The Ugly Duckling of China’s Emissions Control Regime
Read Time:14 Minute, 27 Second
By: Christopher Hankin
Edited By: Chad Higgenbottom
China’s record on the environment is far from perfect. As I write this article, winter is turning to spring here in Nanjing, but I am afraid to go and enjoy the sun because of the dirty air. China leads the world in planet warming emissions, accounting for 1/3 of global CO2 emissions. In spite of this fact, China is also the world’s most ambitious installer of renewable energy capacity and has become the largest exporter of green technology in the world.
As the country closes in on its 2030 renewable installation goal five years ahead of schedule, it’s worth looking at some of the tools that China has leveraged to get to this point. Among the most influential but least discussed tools is the Green Electricity Certificate, or GEC. A GEC is a market instrument which represents 1,000 MWh of electricity certified to come from renewable sources. To use energy industry parlance, it represents the “environmental attributes” of carbon-free renewable electricity.
The GEC lifecycle beings with China’s National Energy Administration (NEA) who is responsible for verifying that the electricity is renewable, and they then issue a GEC to the generator. The generator can then sell the GEC “bundled” to the electricity it represents, or “unbundled” as a separate product. It’s worth noting that in the case of unbundled GECS, the buyer doesn’t ever actually consume the green electricity. In either case, whoever purchases the GEC is then able to use it to prove renewable energy consumption. Organizations consume green energy for two main reasons: to demonstrate environmental commitments to customers, or to comply with laws. In China, GEC purchases are primarily motivated by the latter. GECs are the only way to prove compliance with energy transition tools like dual control, which restricts total energy consumption and energy intensity for Chinese companies, or the renewable portfolio standard, which sets minimum purchase requirements for renewable energy.
As China moves closer to its 2030 carbon peaking goal, GEC trading is hitting new heights and giving renewable energy generators an additional source of revenue. More importantly, GECs are being incorporated into decarbonization tools like China’s renewable portfolio standard, energy dual control mechanisms, emissions trading scheme, and a host of others, as well as receiving more attention from China’s most senior policymakers. GECs reached a high point during the March 2024 Two Sessions when The NDRC Development Plan mentioned GECs by name for the first time. Li Qiang’s Government Work Report also mentioned “improving carbon accounting and verification capacities” and “developing a carbon footprint management system” as top priorities. GEC’s have become the only method for Chinese entities to prove renewable energy consumption, so they are indispensable to those efforts.
To put it succinctly, GECs have become the accounting method of choice for China’s energy transition, putting them at the heart of all efforts to increase renewable energy (RE) penetration and decrease emissions.
The takeoff of China’s renewable energy industry
When GECs were first introduced in 2017 to reduce government deficits, it would have been hard to imagine how important to all of China’s energy transition mechanisms they would later become. Initially, GECs were introduced to China’s energy transition to relieve ballooning debt caused by China’s 2009 renewable energy feed-in tariff (FiT). The FiT worked by granting a fixed payment per unit of electricity, measured in kilowatt-hours (KWh), to renewable energy generators for 20 years. Policymakers’ logic was that, though wind energy was more expensive than fossil fuel alternatives at the time, with support and patience, the prices would start to drop. The policy was expanded to solar generators in 2011, and the results were stunning.
Working in tandem with tools like the Kyoto Protocol’s Clean Development Mechanism, the introduction of FITs fueled explosive growth in installation. Between 2008 and 2011, installed wind capacity in China increased by more than 500% from 12 gigawatts (GW) to 63 GW. Solar capacity increased at roughly the same rate, from just under 3 GW in 2011 to 18 GW in 2013. Although this was great from the perspective of the renewable energy industry, funding the tariff created a huge problem for the central government. In theory, the tariff was funded by adding a surcharge to the electric bills for most customers. In practice, the surcharge was never sufficient. China’s central government views tight price controls on the power sector as a form of public welfare, thereby limiting the amount and effectiveness of the surcharge. Even more significant, some estimates suggest that 35-40% of the surcharge was simply never collected due to a lack of enforcement. The result was that by 2021, the surcharge deficit had reached a whopping RMB 400 billion and showed no signs of decreasing.
Rather than easing price controls, the government responded by reducing the FiT for new projects, ultimately phasing FITs out entirely for utility-scale wind and solar projects built after 2020. The other response was the creation of the GEC mechanism.
In 2017, the National Development and Reform Commission (NDRC), the Ministry of Commerce (MOC), and the National Energy Administration (NEA) jointly published a notice on the trial implementation of the renewable energy GEC system. The policy authorized the NEA to issue GECs to utility-scale wind and solar generators.
