The offsetting mechanism allows the emission reductions generated by greenhouse gas emission reduction projects outside the ETS to "offset" the greenhouse gas emissions of key emitting entities that bear emission reduction obligations, so as to provide key emitting entities with another means to complete their payment obligations in addition to submitting carbon emission allowances (emission allowances).
Article 29 of the Measures for the Administration of Carbon Emission Trading (for Trial Implementation) stipulates that "key emitting entities may use nationally certified voluntary emission reductions to offset the payment of carbon emission allowances every year, and the offset ratio shall not exceed 5% of the carbon emission allowances to be paid." The relevant regulations shall be formulated separately by the Ministry of Ecology and Environment. In the previous draft of the document, the offset ratio was 5%, ranging from 5% to no more than 5%, which shows that the competent authority has strengthened the limit on the CCER offset ratio.
Why limit CCER's offset to 5%?
First of all, the core of the formation mechanism of the carbon market is the total amount of allowances, and the operation of the carbon market is promoted through the continuous reduction of the total amount of allowances. However, CCER is not part of this total cap, and is used as a supplementary offset mechanism. If the offset ratio is set too high, it actually increases the total supply in disguise, changes the relationship between the supply and demand of allowances in the carbon market, and thus affects the market for allowances.
Second, there have been similar cases in China's pilot area trading, which has affected the operation of the carbon market. The two pilot carbon markets in Guangdong and Shanghai have a history of a large number of CCERS entering the market due to the overly loose setting of the offset mechanism, resulting in a serious decline in market demand and a serious accumulation of surplus allowances for enterprises.
5% may not seem like a high percentage, but it's critical. With the launch of the national carbon market, the demand for CCER has increased significantly. According to research, before the suspension of CCER issuance, the national carbon market had not yet been launched for trading, and more than 50 million tons of emission reductions from CCER's approved projects had been verified and publicized.
According to the data of the Ministry of Ecology and Environment's "Report on the First Compliance Cycle of the National Carbon Emission Trading Market".As of December 31, 2021During the first compliance cycle, 847 key emitting enterprises had a quota gap, and a total of about 32.73 million tons of CCER were used for quota settlement and offsetting, which had a significant effect on CCER's consumption.
The period 2021-2022 is the second compliance cycle of China's carbon market, that is, emission control enterprises must complete the settlement of allowances for the previous two years by December 31, 2023. As of 2023,A total of 2,871 CCER approved projects have been announced in China, and about 77 million tons of CCER have been issued.
In anticipation of the expansion of the national carbon market and the gradual tightening of allowances, the supply of CCER exceeds demand and there is no incremental replenishment for a period of time, which raises the market's expectation for the resumption of CCER issuance. Zhou Chengjun, director of the Financial Research Institute of the People's Bank of China, said in an interview with the Financial Times that the launch of the national carbon market has given CCER greater development opportunities. Previously, the CCER market was mostly voluntary, lacking sufficient incentives, and the continuity and activity of transactions were relatively limited. But when the national ETS is launched, CCER can be used as a supplement to mandatory compliance, offsetting 5% of total carbon emissions under current rules, which gives it trading value.
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