China taking climate action through the market at home

Many saw Chinese President Xi Jinping’s decision to skip the upcoming “Climate Summit 2014” in New York as a blow to hopes that the UN-organized meeting would “galvanize and catalyze climate action.” China is the world’s largest greenhouse gas emitter.

 

Expectations for Xi’s participation had been high; in 2009, Hu Jintao, Xi’s predecessor, used a similar UN climate change summit in 2009 to unveil China’s goal to cut the country’s carbon intensity by 40-45% by 2020, compared with 2005.

 

Xi might not have wanted to return to US soil ahead of President Obama's trip to China in November and China's representation at the Summit at the lowly vice-premier level may suggest climate talk fatigue.  But it should not obscure China's climate action on the home front. Many ambitious initiatives count among these, including an overhaul of China's system for cadre evaluation to include carbon intensity targets and a "war on air pollution" following the country's recent "airpocalypse.”

 

Largely unnoticed, China has also moved boldly toward building what will soon be the world’s largest carbon market.  In late August, the National Development and Reform Commission (NDRC), the country’s bureaucratic command center for climate action, announced plans to roll out carbon trading on a national scale in 2016.

 

The announcement should be taken seriously.  It follows extensive real world testing. China began carbon market development the way it has so many policy initiatives: through a process of controlled experimentation.  Five municipalities and two provinces— Beijing, Chongqing, Tianjin, Shanghai, Shenzhen, Guangdong and Hubei— began designing pilot carbon trading schemes, tasked with getting local trading underway by 2013. To meet this deadline, local technocrats worked at breakneck pace to develop local carbon trading platforms and the capacity to operate them.  

 

As China tries to take these local markets to national scale, tough policy choices—and accompanying political terrain related to the scheme’s institutional design—still lie ahead. These include, but are not limited to, how the national CO2 emissions cap will be determined (including size, scope, elasticity, and legality); how emission permits will be allocated; who will be allowed to engage in emissions trading; what type of trading platform will be used and where it will be based; and, how the existing seven ETS markets along with new entrants will be incorporated into a national market. Moreover, given that for emissions trading purposes, CO2 is a virtual commodity established by government fiat, the social trust essential for the success of a carbon market requires features not usually associated with the Chinese system: complete transparency and information disclosure about the creation and operation of the rules of game, data collection, permit allocation, carbon accreditation, MRV procedures, as well as market transactions.

 

Carbon trading does not take place in a vacuum, moreover, and for it to be effective, difficult changes will have to be made to China’s energy, financial, and legal systems. The power sector in China accounts for nearly half of the country’s total CO2 emissions and should be a key player in any effective national emissions scheme. However, under the current system, energy companies are unable to pass along their costs for compliance to consumers— to get them on board, they must be able to do so. In addition, for the carbon market to be able to discover the right “price” for carbon, financial institutions must be allowed to participate in carbon trading—both on the spot and futures market. Otherwise, both the liquidity and fungibility of carbon will be too limited to generate an appropriate carbon price to incentivize any meaningful shift beyond fossil fuels. Finally, the operation of the carbon market has to be safeguarded by law to ensure due process of compliance enforcement and freedom from bureaucratic meddling.

 

None of the above is easy, particularly in an economy that is still in transition. But the odds of success have been increased through the lessons learned and capacity developed through the seven pilot markets.  While the litmus test of success will lie in the contribution China’s ETS makes to greenhouse gas reductions, China’s carbon trading efforts will supplement existing mandatory efforts and those under discussion, such as carbon tax and carbon legislation, complementing the goals for the agreement on climate change to be drafted next year.  In short, although Xi was not in New York to deliver the message, China is working hard to combat climate change at home.

 

(Bo Kong is the ConocoPhillips Petroleum Professor of Chinese and Asian Studies and Assistant Professor at the University of Oklahoma’s College of International Studies. Carla Freeman is an Associate Research Professor at the Johns Hopkins University’s School of Advanced International Studies) 

 

Photo Credit: UN Photo/Mark Garten

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The Paul H. Nitze School of Advanced International Studies (SAIS)
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