Seek­ing a clear day

China will launch its emis­sions-trad­ing sys­tem next year to cut pol­lu­tion

China Daily (USA) - - FRONT PAGE - Con­tact the writer at paul welitzkin@chi­nadai­

It’s the world’s largest in just about ev­ery­thing, from pop­u­la­tion (1.4 bil­lion) to man­made struc­ture (the Great Wall, 5,500 miles). And now China is try­ing to get rid of one “largest’’ while cre­at­ing an­other one.

Next year, China — the world’s largest emit­ter of green­house gases — plans to im­ple­ment a na­tional emis­sions trad­ing sys­tem (ETS) that will cre­ate the world’s largest car­bon-trad­ing mar­ket and cover nearly half of its econ­omy. The free-mar­ket ap­proach to pol­lu­tion con­trol will be closely watched in the US and other de­vel­oped na­tions.

It’s an am­bi­tious goal that Chi­nese Pres­i­dent Xi Jin­ping com­mit­ted the na­tion to af­ter a meet­ing with US Pres­i­dent Barack Obama in 2015 at which the world’s two big­gest eco­nomic pow­ers pledged to re­duce car­bon diox­ide (CO2) emis­sions to tackle cli­mate change.

“Once China be­gins to im­ple­ment this, then other coun­tries will be­gin to think about how to ad­dress the is­sue,” said Dale Jor­gen­son of Har­vard Uni­ver­sity. “Cer­tainly the US will be in the fore­front of this be­cause of the dis­cus­sions that have al­ready taken place between the two pres­i­dents.”

At the Obama-Xi meet­ing, China for­mally un­veiled a cap-and-trade pro­gram, or ETS. It’s part of an ef­fort to put a price on car­bon as a means of bring­ing down emis­sions and driv­ing in­vest­ment into cleaner op­tions.

“In­stead of dic­tat­ing who should re­duce emis­sions where and how, a car­bon price gives an eco­nomic sig­nal and pol­luters de­cide for them­selves whether to dis­con­tinue their pol­lut­ing ac­tiv­ity, re­duce emis­sions, or con­tinue pol­lut­ing and pay for it,” said the World Bank.

Pric­ing car­bon

There are two ways to price car­bon. The ETS, or cap-and-trade, places a limit on green­house gas emis­sions and al­lows in­dus­tries with low emis­sions to sell their ex­tra al­lowances to larger emit­ters. By cre­at­ing sup­ply and de­mand for emis­sions al­lowances, an ETS es­tab­lishes a mar­ket price for green­house-gas emis­sions.

The other method of pric­ing car­bon in­volves the use of a car­bon tax on fos­sil fu­els that con­trib­ute to the cre­ation of green­house gases. For ex­am­ple, a coun­try may in­crease the tax on gaso­line to en­cour­age less driv­ing.

Some 40 coun­tries and more than 20 cities, states and prov­inces al­ready use car­bon pric­ing mech­a­nisms, with more plan­ning to im­ple­ment them in the future, ac­cord­ing to the World Bank.

In the US, there is very lit­tle po­lit­i­cal ap­petite for a na­tional emis­sion trad­ing plan. In 2010 leg­is­la­tion to in­tro­duce a fed­eral cap and trade plan fal­tered in Congress. How­ever, Cal­i­for­nia, and the Re­gional Green­house Gas Ini­tia­tive cov­er­ing nine states in the North­east, have im­ple­mented their own emis­sion trad­ing sys­tems.

In 2011, China’s Na­tional De­vel­op­ment and Re­form Com­mis­sion des­ig­nated four mu­nic­i­pal­i­ties (Bei­jing, Chongqing, Shang­hai and Tian­jin), two prov­inces (Guang­dong and Hubei) and the spe­cial eco­nomic zone of Shen­zhen City as re­gions for emis­sion trad­ing sys­tem pi­lots.

“The goal is to in­te­grate these pi­lots into the roll­out of the na­tional ETS to re­duce CO2 emis­sions and in­cen­tivize clean en­ergy de­vel­op­ment in China,” Bo Kong, a pro­fes­sor at the Uni­ver­sity of Ok­la­homa, told China Daily.

