Global companies seek foothold in China's carbon markets amid strong policy signals

A wide swathe of global companies, including mining and minerals producers, commodity trading houses and oil and gas majors, are seeking to establish a foothold in China's domestic carbon markets, driven by stronger policy signals and expanding emissions regulations.

These companies are not only looking to safeguard their extensive domestic supply chains but are also hedging against tightening global emissions regulations, such as cross-border carbon taxes, which could affect goods from China.

Interest surged after Beijing issued guidelines to expand the national emission trading scheme, or ETS, beyond the power sector to include new industries and rolled out new carbon projects under the domestic voluntary market, known as the China Certified Emission Reduction, or CCER, mechanism.

While China's national ETS only applies to local emitters, the CCER market allows foreign companies with locally registered entities to invest in CCER projects and credits, which is emerging as an attractive investment opportunity.

Several international businesses with Chinese subsidiaries that have previously dabbled in the local carbon market have shown interest in expanding their presence, while others have been making inquiries to understand China's carbon markets to hedge risks or participate when needed.

Mining companies and commodity trading houses with offices in Singapore said that their Chinese customers were also seeking guidance on trading and managing carbon assets, as these global companies possess more experience in carbon trading and reducing supply chain emissions than their Chinese counterparts.

Energy companies like Shell and BP, along with commodity traders like Vitol, have already set up local carbon desks to invest in CCER projects and credits, with others following suit. This contrasts with the shrinking carbon trading teams in other parts of the world, traders said at APPEC 2024 in Singapore earlier this month.

Strong demand

CCER credits are eligible for voluntary retirement only within China; however, the market has emerged as an appealing starting point for international companies due to anticipated growth in domestic demand and an expected rise in carbon prices.

The Ministry of Ecology and Environment, or MEE, has been working to make CCERs eligible under the Carbon Offsetting and Reduction Scheme for International Aviation, or CORSIA, which will open a new demand channel for CCERs within the aviation industry.

The national ETS also permits companies to use CCERs to offset up to 5% of their liable emissions. Therefore, despite being voluntary, the supply, demand and price movements have a direct impact on the ETS market, Michael Wang, head of China markets, global carbon at Macquarie Group, said at APPEC.

Wang expects the first batch of new CCERs to hit the market by the end of 2024, as the scheme reboots after a seven-year hiatus.

The national ETS itself is set to expand, currently covering only the power sector. The MEE announced Sept. 9 that aluminum, steel and cement producers will begin trading allowances in 2025, while the refining, petrochemicals and civil aviation sectors will be included by 2030.

China produces over half of the world's aluminum, steel and cement supplies, and the costs associated with reducing emissions in these sectors impact global commodity markets.

While current ETS prices have been capped, the long-term trend remains uncertain, especially after 2026 when the EU's Carbon Border Adjustment Mechanism, or CBAM, starts imposing carbon taxes on cement, steel and aluminum imports. Some sources expect China to raise its compliance carbon prices after 2026 to align with CBAM.

"[Chinese policymakers] can always ratchet up prices if they want to in five minutes. And suddenly the carbon price may be $40/tCO2e, right? They can do that if they want to," an environmental markets lawyer said.

Better than VCM

Former players in the international voluntary carbon market, or VCM, have shifted their focus to the CCER market, which is already priced higher than VCM credits, allowing trading houses to profit from carbon trading, traders said.

Platts, part of S&P Global Commodity Insights, assessed VCM nature-based carbon removal credits at $12.55/tCO2e and renewable credits at $1.3/tCO2e on Sept. 26, while new CCERs from offshore wind and afforestation projects are expected to be priced at around $13/tCO2e, analysts said.

Early assessments indicate that CCER volumes are set to significantly exceed those of VCM, with an expected issuance of 11.22 million tCO2e of CCERs annually from the first 38 projects currently listed by the MEE for public consultation, data from Commodity Insights showed.

In comparison, the global VCM issuance volume in August totaled 16.7 million tCO2e of credits across all existing projects.

The MEE and the National Energy Administration have also taken measures to boost the integrity of the CCER market, making it more desirable than the VCM.

"For Chinese developers, if their projects can meet CCER's requirements, they will definitely go for CCER. That is the better and smarter choice," a China-based carbon trader said.