The intended audience were companies or individuals who would be willing to pay a premium to purchase renewable energy. The idea was that if generators could sell a GEC, in addition to the electricity they generated, they would not be so reliant on the FiT. On the supply side, this made sense because by 2017, many renewable energy generators were facing massive liquidity issues resulting from subsidy delays. That meant that GECs offered the possibility of getting quick cash to remain solvent, rather than waiting indefinitely for subsidies to be processed. Desire in the private sector to demonstrate action on environmental issues seemed to suggest that the demand side would take care of itself.
In practice, though, it flopped. Hard. The problem was that under the new policy, generators could only sell GECs if they forfeited the FiT. For early renewable energy projects that struggled to turn a profit, every penny mattered. This effectively fixed the price of each GEC at or above the price of the subsidy. Consumers were further deterred because in 2017, China had not yet implemented any mandatory renewable energy consumption requirements, so the only reason to purchase GECs was for PR. Further, at the time, other less expensive options like International Renewable Energy Certificates (I-RECs) were also available.
Analysis from the Oxford Institute for Energy Studies showed that as a percentage of total GECs issued in 2017, less than 0.04% of GECs were sold. For GECs from solar generators, that actually decreased in subsequent years, dropping to 0.01% in 2018 and 2019. The story for wind generators was similar: though there was a jump from 0.03% in 2017 up to 0.14% in 2018, the percentage of GECs sold didn’t surpass 1% until 2022. This is significant because it shows remarkably low uptake. Put simply, no one was buying the GECs and the policy was failing.
August, 2023: the month that changed everything
Anemic trading volumes were one of a few trends on the ground which necessitated a new policy framework. The second trend was that Chinese wind and solar capacity exploded. As of the end of 2023, wind and solar installations exceeded 900 GW. For comparison, the US had cumulatively installed roughly 225 GW of wind and solar at the end of 2023. The end of the FiT meant that much of the roughly 400 GW of capacity which connected to the grid after 2020 was unsubsidized, and thus there was no tradeoff for selling GECs. The final trend was the rapid growth of distributed (e.g., rooftop) renewable generation capacity. Since the 2021 launch of China’s “Whole County Distributed Solar” campaign, much of the growth in China’s renewable energy capacity has come from small-scale, distributed, generators. In 2023 alone, China installed nearly 100GW of distributed solar generation capacity. Larger projects benefit from economies of scale, which means that distributed projects are, in general, less profitable than utility scale. That means that GECs should play a more vital role in making distributed installations profitable.
In this context, in August of 2023 the NDRC, MOC, and NEA published an updated policy framework for GECs. Under the new framework, generators who built facilities before the 2020 subsidy cut off no longer need to forgo subsidies provided by the central government to sell GECs. Additionally, the new policy expanded the types of generators eligible to issue GECs. Initially limited to just onshore wind and utility scale solar, as of August 2023, biomass generators, distributed solar, hydro plants with grid connection after January 2023, and a host of other renewable generators were now eligible to issue GECs.
In a further February 2024 policy update, Beijing made GECs fully tradable between provinces, allowing recipient provinces to meet up to 50% of their emissions intensity reduction goals through GEC trading. Like most of the developed world, China’s renewable energy development has been stymied by the fact that areas with high potential for renewable energy development are far away from demand centers. Designing policy measures to facilitate West to East RE trading is crucial to China’s carbon peaking and neutrality goals, and GECs could become part of that effort.
In terms of trading volume, the policy has been largely successful. Based on analysis that I have done on the primary GEC trading platform, in the six months following the August policy update, trading of unbundled GECs increased by more than 250% compared to the six months preceding the policy, from roughly 45 million to 160 million. The picture is even rosier in certain locales. For example, in Shaanxi, an emerging RE powerhouse, 2023 saw a 22-fold year-on-year increase in GEC trading.
There are a number of caveats with these figures. The most important is that many GECs are sold bundled with electricity, rather than sold separately. Those GEC sales are not included in the publicly available data. Additionally, the platform does not indicate average prices for solar versus wind GECs, nor does it differentiate between subsidized and unsubsidized GECs.
Generators are also taking advantage of the increased issuance scope. In November of 2023, the first biomass GECs were issued to a facility in Anhui, though trading volume is still very low. GECs from distributed solar projects are also available for sale on the platform
.
GECs all the way down
Potentially more impactful than increasing trading volume, the August 2023 policy and a February 2024 policy update aim to further integrate GECs with China’s other decarbonization tools. China has adopted a sort of “kitchen sink” approach to peaking emissions by 2030 and reaching net zero by 2060. The new GEC policy framework has made GECS the accounting tool of choice for China’s energy transition, and that puts them at the heart of all efforts to increase RE penetration and decrease emissions.