Kong said the pi­lot pro­grams means “China won’t start from scratch and the ex­pe­ri­ence at the lo­cal level has pro­vided the govern­ment with knowl­edge that they can build on” for its trad­ing plat­form.

EU’s sys­tem

China was also able to draw upon the ex­pe­ri­ence of the Euro­pean Union’s (EU) emis­sion trad­ing sys­tem. Launched in 2005, the sys­tem (EU ETS) is a cor­ner­stone of the EU’s pol­icy to com­bat cli­mate change and it’s a key tool for re­duc­ing in­dus­trial green­house gas emis­sions cost-ef­fec­tively. The EU ETS cov­ers more than 11,000 power sta­tions and in­dus­trial plants in 31 coun­tries, as well as air­lines.

China and the EU launched a co­op­er­a­tion project on car­bon emis­sion trad­ing in 2014. With the sup­port of EU ob­servers and rel­e­vant agen­cies, al­most 20 train­ing pro­grams were or­ga­nized, helping to im­prove the abil­i­ties of ad­min­is­tra­tive staff, tech­ni­cal per­son­nel and other stake­hold­ers in China.

Jor­gen­son said China’s ETS will fo­cus on the heavy in­dus­tries, par­tic­u­larly in­dus­tries that use a lot of coal and also met­als, ce­ment and util­i­ties.

“ETS tends to fo­cus on ma­jor in­dus­tries and power plants — iron, steel, ce­ment and pa­per. Ser­vices and trans­porta­tion are not in­cluded,” said Chris Nielsen, ex­ec­u­tive direc­tor of the Har­vard China Project. The project is a re­search pro­gram in­volv­ing schools at Har­vard and Chi­nese uni­ver­si­ties that con­duct stud­ies re­lated to air pol­lu­tion and green­house gases in China.

Us­ing a steel plant, Jor­gen­son pro­vided an ex­am­ple of how China’s ETS will op­er­ate. “Au­thor­i­ties will al­lo­cate per­mits to the steel plant based in part on the pre­vi­ous lev­els of its car­bon emis­sions. The plant will have to mon­i­tor its emis­sions and then pro­vide the per­mits to carry out its op­er­a­tion,” he said. “If the plant an­tic­i­pates it will use more car­bon than its per­mits al­low, it will have to go into the mar­ket and pur­chase more per­mits.”

If the plant pro­duces fewer emis­sions, it can sell its ex­cess per­mits in the ETS.

Pric­ing and mar­ket liq­uid­ity will de­pend on sev­eral fac­tors in­clud­ing in­for­ma­tion avail­abil­ity, said Kong.

“For this mar­ket to work, you have to have the abil­ity to ver­ify and cor­rect your data,” he said. “It will take some time, and they must also de­velop the pro­fes­sion­als who will be needed to en­gage in car­bon trad­ing and mak­ing sure the mar­ket runs smoothly.”

Pi­lot pro­grams

Among the im­por­tant lessons Chi­nese of­fi­cials gleaned from the pi­lot pro­grams was volatil­ity in the mar­ket, price fluc­tu­a­tion and a growing trad­ing vol­ume. “These are good in­di­ca­tors that the mar­ket ap­proach might work in China,” said Kong.

The pi­lots also re­vealed in­no­va­tion at the lo­cal level, Kong said. Al­lowances in Bei­jing, Shang­hai and Shen­zhen re­flected those lo­cal­i­ties, he said.

Kong said one of the prob­lems en­coun­tered in the pi­lots was a lack of suf­fi­cient liq­uid­ity for trad­ing.

He be­lieves that China’s ETS must pro­vide par­tic­i­pants with con­fi­dence and in­tegrity to suc­ceed: “For so­ci­ety to em­brace this, you have to have con­fi­dence in the mar­ket. And to in­still in­tegrity, China has to im­ple­ment an MRU sys­tem — mea­sure­ment, re­port­ing and ver­i­fi­ca­tion.

Chi­nese of­fi­cials hope the sys­tem will be­come the world’s lead­ing car­bon mar­ket. Spot trades may reach 8 bil­lion yuan ($1.2 bil­lion) per year, re­sult­ing even­tu­ally in 400 bil­lion yuan in de­riv­a­tive trades an­nu­ally, Chai Qimin, deputy direc­tor of strat­egy at China’s Na­tional Cen­ter for Cli­mate Change and In­ter­na­tional Co­op­er­a­tion, told Bloomberg.

