FRANK JOTZO. China’s emissions trading takes steps towards big ambitions.

Apr 9, 2018

China’s new emissions trading scheme will start small, but comes with big potential, Frank Jotzo writes.

China recently announced that it will begin to introduce a national emissions trading scheme for carbon dioxide this year. The promise for more market-oriented climate policy in the world’s largest greenhouse gas emitting country is enormous. But it will be a gradual start and many big obstacles need to be overcome for the scheme to become an effective part of China’s climate policy portfolio.

Emissions trading puts a price on carbon dioxide and thereby provides economic incentives to industry and consumers to move to cleaner technologies and products. It, or its cousin the carbon tax, is the policy instrument of choice for economic efficiency. China taking the plunge with this quintessential market-based instrument for environmental policy is a big deal.

There is added spice in the fact that emissions trading was ‘invented’ and first applied in the United States, but it has been politically impossible or undesired for successive US administrations to introduce it federally.

China’s decision should also be noted in Australia, where a carbon pricing scheme existed from 2012 but was abolished in 2014.

China’s scheme will at first cover only the electricity sector. But that alone will make it far larger than the European emissions trading scheme, the largest such scheme until now. In later years, the scheme is to be expanded to cover heavy industries, and may then cover around half of China’s overall greenhouse gas emissions.

Pilot schemes for emissions trading have been in operation over the last few years in two of China’s Provinces and five large cities. These have shown that China can successfully implement such a policy instrument.

The context in China is of course very different to the EU scheme, and trading schemes in other market economies including at sub-national level such as in California. China’s emissions trading scheme will operate in a system of manifold interventions by government in the economy. In China’s energy and industrial sector there is extensive state ownership and there is extensive state regulation and directed investment, including to reduce emissions. In this situation, how can emissions trading work?

In a paper published this week in Nature Climate Change, my co-authors and I evaluate initial details of the staging and design of the policy released by the Chinese government.

We find that the outlook is for a relatively limited effect of the scheme at first. It is to be expected that the price on carbon emissions in the scheme will be relatively low to start with. And the chosen method of providing emissions allocation to industry will limit incentives for Chinese companies to cut carbon in response.

But the scheme is designed to evolve and gain in effectiveness over time, as most Western schemes have. Part of that evolution evolves not just the trading policy itself, but reform of China’s electricity sector, putting it on a more market-based footing.

If China’s government decides to turn its emissions trading scheme into an instrument that has real impact, then this will have global repercussions. China could inspire and lead the next generation of carbon pricing schemes, this time in industrialising and developing countries.

This piece is based on an article in Nature Climate Change, ‘China’s emissions trading takes steps toward big ambitions’ by Frank Jotzo, Valerie Karplus (Massachusetts Institute of Technology), Michael Grubb (UCL Institute of Sustainable Resources), Andreas Löschel (University of Münster), Karsten Neuhoff (German Institute for Economic Research and Technische Universität Berlin), Libo Wu (Fudan University), and Fei Teng (Tsinghua University). 

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