China has a renewable portfolio standard (RPS) which sets minimum consumption requirements for renewable energy, an FiT system, a carbon offset mechanism, a renewable energy power purchasing system, an emissions trading scheme (ETS), and tools not found anywhere else in the world like the so-called “dual control” system, which limits total energy consumption as well as energy intensity for covered entities. This proliferation of decarbonization methods necessitated a more robust accounting process. The new policy suite has made clear that GECs are the only way to certify renewable energy production or consumption domestically.
Take China’s renewable portfolio standard (RPS) as an example. China’s RPS requires covered entities to meet minimum consumption targets for renewable energy and non-hydro renewable energy. In the original 2019 policy document announcing the creation of an RPS, GECs were identified as one method for covered entities to meet their renewable energy consumption requirements.
More recently, in February of this year, the NDRC, NEA, and MOC published a new policy aimed at increasing GEC purchases. The policy states that GECs should be used to “improve the implementation” of China’s RPS. At this point, it isn’t totally clear what that means. One interpretation is that RPS standards are poised to increase, which would necessitate more GEC purchases. RPS obligations are set at the provincial level for the present year or at most a year ahead, and historically have reflected the amount of renewable energy expected to be added that year, rather as a target designed to spur additional investment. In other words, covered entities have historically been able to meet their RPS requirements simply by relying on anticipated renewable energy installations. A more stringent renewable portfolio standard might require coastal provinces where renewable energy demand outpaces supply to purchase GECs from inland and western provinces with the opposite situation.
The same February 2024 GEC policy indicates that NDRC, NEA, and MOC want to further link GECs with China’s Emissions Trading Scheme (ETS). China’s ETS requires covered entities in the power sector to limit emissions intensity per unit of GDP, or pay if they exceed the target. In March the China Nonferrous Metals Industry Association announced that the ETS was set to expand to cover the electrolytic aluminum sector. Though the February policy doesn’t clearly say exactly what the connection between GECs and China’s ETS will be, one of the stated aims is to “improve the connection between green certificates, carbon accounting and carbon market management” which indicates that GECs will be part of how emissions intensity is calculated for covered entities.
That hypothesis is further borne out in a separate policy published in the same month by the State Council which says that, starting in May of 2024, entities covered by China’s ETS will be able to adjust their emissions quota by consuming GECs. At this point, the proposal is short on details and long on ambition, but it seems plausible that this means that by purchasing GECs, covered entities can lower their emissions intensity.
In the case of dual control, a November 2023 policy update exempts energy consumption growth coming from renewable sources. In other words, covered entities who want to increase their total energy consumption can do so as long as the additional energy is green, with GECs to prove it. The February 2024 GEC policy further articulates the connection between the two tools, listing “strengthen the connection between GEC trading and dual control” as one of the primary goals. It continues, saying that policymakers at the provincial level can use GECs to establish mandatory renewable energy consumption standards for energy intensive industries.
For China’s Green Power Trading, another tool designed to increase the profitability and consumption of renewable energy generators, GECs are the only method to certify and track green electricity. GECs are also being integrated into China’s Certified Emissions Reduction mechanism (CCER), though the exact connection remains unclear.
The Opportunities and Challenges Ahead
A word of warning: GECs still have a long way to go. One challenge to overcome is the risk of double counting. In the early integration with CCER, GECs contributed to serious double counting, where renewable energy generators would take credit for generating green energy and receive a GEC, but also claim an emissions reduction credit for not burning fossil-fuels.
The GEC policy framework also still does not allow secondary trading. The reason given in the August 2023 policy was that secondary trading might invite speculation, with organizations purchasing GECs as an investment asset rather than to comply with one of the many decarbonization tools. The downside is that it makes organizations nervous about purchasing too many GECs and being left with an unsellable, unnecessary, asset.
Finally, GECs are also still very novel. Compared with more mature renewable energy accounting systems like the Renewable Energy Certificate (REC) in the US or Guarantee of Origin (GO) in the European Union, China’s GEC has a very short history. That is reflected in the fact that married to the ambition in all of the policies described above is uncertainty. There are still a lot of details yet to be worked out, and there will inevitably be bumps in the road.
For all of these problems, one crucial factor is time. As GECs are further integrated into all aspects of China’s energy transition, and as consumers become more familiar with them, they will start to benefit from a virtuous cycle. More use cases mean more incentive to purchase GECs; more trading volume means more legitimacy; more legitimacy means more use cases; and the cycle repeats.
Compared with their 2017 iteration, GECs have done a complete 180, from a tool on the periphery of China’s energy transition designed to reduce government deficits, to the very foundation. GECs have become the only way to certify renewable energy production and consumption, and as China closes in on the 2030 carbon peaking goal and all of the energy transition tools start to become more stringent, GECs are poised to play an indispensable role as the accounting method of choice.
