The resumption of CCER has given rise to market-oriented opportunities for forestry carbon sinks, and issues such as ownership and standards remain to be solved, and financial institutions are still hesitant to wait and see

Forestry carbon sequestration is an important way to mitigate climate change and plays an important role in the process of achieving the "double carbon" goal in China.

At the recently concluded 28th Conference of the Parties to the United Nations Framework Convention on Climate Change (COP28), ecosystem carbon sinks, dominated by forestry carbon sinks, once again attracted widespread attention. The COP28 decision calls for intensified efforts to halt and reverse deforestation and forest degradation by 2030.

With the successive release of the Administrative Measures for Voluntary Greenhouse Gas Emission Reduction Trading (Trial), various signals indicate that China's national certified voluntary emission reduction (CCER) market is about to restart. In October 2023, the Ministry of Ecology and Environment (MEE) officially released the first batch of project methodologies for voluntary greenhouse gas emission reduction projects, including afforestation and carbon sequestration.

Many industry insiders believe that in addition to afforestation carbon sequestration and mangrove restoration, there are many forestry carbon sequestration methodologies waiting to be developed. As one of the important project types of CCER, it is believed that forestry carbon sequestration will welcome huge development opportunities in the future. However, unclear ownership, unclear standards and methodologies, and insufficient incentive and guarantee mechanisms are the main reasons why financial institutions hesitate to invest in forestry carbon sequestration. In order to enhance the confidence of financial institutions, accelerate entry and provide a wealth of green financial products, in addition to further solving the above problems, it is also necessary to improve and standardize the design, development and certification of forestry carbon sequestration projects, and effectively calculate the carbon sequestration of tradable forest projects. In this way, forestry carbon sinks can enter the carbon market for realization, and realize marketization.

Afforestation carbon sequestration was approved as the first batch of CCER methodologies

On October 24, 2023, the Ministry of Ecology and Environment (MEE) formulated and released the methodology for four voluntary greenhouse gas emission reduction projects, including afforestation carbon sequestration (including bamboo forests), mangrove restoration, grid-connected offshore wind power, and grid-connected solar thermal power generation.

Compared with the CCER methodology that was launched in 2017, the new version of the afforestation carbon sequestration methodology has been revised and upgraded.

"Compared with the previous methodology, the current version is more centralized, and the scope of use has been increased, which is applicable to several types such as arbor, bamboo, and special shrub afforestation, and some restrictions have been imposed on some applicable conditions such as additionality, ownership, and technical measures in the afforestation process. Recently, at a seminar jointly organized by the Institute of Forest Ecology, Environment and Nature Conservation of the Chinese Academy of Forestry, the China Green Carbon Foundation and the Natural Resources Defense Council (NRDC), Zhu Jianhua, a researcher at the Institute of Forest Ecology, Environment and Nature Conservation of the Chinese Academy of Forestry and the first chief author of the new CCER afforestation carbon sink project methodology, introduced.

For the development of forestry carbon sinks, Zhu Jianhua predicted, "It depends on the demand of the voluntary carbon market and the decision of the competent authority, and in the future, it may be possible to do a large forest management methodology, or it may refer to the VCS (Verified Carbon Standard) practice to do some methodologies on forest protection, reduction of logging, and improvement of forest quality, such as more specific methodologies such as restoration of degraded forests and transformation of secondary forests." We hope that more project methodologies will be introduced to support the development of forestry carbon sequestration. ”

Specifically, Zhu Jianhua believes that the new version of CCER afforestation carbon sequestration methodology has changed in five aspects.

First of all, the new version of the methodology optimizes the algorithm for distinguishing carbon pools or emission sources in the accounting method, and provides all the default parameters, which can be referred to by the project owner and the validation and verification agency for the design, implementation and emission reduction accounting of the project document.

Secondly, based on the principles of authenticity and conservatism, the new version of the methodology highlights many specific practices. For example, taking into account the process of soil organic carbon loss due to afforestation activities, wood products are not included in the calculation. In addition, based on the risk of potential natural disasters and man-made damage, the deduction rate for non-persistent risks has been increased.

"There may be some losses for the owners, but they provide some safeguards in terms of the authenticity and reliability of our overall market carbon sinks. Zhu Jianhua said.

In addition, the new version of the methodology has made a relatively large improvement in "additionality", and added the project conditions for exemption from additionality argumentation. All afforestation projects that meet one of the three conditions of the average annual precipitation below 400 mm, national key ecological function areas or ecological public welfare forests can be exempted from the additionality test.

