China—National Cap and Trade Program
President Xi Jinping announced last week that China will push ahead with an ambitious plan to build the world’s largest market for carbon emission permits. This national cap-and-trade program will expand from the seven regional pilot emissions trading systems established in the country’s 12th Five Year Plan (in 2011). The program designated 5 cities (Beijing, Chongqing, Shanghai, Shenzhen and Tianjin) and 2 provinces (Guangdong and Hubei) where government-set ceilings of pollution were divided into emission permits, issued, and sold to businesses. By selecting polluting industries, participating factories and firms become inclined to lower their emissions—at first to meet their allocated quota, and if successfully done, to sell or save leftover permits at market prices. In this manner, China’s government can over time lower the allowed emissions, making permits scarcer and magnifying price pressures on companies to cut pollution. Cap and trade, in effect, generates greater accountability to what is now an economic externality.
Operation and Evaluation of the Seven Pilots:
The seven pilot projects were limited to covering carbon dioxide and, in terms of industry coverage, set to include high polluting industries; firms involved in heat and electricity production, iron and steel, nonferrous metals, petrochemicals, pulp and paper, glass and cement. Each of the pilot schemes were uniquely designed based on local characteristics and were monitored, reported and verified by third party auditors.
The average credit price ranged from $4.1 USD in Hubei to $12.4 in Shenzhen. The Chinese pilots encountered similar challenges to global ETS programs, in which low carbon prices and unsatisfactory trading volumes prevent the efficiency of the markets. Although the trading levels were very low, by July 2015, more than 38 million tons of carbon dioxide had been traded on the carbon markets. China Network Television reported in August 2014 that, as a whole, the pilot projects allowed for a 5% reduction in China’s carbon intensity in the first six month of that year. Demonstrating the success of the schemes, China’s national government projected a reduction of carbon intensity by 40 – 45% from 2005 levels by 2020.
The Chinese pilot programs have provided important insights for the scaling and expansion to a national market, with the trial and error demonstrating that it is possible to implement ETS in low-income environments, while revealing structural deficiencies such as illiquidity and over-allocation.
National scheme: progress and design
While the pilot programs have acted as important test runs for China, implementing a national market proves to add increasingly challenging issues. The National Development and Reform Commission, the government agency preparing the market, decided that instead of launching all eight industries originally planned, the market would first focus on three of the heaviest polluting industries: coal-fired power plants, cement, and aluminum. The narrow range of sectors allows for a more focused approach that will enhance success. Moreover, China’s statistics and enforcement regulations could prove to be unreliable and may skew outcomes of the markets.
Overall, a successful start to a carbon market will put China in a great position as an international leader for climate action. It should help China fulfill its pledge to the Paris Agreement to reduce CO2 emissions per unit of GDP by 40–45% below 2005 levels by 2020.