After Cap & Trade Failure In Europe, USA, and Australia, China’s Next

China is the largest polluter of GHG emissions, credited for nearly 30% of global emissions. It currently emits over 10b tonnes of COequivalent of GHG emissions. No global solution for our climate challenge is possible without China playing a central role.

China’s Plan

In June, China submitted its pledge to the United Nations to peak its greenhouse gas emissions by 2030, a goal laid out in a bilateral agreement in 2014. The pledge also said China plans to reduce its emissions intensity by up to 65%, doubling its current wind and nearly quadrupling its solar power generating capacity by 2020.However, according to a recent study published by London School of Economics, China’s GHG emissions will probably peak in 2025, five years earlier than its stated target in a boost for hopes to curb climate change. Going at the current trends, the world’s biggest carbon emitter will discharge 12.5-14b tonnes of CO2e in 2025, after which emissions will decline.

Following the pledge, China announced its grand Cap & Trade program to achieve emission cut targets more aggressively than ever. It‘s national program, to take effect in 2017, will cover “industry sectors such as iron and steel, power generation, chemicals, building materials, paper-making, and non-ferrous metals.”

Cap-and-trade programs typically give a company the right to emit a certain amount of a given pollutant; if it can cut its emissions beyond what’s expected, it can sell the excess allocation. Conversely, if it needs more credits, it can buy them from another company.The program is meant to complement the Obama administration’s Clean Power Plan, which was finalized in August 2015 and aims to slash carbon emissions from electric power plants by 32% below 2005 levels by 2030.

China began moving toward a national cap-and-trade program in 2011, when it announced the formation of seven regional, pilot emissions trading systems in its 12th Five Year Plan (2011 to 2015). The next step for the 13th Five Year Plan is to scale up pilots to the national level, a draft of which will be unveiled later this year.

The seven pilot ETSs (emission trading systems) were established in the cities of Beijing, Chongqing, Shanghai, Shenzhen, and Tianjin, with two provincial systems in Guangdong and Hubei. The first, in Shenzhen, opened in mid-2013; the last (Chongqing’s) came online in June 2014.

Key Challenges

There are many challenges and limitations in way achieving the ambitious targets China has set.

It won’t be an easy to transition to a national cap-and-trade system by 2017. The pilot programs have already revealed some serious issues, such as lack of transparency on emissions and pricing in some of the pilots. Transparency will be vital for keeping track of the actual amount of emissions being released, where the emissions cap is set, and what prices are being charged.

In the end, it is worth noting that China’s announcement of its mega Cap & Trade plan has a silver lining: global emission will indeed be cut if it translates into reality. However, it is imperative that the policymakers must pay heed to the aforementioned challenges.

China needs to heed the lessons learned from Europe’s example. Europe’s emission trading system collapsed partly because recession reduced industrial demand for the permits, and then the European Union gave away too many allowances, leading to immense overcapacity in the carbon market. Prices had already fallen from$30 per tonne in 2011 to $5-7 per tonne in early 2013. China is already experiencing economic fragility, and poorly implemented climate regulation will increase the trouble.

Many economists also believe that a carbon tax regime is far simpler and more efficient. China could simply put a price on each ton of coal, as an MIT-Tsinghua study shows, and fairly quickly see emissions peak with virtually no cost to the economy. But that would take away bureaucratic discretion.

The United States failed to pass a nationwide cap and trade policy, Australia reversed its own carbon market plan, and the UN’s Clean Development Mechanism market collapsed. China’s road to an effective emission reduction regime will not be smooth, but not impossible, provided there is right intent and willingness to learn from previous mistakes.

 

About the author

Alok Gupta, heads BSI’s New Delhi office, specializes in the economics of energy supply markets, with a focus on economic modeling and supply market analysis. He has served BSI’s major oil, gas, and power clients worldwide, primarily in Europe, the Middle East, Russia, and the Americas. Alok has extensive project experience in oil and gas pricing, renewable energy projects, and environment and climate change policies. He holds an M.S. in Economics from TERI University.