Earth to Investors

On September 12, 2024, Pengyang County in Ningxia Hui Autonomous Region made history by completing the first-ever carbon sink transaction in the Yellow River Basin.　

Carbon sinks are natural systems that absorb more carbon from the atmosphere than they release, such as forests and grasslands.　

More recently, experts are turning to soil and water erosion prevention projects as new sources of carbon sinks.　

By monetizing the ability of conservation projects like these to absorb carbon dioxide, carbon sink transactions quantify the contributions of environmental initiatives while opening new economic opportunities for sustainable development.　

Amounting to 36,000 metric tons, the Pengyang carbon sink traded for over 1.12 million yuan (US$153,000).　

Two days later, officials signed off a 5.44 million yuan (US$744,700) transaction for 151,000 metric tons of carbon sinks in a tributary of the Yellow River in Yan’an, Shaanxi Province, followed by another on October 19, 2024 in Xi’an, the capital of Shaanxi.　

Pengyang County is located in Xihaigu, a region that was once labeled by the United Nations in the 1970s as the “most unfit place for human settlement” due to land reclamation, drought and fragile ecological conditions.　

According to a Pengyang County Water Bureau employee, 92 percent of the county’s land area in 1983 was affected by soil erosion, and only 3 percent was forested.　

Thanks to decades of efforts in water and soil conservation and management of small watersheds, Pengyang County has a forest coverage rate of 21.3 percent today, while soil erosion areas have decreased to just 20 percent.　

Such soil erosion controls have transformed barren hills into green landscapes, filled in ravines and rehabilitated deserted ecosystems on the Loess Plateau, significantly reducing sediment flow into the Yellow River.

Given the substantial ongoing investment in soil and water conservation, local governments have long sought a sustainable way to recoup costs and ensure continued conservation efforts. But only in the past two years have authorities turned to carbon sink transactions as financially viable solutions.

Guo Qingjun from the National Forestry and Grassland Administration told media at a Beijing press conference in August 2024 that the annual carbon sink capacity of China’s forests and grasslands has exceeded 1.2 billion metric tons of carbon dioxide equivalents, making China the world leader in this category.　

In 2011, China launched pilot carbon emissions trading schemes in regional markets. Over the years, several regional carbon exchanges have been established to facilitate local carbon trading activities. The National Carbon Emission Trading System (ETS), China’s nationwide carbon market, was launched in 2021. Initially focusing on the power sector, the market now covers over 2,250 major emitting entities, accounting for approximately 5.1 billion metric tons of annual carbon dioxide emissions – more than 40 percent of China’s total CO2 emissions – making it the world’s largest carbon market by volume of greenhouse gas emissions covered.　

China’s carbon market consists of two segments: mandatory and voluntary carbon markets. The mandatory market trades “carbon emission allowances” (CEAs), while the voluntary market trades “China Certified Emission Reductions” (CCERs), which are voluntary emission reduction projects developed by operators in line with State-mandated methods, including carbon sink projects.　

Under the Measures for the Administration of Carbon Emissions Trading (for Trial Implementation), key emitting entities may offset their carbon emissions by using CCERs to settle their CEAs each year.　

As of September 2024, the trading volume of CEAs had reached around 440 million metric tons, with a transaction value of 24.9 billion yuan (US$3.41b). This covers annual carbon dioxide emissions of approximately 5.1 billion metric tons.　

In addition to the energy sector, the national carbon market has recently begun planning to include other key industries, such as steel, cement and aluminum smelting.　

Zhang Qian, a lecturer at the School of Economics and Management at Beijing University of Agriculture, said that if companies’ carbon emissions exceed their allocated CEAs, they will face the additional cost of reducing emissions and purchasing CEAs from the national carbon trading market. Alternatively, they can purchase CCERs from the voluntary emissions market to offset their emissions.　

However, there are restrictions on CCERs – key emitters can offset no more than 5 percent of their required CEAs using CCERs. This regulation aims to prevent companies from over-reliance on carbon sinks.　

Professor Pang Jun from the School of Ecology and Environment at the Renmin University of China in Beijing told NewsChina that the primary goal of the carbon market is to set a reasonable overall carbon emission cap for enterprises.　

Introducing CCERs effectively increases the total carbon allowance supply. If the offset ratio is set too high, it would undermine the effectiveness of carbon emission reductions, countering the policy’s original intention. Therefore, the offsetting of CCERs must be kept within a controlled limit.

In early 2021, the Ministry of Water Resources began research into carbon sinks from soil and water conservation. Li Zhiguang, a senior engineer at the ministry’s Soil and Water Conservation Monitoring Center, told NewsChina that, to his surprise, existing soil and water conservation measures had already contributed up to 50 percent of the carbon sinks in China’s overall terrestrial ecosystem.　