Zhu Jianhua said that this is a good thing for the owner, which can save a lot of cumbersome additionality arguments. At the same time, the new version of the methodology also adds a lot of key points about validation and verification, so that the project owner and the verification agency have a clearer understanding of the evidence and the content of the verification and verification, which is conducive to improving the efficiency of project development and reducing costs.

Finally, in terms of biodiversity, although the methodology does not clearly stipulate the technical measures and tree species selection for afforestation, the restrictions on afforestation plot types, original vegetation removal, fire and soil disturbance in the applicable conditions of the methodology avoid the impact of carbon sink project development on biodiversity to a certain extent, and also follow the requirements of CCER projects to meet the requirements of sustainable development.

It is understood that at present, the development of carbon sink projects still pays little attention to ecological benefits, especially in performance-oriented markets such as CCER. The industry believes that the main reasons are the lack of recognition and demand for biodiversity benefits by enterprises that purchase carbon credits for compliance needs, as well as the lack of authoritative quantitative standards for biodiversity benefits.

It is worth mentioning that carbon sink projects certified by the Climate, Community and Biodiversity Standard (CCB Standard) can receive a market premium, encouraging the development of forestry carbon sink projects with multiple benefits such as climate change mitigation, biodiversity conservation, and community development.

The marketization potential of forestry carbon sequestration needs to be improved

"In the field of carbon neutrality, it is not only necessary to achieve the carbon neutrality goal of our country, but also to achieve the carbon neutrality goal of every enterprise and every region in the future. In order to achieve national, regional and corporate carbon neutrality goals, it is necessary to consider ecosystem carbon sinks as the solution for the last mile of carbon neutrality, which is the ballast stone to achieve carbon neutrality goals. Hou Yuanqing, deputy secretary-general of the China Green Carbon Foundation, said that we need to work together and act immediately.

At present, nature-based solutions (NbS), including forestry carbon sequestration, are becoming a global focus.

In 2019, China proposed at the United Nations Climate Change Summit that it hoped to include a series of plans involving forest carbon sinks, marine blue carbon, and related emission reductions and sinks in agricultural and food systems. As one of the important ways to mitigate climate change, NbS also received widespread attention at COP28. At present, China has incorporated NbS into relevant tools of national governance, climate action and climate policy. It is imperative to help the growth of forestry carbon sinks.

At the seminar, Liu Shirong, academician of the Chinese Academy of Engineering and chief scientist of the Institute of Forest Ecology, Environment and Nature Conservation of the Chinese Academy of Forestry, said that based on the IPCC (United Nations Intergovernmental Panel on Climate Change) and UNFCCC (United Nations Framework Convention on Climate Change) and other information, there are four ways to improve the potential of forest carbon sinks: carbon conservation, carbon expansion, carbon enhancement and carbon resource utilization.

Among them, carbon conservation measures are mainly to protect the existing forest ecosystem and reduce deforestation and forest degradation, carbon expansion measures are afforestation, mainly artificial afforestation, land greening, etc., carbon enhancement measures are reforestation, degraded forest transformation and forest management, and carbon resource utilization measures are mainly to replace fossil energy through bioenergy and produce and utilize wood forest products.

Liu Shirong introduced that in terms of carbon protection, China has proposed the construction of a natural reserve system with national parks as the main body; in terms of carbon expansion, China has promoted large-scale land greening, and now it has proposed scientific greening, and green with water; many technical measures are needed to increase carbon, and it is necessary to study the configuration, selection, and management of tree species, and respect the laws of nature.

"According to a 2023 report by the United Nations Environment Programme, the average cost of forest sink enhancement is US$30-50 per tonne. Zhang Jieqing, chief representative of the Beijing Representative Office of the Natural Resources Defense Council (NRDC), said that the average price of global forest carbon sinks is only 2-10 US dollars, but the cost of afforestation to increase sinks is much higher than it, and there is a huge gap between them, and the price is far from covering the cost.

The forestry carbon sequestration financing market has experienced rapid development in recent years. According to Zhang Jieqing, before 2015, the voluntary emission reduction market was the main force of forestry financing, and after 2015, with the acceleration of global climate action, especially the acceleration of carbon pricing mechanisms, the scale of forestry carbon sink financing under the regulation and emission reduction market has risen rapidly. From 2017 to 2019, the scale of forestry carbon sequestration financing under the global regulated market has reached US$233.6 million, accounting for more than 50% of the total financing scale, and the scale of forestry carbon sequestration financing in the voluntary emission reduction market has reached US$39.72 million, accounting for 8.9% of the total financing scale.

