In Paris, China Announces Promising Elements of National Emissions Trading System

From the Paris Climate Negotiations

Negotiators from around the world have gathered in Paris to finalize a global climate agreement, which will be supported by the commitments of over 180 countries to domestic climate action included in their Intended Nationally Determined Contributions (INDCs). In September, China’s President Xi Jinping announced that China will launch a national emissions trading scheme (ETS) in 2017 as one of the key policy instruments that China will use to achieve its own commitment to peak carbon emissions around 2030 or earlier. While questions remain about how China will implement a complex market-based mechanism, recent announcements by Chinese officials shed light on promising plans for the policy’s design and implementation.

What are the experiences and lessons from China’s carbon trading pilots?

China articulated its plan to establish a carbon trading market over time in 2011 via its 12th Five Year Plan, a national blueprint for economic and social development from 2011 to 2015. Two provinces and five cities were designated as ETS pilots, and they started trading in 2013 and 2014. These pilots cover more than 2,000 enterprises with more than 46 million tons of carbon dioxide annually, representing 18 percent of China’s population and 27 percent of its GDP. Combined, the seven ETS pilots are the second largest cap-and-trade scheme in the world, following only the European Union.

A WRI study published in September found that the pilots have laid the foundation for a national ETS. Each of the pilots has gone through all the necessary steps to build infrastructure and become operational. The ETS pilots have also mobilized a large number of regulators, enterprises, service providers, and investors to participate in the policy experiment.

However, challenges remain. There are seven separate markets with seven sets of rules, making it challenging for companies to operate in more than one pilot region. Market separation also limited market liquidity, which is needed for companies to fulfill compliance obligations in a timely manner. Most pilots allocate their emissions based on the historical record, or the so-called grand-fathering method, thereby penalizing enterprises that are efficient to begin with. While most enterprises are able to submit verified greenhouse gas emissions, there is room for improvement in the measurement, reporting and verification processes on data management and transparency.

What will be different in the national carbon market?

Fortunately, recent statements from National Development and Reform Commission (NDRC) officials indicate that China is keeping lessons learned in mind when designing the national ETS.

According to Jiang Zhaoli, Deputy Director General of the Climate Change Division of NDRC, speaking in Paris, the national scheme will form a single market with one consistent set of rules, covering nearly 10,000 enterprises in 31 provinces and 4 billion tons of carbon dioxide emissions.1 The new national carbon market will then become the biggest ETS in the world, with around the same amount of emissions as India and Brazil combined. The size of the market and common rules should help to increase market liquidity.

To ensure a reasonable price on carbon, avoid a price crash, and reinforce market liquidity, enterprises regulated by the ETS will be subject to an emissions cap that is more stringent than the national target. China has established emissions reduction targets to reduce its carbon intensity per unit of GDP by 40-45% by 2020 and 60-65% by 2030, both compared to the 2005 level. China also committed to peak its carbon emissions around 2030 with the intention to try to peak earlier.

Jiang also said the national ETS will mainly rely on certain emissions performance standards (i.e. emissions benchmarks) to allocate emissions allowances, thereby rewarding companies that take early actions. More importantly, it will be done in a transparent manner. “The national ETS in design will be transparent from cap setting, allowance allocation, emission reporting, to third party verification”, pledged Jiang.

Recent incidents of dangerous air pollution in Beijing remind us that the country is still in the early phase of a journey toward sustainable development. However, the government is taking notes and learning from past experience. This should give us reason for hope.

On the way to the “new normal” development model

China’s success in meeting and beating its INDC targets hinges on its transition to the “new normal”, a development model that China’s leaders envision will enable slower but better quality growth, while spurring innovation, reducing inequality, and ensuring environmental sustainability. A critical part of the “new normal” is economic restructuring, which means energy- and emissions-intensive industries, such as cement and steel, will play a smaller role in the economy and become more efficient.

Already, enterprises in China have begun to see the ETS as an instrument to help drive the economic transition. “Supply-side over-capacity is a big problem for China’s economy”, said Song Zhiping, Chairman of China Building Material Company. “Limiting emissions through allowances will help mitigate this problem.” In 2014, it is reported that around 30% of cement production capacity in China was not used due to over-supply.

The ETS will only be one of many policy instruments for China to mitigate its carbon emissions, and China will continue to use other tools at its disposal, such as promoting energy efficiency, boosting renewable energy and limiting coal use, to achieve its climate, energy and environmental goals. However, “getting the prices right” is a challenge for all countries, and China could turn out to be a leader in this effort.

1.Jiang also said that the ETS will initially cover six industrial sectors and 15 sub-sectors. In the September joint statement with the United States, China indicated that the initial sectors covered may include iron and steel, power generation, chemicals, building materials, paper-making, nonferrous metals, and cement.

Author Information:
Ranping Song is the Developing Country Climate Action Manager at WRI.

Photo Credit:
Netopyr-e via Wikimedia Commons
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