China’s first carbon sink transaction from soil and water conservation took place in southeastern Fujian Province. In December 2023, Zijin Mining Group and Fujian Golden Dragon Rare Earth purchased 100,000 tons of carbon sinks for 1.8 million yuan (US$246,600) from Changting County State-owned Investment Group to offset their carbon emissions.　

Li Zhiguang said that carbon sink projects offset soil and water conservation in two key ways. The first is through controlling soil erosion through conservation measures, which allow carbon stored in the soil to be retained. The second is the increased productivity of land after soil and water conservation, which enhances the carbon sink capacity of vegetation and forestry.　

“Carbon sink trading is undoubtedly an important way to realize the value of carbon sinks. Only with a set price can carbon sinks achieve their deserved value,” Zhang Qian told NewsChina.　

In early 2024, the Ministry of Water Resources guided local governments and companies to carry out pilot projects for carbon sink transactions related to soil and water conservation. Industry insiders revealed that four key preconditions for these projects are strong willingness and enthusiasm for carbon sink trading, long-term, comprehensive water and soil conservation practices with significant carbon sink capacity in the designated regions, the availability of a proper transaction platform, and the availability of qualified sellers.

In late 2022, the General Office of the Communist Party of China Central Committee and the State Council issued a document explicitly proposed that soil and water conservation carbon sinks should be included in the voluntary greenhouse gas emission reduction trading mechanism. The following April, authorities released guidelines for formulating carbon sink standards for soil and water conservation.　

Local counties and cities have shown notable enthusiasm. Zhang Yongfeng, deputy bureau chief of Yan’an Water Bureau, told NewsChina that soon after China’s first carbon sink transaction was completed in Changting, the bureau began planning its own. In March 2024, the bureau brokered deals and began developing monitoring and accounting methods for the project.　

Yan’an government called on Northwest A&F University in Xianyang, Shaanxi to calculate the carbon sink potential of soil and water conservation in the tributaries of the Yellow River. After an investigation from April to August 2024, researchers calculated it was 169,600 tons, which was priced at 36 yuan (US$4.9) per ton.　

So far, most aspects of the carbon sink trading process for soil and water conservation – particularly price-setting – are determined through negotiation rather than competitive bidding. As a relatively new venture, an employee with the Ministry of Water Resources told NewsChina that plans to improve monitoring and accounting systems are underway.　

China has seen seven carbon sink transactions for soil and water conservation as of October 2024.　

“In the past, we tried to explore ways to realize the value of ecological products for soil and water conservation, such as developing rural tourism after improving the ecological environment in small watersheds. Now, carbon sink trading for soil and water conservation allows for direct income generation,” Zhang Yongfeng said.　

He added that local governments hope to reinvest the revenue from carbon sink trading into future projects which is still relying on financial support from the government.

For most enterprises, a primary concern is that carbon sinks for soil and water conservation are not included in the CCER system.　

Currently there are four eligible types of projects: forestry carbon sinks, grid-connected solar thermal power, grid-connected offshore wind power generation, and mangrove vegetation creation, according to guidelines published by the Ministry of Ecology and Environment (MEE) and the State Administration for Market Regulation (SAMR).　

Zhang Yongfeng told NewsChina that Shaanxi Yanchang Petroleum Group had clearly expressed their desire to purchase all the carbon sinks related to Yan’an’s water and soil conservation carbon sinks, provided they are eventually eligible for trading in the CCER market.　

But most interviewees expressed optimism about their inclusion in the CCER system soon, and that it will not be difficult to find buyers.　

Local governments have been actively promoting water and soil conservation carbon sink trading. According to carbon sink trading insiders, this is intended to provide case studies and experience for their eventual inclusion in the CCER system.　

Companies that have purchased water and soil conservation carbon sinks along the Yellow River told NewsChina that their involvement represents an “advanced investment.”　

Zhang Qian pointed out that as the target date for achieving China’s “dual-carbon” goals (carbon peaking and carbon neutrality) approaches, CEA allocation is expected to become stricter. This will likely increase pressure on enterprises to reduce emissions, creating development opportunities for carbon sink trading.　

Water conservancy agencies and local governments are promoting the development of soil and water conservation carbon sink projects. Zhang Yongfeng said that Yan’an will continue to research the carbon sequestration potential of the city’s water and soil conservation measures.　

In addition to raising local awareness of the role soil and water conservation measures play in carbon sequestration, Li Zhiguang noted that these efforts will help soil and water conservation carbon sink projects prepare to meet the necessary requirements. This way, when these projects are eventually included in the CCER system, they will be ready for trading.　

Zhang Yongfeng emphasized that all proceeds from the sale of carbon sink projects will be used to maintain and improve the soil and water conservation throughout the river basin. He added that Yan’an plans to introduce management measures for the use of carbon sink trading funds in the future, to make sure generated profits are put to good use.