"Climate change mitigation and adaptation cannot be achieved without financial support. Zhang Jieqing stressed that in the face of huge funding needs, public funds alone are far from enough, and other forms of finance that are not public funds are one of the key solutions.

Forestry carbon sequestration needs green finance support

In order to achieve the growth of forestry carbon sinks, it depends not only on scientific and technological allocation, but also on financial mechanisms to help it. Under the huge gap between cost and return, green finance has become an important support tool for the development of forestry carbon sinks. Ownership issues and insufficient incentives and guarantee mechanisms are the main reasons why financial institutions hesitate to invest in forestry carbon sequestration. In order to enhance the confidence of financial institutions, accelerate entry and provide a wealth of green financial products, it is also necessary to establish a clear and complete methodology related to forestry carbon sequestration.

In order to solve the problem of ownership, on September 25, 2023, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council issued the "Plan for Deepening the Reform of the Collective Forest Tenure System" (hereinafter referred to as the "Plan"), proposing to support eligible forestry carbon sink projects to develop into voluntary greenhouse gas emission reduction projects and participate in market transactions, and establish and improve the ecological protection compensation mechanism that can reflect the value of carbon sinks.

In terms of finance, the plan proposes to include forest rights trading services in the scope of green financial support, and increase support for forestry loans. If the non-performing ratio of a commercial bank's forest right mortgage loan is within 3 percentage points (inclusive) of its own non-performing loan rate, it may not be used as a deduction factor for the regulatory rating of the regulatory department and the bank's internal assessment and evaluation.

At present, China is in a leading position in the field of green finance. In 2015, the concept of green finance was clearly put forward in the "Overall Plan for the Ecological Civilization System", and a series of subsequent documents, including the "Green Finance Guidance" of the central bank, established a sound development idea and management system for green finance.

However, Zhang Jieqing pointed out that although the scale of China's green finance market is large, it is mainly concentrated in banks, mainly green credit, and other financial instruments have limited participation.

"When CCER was not launched, everyone knew that forests were important, and forest carbon sinks were important, but it was not justified in its price, and banks were reluctant to invest. After the launch of the CCER market, we believe that financial institutions, including non-bank financial institutions, will have more incentive to participate in forestry carbon sequestration in the future. Zhang Jieqing said.

After the launch of CCER, green finance to support forestry carbon sequestration still faces challenges.

Zhang Jieqing believes that first of all, the ownership of forestry carbon sinks has not been clarified from the legal level. In the methodology, it is clear that the ownership must be clear in order to price it, and it is difficult for finance to intervene without clear ownership. Second, green financial products are not abundant and the service mechanism is not perfect. The less methodological skills are perfect, and the more difficult it is to clarify prices, the less incentive financial institutions will be to participate and not actively develop financial products. Finally, incentives and safeguards are insufficient, and some incentives are needed to allow financial institutions to participate in the market to ensure that finance truly supports the development of forestry carbon sinks.

"In the early days, some incentives and guarantees from the government were essential. Only in this way can we slowly cultivate a small market. After the market grows, the market will naturally give you answers to many things, and the more active the market, the better our career development. Zhang Jieqing said.

Lu Zhengwei, chief economist of Industrial Bank, previously said that drawing on foreign experience, China can consider launching forest land REITs in China. As the underlying asset of equity REITs, it has a unique advantage, that is, in addition to the expected normal return, there can also be a less certain equity income component. This forestry carbon sink, which has attracted great attention from all parties but has not yet been officially opened, is especially suitable for the launch of forest land REITs, allowing the market to have room for imagination.

Political Commissar Lu introduced the feasibility of China's implementation of a multi-level carbon market. The first level is the carbon sink recognized at the international level, which follows the international methodology and can be used for international carbon offsetting. The second level is domestically recognized carbon sinks, which can be used for carbon offsetting domestically. The third level is regional carbon sinks, which can only be offset within a certain area. Through the multi-level carbon market, we can not only advocate green production methods and lifestyles, but also give full play to the comparative advantages of the main functional areas and establish a market-based benefit compensation mechanism between their regions, which is conducive to narrowing the development gap between the east and the west and promoting a just transition.