralized and unified trading and settlement services for Verified Voluntary Emission Reductions. It is also responsible for the operation and management of the trading system. China Beijing Green Exchange has already passed the preliminary acceptance inspection of the construction projects for the registration and trading systems in June 2023.

The Management Measures stipulate that voluntary emission reduction trading should be completed through the trading system. It can adopt listed agreements, bulk agreements, one-way bidding, and other trading methods that comply with regulations, continuing the provisions of the Interim Measures. China Beijing Green Exchange will update the trading entities in the registration system with timely changes regarding the quantity and status of the held Verified Voluntary Emission Reductions.

Furthermore, the Management Measures also include brief provisions on the use of voluntary emission reductions: Verified Voluntary Emission Reductions used for offsetting quotas in the national carbon emissions trading market and local carbon emissions trading market, carbon-neutralizing large-scale events, offsetting corporate greenhouse gas emissions, etc., according to national regulations, should be deregistered in the registration system. Participating entities can also voluntarily deregister their held Verified Voluntary Emission Reductions for the purpose of public interest.

04 Concluding Remarks

The promulgation of the Management Measures signify the re-launch of the CCER, a nationwide unified market. In light of this, it's not unreasonable to anticipate a significant increase in the CCER's trading volume, frequency, and the number of participating entities, on the basis of progress made up to 2017. This momentum could play a pivotal role in propelling China towards its ambitious "Dual Carbon" objectives.

Nevertheless, it's worth noting that the Management Measures haven't clearly outlined the regulatory framework for cross-border transactions or individual participation. We look forward to relevant laws and exchange rules to lay down clear guidelines for admission and trading. This will open the doors for eligible individuals and international investors to actively engage in CCER trading.

[1]The project has not participated in other Emission Reduction Trading mechanisms, and there is no situation of repeated project recognition or duplicate calculation of emission reductions.

[2]When implemented as a voluntary greenhouse gas emission reduction project, compared to other alternative solutions that can provide equivalent products and services, it is not the optimal choice in terms of financial indicators like the internal rate of return. There exist barriers in financing and key technologies. However, implementing it as a voluntary emission reduction project helps overcome these obstacles. Moreover, compared to the baseline scenario determined by the relevant project methodology, it has an additional emission reduction effect. That is, the project's greenhouse gas emissions are lower than the baseline emissions, or the greenhouse gas removal is higher than the baseline removal.