Evaluation needed to make carbon trading a success
China’s policymakers have recognized the role that markets can play to promote the efficient allocation of resources to protect human health and the environment. After several years of piloting carbon dioxide emission trading at the provincial and municipal level, the central government has announced the start of a national carbon emission trading program as one mechanism to help the country achieve climate mitigation goals.
By putting a price on carbon, the market provides strong economic incentives for industry to reduce emissions and improve efficiency. In the long term, this can lead to adjustments in the energy structure and result in a significant boost for green development. In addition, reducing carbon from the electricity system has the potential to provide reductions of conventional air pollutants like sulfur dioxide, nitrogen oxides, and fine particles that have a substantial impact on air quality and human health.
Market approaches work best when investors are certain about the long-term design and operation of the program, and international experience has shown that disruptions to the market can be minimized through a transparent and predictable mid-term evaluation process.
China has chosen to implement the carbon trading program in stages, initially covering only the power sector and then expanding to other sectors in future stages. This staged approach provides the opportunity for the government, industry, market participants, and other stakeholders to observe how well the program functions and adjust the program to improve its effectiveness.
The carbon trading programs in the EU and US also went through several implementation stages as governments evaluated what worked well with their respective programs, with the aim of identifying improvements that could deliver greater benefits and efficiency.
China can draw lessons from the international experiences with program evaluation, particularly the experience of the Regional Greenhouse Gas Initiative (RGGI) – a carbon trading program for the power sector in the northeastern US. The states in the RGGI region were aware that the trading program was a new approach for controlling carbon emissions and that they would need to proceed with caution and deliberation to avoid disrupting electricity markets. They also wanted to be certain that the program was producing real emission reductions. These concerns led to an agreement to conduct regular mid-term evaluations to assess the program and determine whether improvements were needed. So how did the evaluation work?
First, prior to the start of the program, the RGGI detailed the parameters of the mid-term evaluation, including schedule,
scope, process, responsible organizations, and mechanisms for engaging stakeholders. The scope of the evaluation included assessing whether the program was meeting its goals, the impact it was having on electricity prices and reliability, the stringency of the emission limit, and the effectiveness of the program’s environmental and price safeguards. By defining the parameters of the mid-term evaluation, there was a strong signal to all stakeholders that the design of the RGGI program could change, but there would be a transparent and inclusive process to identify appropriate changes. It also helped identify the specific data that would be needed to inform the evaluation so that processes could be established and institutions identified to collect the data. Second, shortly after the start of the carbon trading program, the RGGI initiated the evaluation process by convening panels of experts from state governments, academic institutions and think tanks, industry, consumer organizations, and NGOs to discuss topics related to program design, operation, and effectiveness. Experts conducted scientific evaluations to assess the impacts of the program and suggest changes to improve the trading program’s effectiveness.
Third, the RGGI published the results of the scientific and policy evaluations and sought input from experts and the public on how to adjust the carbon trading program to address shortcomings. After collecting input from stakeholders, the RGGI implemented a mechanism to reduce the total number of new allowances available each year to more closely align the emission cap and actual carbon emissions. In addition, the RGGI implemented a cost containment reserve to limit the potential economic impact of the other changes. The RGGI implemented these program enhancements through the regulatory process – a rule change was proposed, the public had an opportunity to comment, and a final rule was published, giving consideration to the comments that were received.
The 2012 and 2016 midterm evaluations have led to a variety of program changes to create a more robust and sustainable market, improve the administrative efficiency of the program, and reduce the risk that excessively high allowance prices would have on the economy and that excessively low allowance prices would have on the environmental performance of the program.
China’s national carbon trading program will be the largest trading program in the world. If successful, it may serve as a model for other countries adopting climate policies. However, carbon trading is still a relatively young concept in China. A formal, clearly defined mid-term evaluation process could provide an opportunity to learn from successes and challenges, and, when necessary, make transparent program modifications.