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Rise of the green dragon: implications of carbon reporting in China

China’s plans for a nationwide carbon trading scheme will increasingly require Chinese companies to report their carbon emissions.

China’s environmental problems are well documented. Economic reforms initiated in the late 1970s ushered in an era of breakneck GDP growth, but also led to a myriad of environmental issues including deforestation, desertification, water and air pollution. However, the government is not oblivious to this and countering the environmental consequences of rapid economic growth has assumed increased importance to the Chinese leadership in recent years. One area in which this can be seen is China’s approach to tackling climate change.

China has adopted a more proactive stance in international climate change negotiations and has pledged to commit to binding emissions targets after 2020 along with the world’s other two largest emitters of greenhouse gases, the U.S. and India. As China overtook the U.S. in 2006 to become the world’s biggest CO2 emitter it will play an integral role in any global solution to the threat of climate change. There is a recognition amongst the Chinese leadership that the current economic model cannot continue unabated, with China’s President Xi Jinping stressing that “we should no longer evaluate the performance of leaders simply by GDP growth. Instead, we should look at welfare improvement, social development and environmental indicators to evaluate leaders”.

Despite a number of administrative and political challenges to achieving more balanced growth, the introduction of a carbon-trading pilot scheme is a step in the right direction. The scheme was first piloted in the Pearl River Delta city of Shenzhen in June of this year and will be followed by schemes in the cities of Beijing, Shanghai and Tianjin and the provinces of Guangdong and Hubei. Carbon emissions trading schemes set a regional cap on carbon dioxide emissions and allocate credits equivalent to one tonne of carbon amongst companies. Polluting companies can then buy credits from less polluting companies with the idea being that companies will be incentivised to reduce their emissions to minimise their costs.

Whilst the pilot scheme will only cover a select few localities in China, if successful it could be rolled out across the country in the next few years. At present only those companies covered by the pilot scheme are legally required to measure and report their carbon emissions, although this would change if a nationwide scheme was implemented. It therefore makes sense from both a financial and reputational perspective for Chinese companies to begin measuring and reporting their carbon emissions. In addition to possible future domestic regulations, pressure from Western companies seeking to improve energy efficiency and environmental practices in their supply chains and stringent carbon regulations in international markets will require transparent emissions reporting if Chinese companies wish to remain competitive in the global marketplace.

The national government has not mandated a particular methodology for measuring and reporting emissions, although some localities have published guidelines which refer to international standards; for example Shanghai is using reporting guidelines which refer to the Greenhouse Gas Protocol and ISO-14064-1. CDSB’s Framework offers a straightforward way of incorporating climate change information into mainstream financial reports and can act as a useful tool for Chinese companies as they seek to comply with the new regulations. Chinese accounting standards are largely aligned with the International Financial Reporting Standards (IFRS) which according to research from ACCA has benefitted the Chinese economy by making accounting earnings more informative and therefore more useful to domestic and international investors. The CDSB Framework has been designed in accordance with the IFRS standards and is therefore useful in guiding Chinese companies in reporting their carbon emissions.

The business case for extra-financial reporting is clear: financial statements capture less than 20% of corporate risks and these risks are particularly pertinent to China where climate change, water pollution and deforestation have significantly degraded its natural capital. The development of a nationwide carbon trading scheme which encompasses mandatory reporting of emissions would be a significant step in the right direction. China is at the beginning of its green transformation and is increasingly coming to terms with the environmental challenges it faces. Chinese companies are in a unique position to exploit the opportunities associated with this increased awareness whilst limiting the risks involved, and the CDSB Framework can act as a useful stepping stone in this process.

For more information on carbon measurement and reporting in China see CDP and the Institute for Environment and Development’s joint report "The Business Case for Carbon Measurement and Disclosure in China".

The opinions expressed in this blog do not necessarily represent those of the Climate Disclosure Standards Board or CDP.

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