Panel Paper: The Environmental Integrity of Renewable Energy Carbon Offsets in China's Cap and Trade System

Thursday, November 8, 2018
Jackson - Mezz Level (Marriott Wardman Park)

*Names in bold indicate Presenter

Gabriel Chan, University of Minnesota and Joern Huenteler, The World Bank

China launched the world’s largest greenhouse gas emission trading scheme (ETS) at the end of 2017 after gaining experience with several sub-national pilot ETSs. The environmental performance of ETSs can be affected by the use of carbon offset programs, which allow emitters to submit permits created from emission reduction activities outside of the scope of the ETS.

Prior research on the Kyoto Protocol’s Clean Development Mechanism (CDM) has identified approaches taken by the CDM as particularly problematic. The CDM was established to allow Annex B parties to the Protocol to receive credit for emissions reductions in other countries through the issuance of Certified Emissions Reductions (CERs). Over the CDM’s active period from 2005 – 2012, nearly two-thirds of CDM credits were created through activities in China. This experience, which helped direct ~$5 billion in climate finance from Annex B countries (primarily in Europe) to support investments in China were an enabling factor in China’s ongoing energy transition. For example, over the period 2005 – 2012, approximately 80% of wind energy investments in China received some support through the CDM, while over this period China became the largest installer of wind capacity in the world.

China’s experience with carbon markets through its participation in the CDM is widely recognized as being a critical learning experience that influenced its decision to adopt an ETS-based approach to domestic climate policy. In fact, many direct practices from the CDM were applied in the development of the Chinese ETS. Several of China’s pilot ETSs and the preliminary operation of its national ETS allowed for domestically certified carbon offsets under the Chinese Certified Emission Reduction (CCER) scheme. Many CCER approval rules used identical rules to that of the CDM. The practice of directly applying the CDM’s certification schemes offers several attractive political features – importantly, replacing CER buyers with CCER buyers may fulfil the implicit agreements to help finance renewable energy projects approved by the Chinese central government for participation in the CDM. However, from an environmental perspective, the broad crediting of CCER projects may call into question the overall environmental integrity of the Chinese ETS. Multiple lines of evidence, including our own prior work, have called into question the environmental integrity of the CDM’s additionality methods. Applying these same methods within the Chinese ETS would allow the broad application of offsets to undermine the integrity of the Chinese ETS cap.

In this paper, we will provide the first systematic documentation of CCER credit usage in the Chinese ETS pilots and the national ETS. We will create a database of CCER project registrations and establish which CCER projects are directly applying CDM methods, particularly those CCER projects focused on renewable energy. Leveraging the results of our prior work on the environmental integrity of the CDM’s methods, we will extrapolate to the domestic Chinese context to evaluate the anticipated environmental impact of the use of CCERs in the Chinese ETS and the feasibility of China achieving its climate pledges.