One unan­swered ques­tion is just how far and deep China’s ETS will go when it de­buts next year. “Some would ar­gue that to im­ple­ment a sys­tem means to ac­tu­ally start trad­ing in 2017,” said Nielsen. “Oth­ers are sug­gest­ing that it will be dif­fi­cult, but it will work to at least get the frame­work of the rules for na­tional emis­sion trad­ing.”

If the ETS is es­tab­lished and suc­cess­ful, China must then fig­ure out how to price car­bon for the other parts of its econ­omy like ser­vices and trans­porta­tion. The na­tion’s new eco­nomic goals in­clude an­nual gross do­mes­tic prod­uct growth of about 6.5 per­cent and a greater em­pha­sis on ser­vices and val­uedadded pro­duc­tion.

“There is a recog­ni­tion that it will be dif­fi­cult for the ETS to cover the en­tire econ­omy,” said Nielsen, who, along with Jor­gen­son, con­ducted a sem­i­nar in Bei­jing this summer on how to reg­u­late emis­sions from the rest of China’s mas­sive econ­omy and the po­ten­tial use of a car­bon tax to ac­com­plish that task.

“The Min­istry of Fi­nance has long ad­vo­cated for a car­bon tax,” said Nielsen. “The Na­tional De­vel­op­ment and Re­form Com­mis­sion has more of a com­mit­ment to build­ing an emis­sion trad­ing sys­tem.”

Jor­gen­son said the ETS will cover about 47 per­cent of the to­tal emis­sions leav­ing large seg­ments of the econ­omy like ser­vices not cov­ered. He said a pric­ing sys­tem for ser­vices presents a dif­fer­ent set of prob­lems than one cov­er­ing the use of coal by a power plant.

Jor­gen­son said a car­bon tax might be a more ef­fi­cient ap­proach for the ser­vices sec­tion of an econ­omy. “The idea is that if the car­bon tax is ad­min­is­tered as part of a tax sys­tem, then the col­lec­tion would be in the hands of the tax au­thor­ity, which al­ready in­ter­acts with all of these firms, even the small­est of them, through the ex­ist­ing tax sys­tem,” he told the Har­vard Gazette.

He said that if China does de­cide to use a car­bon tax for a por­tion of its econ­omy, the coun­try will have to an­swer, “How do you in­te­grate a car­bon tax that pre­vails in one part of the econ­omy with a trad­ing sys­tem that pre­vails in an­other part?”

Bri­tish Columbia

China may want to look at Bri­tish Columbia for guid­ance on a car­bon tax. The province is Canada’s third-most pop­u­lous, and it be­gan tax­ing car­bon diox­ide and other green­house-gas emis­sions from com­bus­tion of fos­sil fu­els in 2008.

Ac­cord­ing to the US-based Car­bon Tax Cen­ter, since 2008 per capita emis­sions of car­bon diox­ide and other green­house gases cov­ered by the Bri­tish Columbia tax have de­clined, con­tin­u­ing a down­ward trend that be­gan in 2004. Av­er­aged across the pe­riod with the tax (2008 through 2013; no data are avail­able for 2014), province-wide per capita emis­sions from fos­sil-fuel com­bus­tion cov­ered by the tax were nearly 13 per­cent be­low the av­er­age in the pre-tax pe­riod un­der ex­am­i­na­tion (2000-2007).

How­ever, not all are sup­port­ive of a car­bon tax. The Amer­i­can En­ergy Al­liance (AEA), the ad­vo­cacy arm of the In­sti­tute for En­ergy Re­search, said car­bon taxes make gaso­line and elec­tric­ity more ex­pen­sive, with a heav­ier bur­den on low-in­come earn­ers. It will also in­crease the price of most goods and ser­vices since en­ergy is a key cost com­po­nent, the AEA said.

Jor­gen­son noted that Aus­tralia once had a car­bon tax and re­pealed it.

Once China be­gins to im­ple­ment this, then other coun­tries will be­gin to think about how to ad­dress the is­sue.” Dale Jor­gen­son, Har­vard Uni­ver­sity

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