Authors:
- Guo Minping, Researcher, IIGF
- Li Mengchen Assistant Researcher, IGI,
- Li Yang, Research Assistant, IGI
In June 2021, Yueyang Forest & Paper Co., Ltd. and Inner Mongolia Baotou Steel Union Co., Ltd. signed a CCER framework cooperation agreement on forestry carbon offsets. According to the cooperation agreement, Yueyang Forest & Paper will provide Baosteel with more than 2 million tons/year of CCERs over 25 years, providing at least 50 million tons of CCERs, secured by the company’s 8000 square kilometers forestry base. The transaction price is set on a floating basis. It will be guided by the CCER transaction price on the Shanghai Environment and Energy Exchange (SEEE) or set by other institutions designated by the State. In addition, listed companies such as Fujian Jiangle Forestry Corp, Zhongfu Straits Development Company Limited, and Dongzhu Ecological Environment Protection Co., Ltd have also relied on the resources of listed companies in forestation and forestry to develop CCER projects actively. It also shows that China’s forestry carbon market has great potential, and the amount of tradable carbon sinks needs to be further expanded. This paper will analyze the existing shortcomings of China’s forestry carbon market by synthesizing relevant research results at home and abroad and making recommendations for improvement in terms of the relevant institutional framework and market structure.
I. Definition and classification of forestry carbon offsets
Forestry carbon offsets refers to reducing the concentration of CO2 in the atmosphere by using plant photosynthesis, which absorbs carbon dioxide and locks it in plants and soil through afforestation and forest management. According to the 2019 Refinement to the 2006 IPCC Guidelines for National Greenhouse Gas Inventories identifies two types of carbon sinks: operational carbon sinks and afforestation carbon sinks. Operational carbon sinks mainly refer to the increase of forests to absorb carbon through the proper management techniques. It usually covers five areas: above-ground biomass, below-ground biomass, deadwood, dead leaves, and soil. It is possible to reduce the loss of these five carbon pools through ecological management techniques such as pest and disease control, fire warning etc., thereby increasing carbon sink production. Afforestation carbon sinks refer to the conversion of land into forest land either naturally or artificially. Artificial conversion includes promoting the growth of natural forests (artificially improving soil water balance, etc.), creating planted forests on non-forested or unmanaged forest land, and reforestation of managed land such as farmland. Overall, forestry carbon is based on the management of forest carbon sinks to link finance with reduction of the CO2 from the atmosphere.
Based on the analysis of international standards related to certified emission reductions, China’s National Development and Reform Commission has filed the Methodology for Carbon Sink Plantation Projects, Methodology for Carbon Accounting and Monitoring of Bamboo Afforestation Projects, Methodology for Forest Management Carbon Sink Projects, Measurement and Monitoring of Greenhouse Gas Emission Reduction for Sustainable Grassland Management, Methodology for Carbon Sink Projects from Bamboo Forest Management and other related methodologies. The existing methodologies have all been optimized based on international research and combined with China’s carbon sink practices and industry characteristics, laying a solid foundation for the formal opening of forestry carbon project certification in China.
II. Development of domestic forestry carbon market
(1) Gradual expansion based on CDM projects
Forestry carbon originated from the Clean Development Mechanism (CDM). In 2006, with the support of the World Bank, the first registered CDM forestry carbon project in the world–the Facilitating Reforestation for Guangxi Watershed Management in Pearl River Basin, was implemented in Guangxi. The project is establishing 3,008.8 hectares of multiple-use forests. The project is expected to reduce greenhouse gas emissions by approximately 770,000 tons by 2035. During the first monitoring period it has successfully issued 132,000 tons of carbon emission credits generating a profit of US$519,000. The CCER mechanism has developed on the basis of the CDM and has further enriched and improved the methodological application of forestry carbon projects.
At present, the main forms of forestry carbon trade in China include:
- trade under the CDM forestry carbon project;
- trade within the CCER forestry carbon project, including Beijing Certified Emission Reductions (BCER) projects, Fujian Forestry Carbon Emission Reductions (FFCER) projects, and Guangdong Pu Hui Certified Emission Reductions (PHCER) projects;
- other voluntary projects, including provincial forestry Voluntary Carbon Standard (VCS) projects, non- provincial forestry PHCER projects, Individual Plant Carbon Sink Trading for Guizhou’s Targeted Poverty Alleviation, etc.
According to relevant research findings, before the CCER market was suspended, a total of 97 projects entered validation, 13 started the relevant registration procedures and 3 finished emission reduction registration. Among the project methodologies, reforestation projects were the most popular.
(2) Pilot projects established in forestry abundant locations
China launched forestry carbon sink pilot projects in 2004, and the projects have been implemented in Jiangxi, Fujian, Zhejiang, Inner Mongolia, and Liaoning provinces. Each province and city used existing methodologies to conduct background surveys on forestry carbon resources. Based on their resource advantages, pilots carried out policy-oriented research and design of market layout for carbon sink projects. The provinces with abundant forest and grass resources, such as Fujian, Zhejiang, and Inner Mongolia, have continued to conduct research on carbon sink project methodologies and local market construction during the temporary suspension of trading in the CCER market.
