FEATURE: Additionality and offshore wind in China's voluntary carbon market

12 Sep 2024

Quantum Commodity Intelligence – China's domestic voluntary carbon market registry currently has a pipeline of 38 projects. Nine new developments have been added in the last week, with the projects now under consultation and awaiting registration to become the first schemes to receive carbon credits.

The nine new projects listed in the National Voluntary Greenhouse Gas Emission Reduction Registration System and Information Platform include six offshore wind farms, two grid-connected solar thermal power projects and one afforestation scheme. Three of the offshore wind farms being the largest projects yet in the pipeline.

One wind farm, with 44 turbines of 11-12MW generating capacity will be located up to 61 kilometres off the coast of Guangdong Province, and has the potential to earn 8.92 million China Certified Emission Reductions (CCERs) over a 10-year period.

Two other wind projects, added to the list in the last update, have the potential to earn 8.46 million and 8.04 million CCERs respectively. The 38 projects, if approved, could cut or remove from the air 7.167 million tonnes of carbon dioxide (tCO2) a year, and 123 million over their crediting period, spanning typically 10 years. Out of these, 22 are offshore wind projects with the potential to earn 110.6 million credits.

But, as any watcher of China's energy sector will know, offshore wind is not a new technology to the country. China has 37.8GW of installed capacity out of a global total of 75.2GW, according to a report by the Global Wind Energy Council released in June. China added 6.3GW alone last year out of the 10.9GW installed around the world, the report said.

A big question over offshore wind in China's voluntary market is therefore additionality – whether or not the projects need carbon finance to go ahead.

China's central government has not provided subsidies to offshore wind since 2022, which may be a thin argument for additionality in the present, although the whole point of subsidies is to support a sector until it becomes commercially viable.

More offshore wind

And, as the installed capacity figures show, China's offshore wind sector is leading the world and will continue to do so. "GWEC Market Intelligence predicts that 72GW of new offshore wind capacity  will be added in China in 2024-2028, contributing 52% of the global offshore wind additions in this period," the report predicts.

A line on China's voluntary registry webpage under the heading 'The argument for additionality' says the projects are "exempt", but this also applies to the other approved sectors for the CCER scheme, afforestation, mangrove restoration and grid-connected solar thermal power.

China's argument for additionality for offshore wind, according to a report this month by Norway-based renewable energy and carbon market analytics firm Veyt, centres on offshore wind development in comparison to onshore wind.

The "buildout of grid-connected offshore wind power pales in comparison to onshore wind given its higher technical requirements and upfront costs for operation management", the Veyt report said. "These obstacles render those project types additional because they involve going beyond 'business-as-usual' power sector development for China, according to regulators," it added.

A Chinese government official defended the inclusion of offshore wind in the CCER system  on the sidelines of World Bank's Innovate4Climate 2024 conference held in Berlin this week.

Lei Zhu with the Ministry of Ecology and Environment's carbon department said wind projects at least 30 kilometres off the coast with sea depths of at least 30 metres are allowed to apply for registration. "These kinds of projects are expensive. If there is no support from [VCM], maybe there will be some financial difficulties to realise emission reductions," he said.

On September 11, China's Ministry of Ecology and Environment and the National Energy Administration jointly issued a notice on connecting China's green electricity certificates (GECs) scheme with CCERs.

Veyt analyst Duong Thi Thuy Mai said in a social media post that the move is expected "given the overlapping scopes of both schemes" and aims to address double counting and additionality concerns.  There will be a two-year transition period starting from October during which CCER offshore wind power and solar thermal power projects can independently choose to issue GECs or apply for CCER.

The notice also aims to set out a process to avoid duplication of GECs and CCERs. "Those who plan to participate in GEC transactions must not apply for CCER while those who plan to apply for CCER will be "frozen" by the National Energy Administration Qualification Center. After completing the verification and registration of CCER, the National Energy Administration Qualification Centre will cancel the untraded GECs corresponding to CCERs and disclose the information to the public," she said.

In June, Quantum reported that some Chinese developers were looking to switch to the CCER scheme from global carbon standards because demand and prices of credits had dropped. And domestic CCER demand could get a boost as China is likely by the end of this year to expand its domestic emissions trading scheme (ETS) to include the highly-carbon intensive sectors of steel, cement and aluminium. The move was announced by the country's environment minister at a conference last weekend, according to state media reports.

Demand

The inclusion would vastly increase the pool of emissions that Chinese heavy industry would need pay a carbon price on, and is likely to vastly increase the size of the market for project-based CCERs, which can be used to cover 5% of total emissions covered by the ETS.

"By the end of this year, in addition to the power sector that is currently covered, steel, cement, aluminium smelting and other industries are expected to be included in the national carbon emission trading market, Huang Runqiu, China's Minister for Ecology and Environment, told the conference.

The minister couched the announcement as part of China's wider aim of peaking its greenhouse gas (GHG) emissions by 2030 and then reducing them to meet a 2060 carbon neutrality goal of meeting. As part of these efforts, China will increase the variety of methodologies and improve the national GHG voluntary emission reduction trading market, in which CCERs can be used for compliance or traded in a secondary market.

Veyt's Duong said the ETS expansion announcement would take time to impact demand and supply of CCERs. "It's likely that the main priority of ETS expansion will be first given to the ETS, meaning setting benchmarks for new sectors, further clarifying guidelines on measurement, reporting and verification [for the compliance markets]," she said.

For methods to be approved for projects for sources of CCERs for metals and cement, "it may take years, and definitely not months", Duong said. "Chinese regulators also make it clear that they would take a step-by-step in approving new offset methodologies. It's a lesson that they have drawn from the lack of quality of old offset credits," she said.

China in August released a plan to standardise carbon emission calculations across key economic sectors. The plan aims to draw up 70 national standards on carbon accounting, footprint, reduction, capture, utilisation and storage by the end of the year, which would cover all main sectors and companies, and "provide effective services for the construction of the national carbon emission rights trading market".

China's national ETS, launched in 2021, covers 5.1 billion tonnes of carbon dioxide in the power sector, equivalent to around 40% of the country's total emissions but so far hasn't included some of its biggest polluters, such as steel, non-ferrous metals, cement, petrochemicals, and ceramics.