Emissions Trading: the focus of China’s bold climate policy agenda

shutterstock_133972502_smallFor the past 7 years, recognizing its responsibility for contributing 20% of the world’s climate pollution, China has been actively been working to reduce its greenhouse gas (GHG) emissions.

Be it from the launch of its National Climate Change Strategy in 2007, to the announcement in its 12th Five Year Plan in 2010 calling for the creation of 7 regional emissions trading schemes (ETS), China has kept its promises and is rapidly implementing this policy tool across the country.

Contrasting the scope of these trading schemes with the European Emissions Trading Scheme (EU ETS), the cornerstone of the European Union’s key tool for reducing industrial GHG emissions cost-effectively, this blog provides an overview of the ETS as a policy tool and analyzes the differences between the Chinese schemes and their European counterpart.

What is climate change policy?

shutterstock_154389434_smallClimate change policy was first born at the United Nations Conference on Environment and Development in 1992. The conference led to the establishment of the United Nations Framework Convention on Climate Change (UNFCCC) and the Kyoto Protocol.

The Kyoto Protocol considers 6 GHGs (Carbon dioxide (CO2); Methane (CH4), Nitrous oxide (N2O), Hydrofluorocarbons (HFCs), Perfluorocarbons (PFCs); and Sulphur hexafluoride (SF6)) and requires developed countries to commit to legally binding GHG emission reductions. For developed countries like the USA this has translated to a commitment to reduce these emissions by 17 percent below 2005 levels by 2020, for the EU this has meant a reduction commitment of 20% below 1990 levels by 2020.

The Kyoto Protocol does not compel developing countries to reduce their GHG emissions; this means China faces no legally binding obligation to reduce its emissions on an international level. That being said, China has confirmed its intention to reduce its carbon dioxide emissions per unit of GDP by 40 to 45 percent below 2005 levels by 2020. This is where emissions trading,  as a policy tool, comes in to help the country address its ambitious target.

What is an emissions trading scheme?

Emissions trading is a market-based approach to controlling pollution. By creating tradable pollution permits, these markets attempt to add the profit motive as an incentive for good performance by polluting industries. Unlike traditional environmental regulation, the system is not solely based on the threat of penalties.

China’s regional Emission Trading Schemes form part of a market mechanism to achieve the country’s GHG emission control goal until 2020 with relevant low cost.

For more information about Emissions Trading please view this informational video: https://www.youtube.com/watch?v=ReOj12UAus4.

How the EU ETS and the Chinese ETS schemes work

chart

Having been launched in 2005, the EU ETS predates the Chinese ETS schemes and covers over 10,000 polluting entities in 30 Member States.

Given this difference in size and coverage, we have felt it preferable to include below an analysis of these similarities and differences, as extracted from a recent report by Environomist.

Some similarities and differences between the schemes :

shutterstock_179942231_samll–           On the share of GHG emissions between countries/regions: The EU ETS has an advanced economy, which consumes large amounts of energy and therefore causes high GHG emissions: emissions from German, France, Britain, Italy, and Spain account for +50% of the total emissions of Europe. Compared to vastly differentiated emission reduction targets among member states in the EU ETS (i.e. Germany 21%, UK 12%) all the emission reduction targets of China’s ETS pilots fall into a band of 15% to 19.5%;

–          On the types of gases covered: The EU ETS monitors emissions of six types of GHGs, but handles all transactions in a unit of tons of CO2 equivalence. In all the domestic pilots except Shenzhen, only CO2 emissions are monitored, checked and dealt with at this stage;

–          On regulation: Environmental regulations in Europe are more stringent and reduce the tendency of industries moving to other countries due to high environmental compliance costs. In China energy-intensive enterprises may move to other provinces and cities to avoid the pressure from compliance costs, but this situation will be alleviated in 2015 with the inception of a nation-wide ETS;

–          On penalties: Both the EU ETS and the seven domestic ETS pilots all use penalty fines as the primary measure to enforce compliance. The EU ETS will fine 100 euro per unit ($138.69)when exceeding allowances. The China ETS penalties vary depending on the region. Here are some examples:

  • Shanghai regulates different penalty measures according to different violations, for example, for not carrying out the report duty or for providing fake files, concealing important information or rejecting verification, the fine will be set from 10,000 CNY  ($1629) to 30,000 CNY ($4886);
  • Hubei province will also fine at three times of that year’s average carbon allowance market price if an enterprise does not surrender enough allowances.

Conclusion: a national Emissions Trading Scheme?

In his first government work report delivered as Premier to the National People’s Congress last Wednesday, Mr Li referred to the record levels of air pollution that China has recently experienced. Pointing to the smog that has been affecting large parts of China, the Premier stated that “environmental pollution has become a major problem [for China], which is nature’s red-light warning against the model of inefficient and blind development”.

The issue of air pollution, which we previously reported on in a DREFF blog dated March 6, 2014 has been affecting the capital city of Beijing on both an economic and public health level. As The Climate Group report points out in a report on carbon pricing, the government has so far responded to this issue by introducing a new carbon tax of 5 to 10 yuan (80 cents to US$1.61) per ton, that would most likely not be incompatible with existing carbon markets. The efficiency of this new tool therefore remains to be seen.

In terms of the regional emissions trading scheme set out in the Environomist report, we know they form part of a larger national plan to lead the country towards a national carbon market in 2015. However, as indicated in The Climate Group report, each of the seven pilot regions were initially selected to reflect different levels of economic development, allowing the government to observe how carbon pricing would affect different parts of the country.

Even the EU ETS, which is often considered as a role model for emerging cap-and-trade systems in other regions, was initially beset with issues of price volatility and fraud. It is obvious that as a rapidly developing country China, needs to account for its share of the world’s GHG emissions. However, is a national ETS the most effective way forward? Only time will tell…

Questions for the reader:

–          Do you have an ETS in your country?
–          If so, what polluting industries are included? Have you noticed any changes in those industries?
–          If not, would you like to have one? What industries would you want to see included?

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