(3) The restart of the CCER project will pave the way for further development of forestry carbon credits
China’s national carbon market and local carbon markets currently allow emission control companies to use a small proportion of CCERs credits to offset their China Emissions Allowances (CEAs) deficits. According to the Administrative measures for carbon emissions trading (Trial Implementation) released in December 2020, CCERs refer to voluntary emission reductions certificates that quantify the emission reduction effects of renewable energy, forest carbon sinks, methane utilization, and other projects in China and are registered in the carbon exchange.
The work related to CCER in China was suspended in 2017, but the revision of management methods, research, development of methodologies, and market construction has never stopped. According to the Implementation Plan on Building a Modern Environmental Governance System Issued by the People’s Government of Beijing Municipality in March 2021, Beijing will improve its carbon emissions trading system and build a national center for the management and trading of voluntary greenhouse gas emission reductions. The Opinions of the State Council on Supporting the High-Quality Development of Beijing City Sub-center, issued in November 2021, also promote the China Beijing Environment Exchange (CBEEX) as a national center for voluntary emission reduction trading and upgrade it to the level of international green exchange. In terms of market construction, according to the public information of CBEEX, the tender and procurement for the electronic system of CCER management and trading has been completed by the end of 2021, and the recruitment of full-time staff is also in progress. From the perspective of market demand, during the 14th Five-Year Plan period, industries such as iron and steel, non-ferrous metals, petrochemicals, chemicals, and building materials will be gradually incorporated into China’s carbon market, and the overall scale of emission control will be expanded to 8 billion tons, thus increasing the demand for CCERs to 400 million tons. It is therefore urgent and necessary to restart the issuance of CCERs in the primary market.
Before the suspension of CCER in 2017, the key issuance of credits was in projects related to clean energy, including the construction and development of wind power, photovoltaic, and hydropower. However, hydropower projects were explicitly rejected by many local pilot markets for carbon credit offsets due to their high ecological impact and far greater scale of volume than other types of projects. Due to the rapid technological advances over the past five years in wind and photovoltaic industry, the costs fell by more than 50%. With the massive development of national clean energy projects and the development of the green electricity trading market, the likelihood of these projects being issued with CCERs in the future is decreasing. Against this backdrop, the importance of forestry carbon in CCER projects will be gradually increased and together with the role of afforestation in China’s ecological protection strategy, the development of forestry carbon sinks will inevitably become the main source of emission reductions certificates in CCER projects. This is also reflected in the recent actions of listed companies such as Yueyang Forest & Paper Co., Ltd. and Fujian Jiangle Forestry Corp.
III. Challenges to the development of forestry carbon in China
(1) Forestry carbon offsets are still at the initial stage in China
According to the data of the national forest resources inventory, China’s forest coverage has been increasing year by year. During the 13th Five-Year Plan period, China has increased forest coverage to 23.04% reaching 17.5 billion cubic meters, reaching. Despite the robust afforestation efforts, many regions in the north and northwest China still have big afforestation potential. According to studies, there are still about 30 million hectares of land in China that can be used for afforestation, and together with the potential for the forest rehabilitation from slope agriculture there is a total of more than 40 million hectares of land that can be used to expand the forest area. However, 50% of these areas are in arid and semi-arid areas with less than 400mm of rainfall, making afforestation more difficult
(2) Low carbon prices lead to insufficient incentives for development carbon sink projects
Forest ecosystems play important role in ecosystem and make great contributions to society in terms of water conservation, soil and water preservation, ecological conservation, and carbon sequestration. The development of forest carbon trade can convert these services provided by the forests into material return for the those engaged in the afforestation efforts. However, China’s current carbon price is low, with CCER prices hovering in the RMB 20-30/ton for a long time, resulting in low market returns and a lack of effective economic incentives for forestry carbon projects. Zhang Ying et al. (2019) found through estimation that the average cost of cultivating and maintaining carbon sink forests in China is 288 RMB/ m2, while the average return for 30 years of afforestation is 141 RMB/m2
(3) Another challenge is posed by the disputes over forestry rights on the local level and lack of communication leading to ineffective management. Government and enterprises should cooperate to establish a resources network and vigorously promote the integration of forestry resources. It is recommended that regions with abundant forestry resources establish a unified and standardized forestry resource network and coordinate the development of small and big forests. Specifically, it is recommended that the National Forestry and Grassland Administration strengthen its ability to coordinate planning and local forestry groups’ forestry management, establish databases and resource sharing platforms to improve the utilization of forestry resources as much as possible. Forestry rights reform can be further advanced at national and local levels.
With planned expansion of the national carbon trading scheme the significance of CCER will further increase. Accordingly, Beijing is expected to relaunch the CCER scheme in 2022.
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