As China prepares to launch a nationwide carbon cap-and-trade program to try to slow climate change, experts are warning of a long list of flaws in seven pilot programs that are already operating throughout the country.
Major issues ahead of
the planned 2017 launch of a national carbon trading program include a lack of
openness, transparency and fairness; a flawed system of allowance allocation
which does not reflect real industry conditions; and an inadequate monitoring,
verification and reporting system.
Inconsistencies in the
existing pilot programs have manifested in wildly varying prices. During a
survey earlier this year, prices for carbon allowances were found to be five
times more expensive in one of the markets than in one of the others.
A statement on climate
change issued by Chinese President Xi Jinping and U.S. President Barack Obama
on September 25 was hailed as a breakthrough following years of dormancy of
U.N. climate talks.
China’s cap-and-trade
program, once established, will set a maximum amount of climate-changing carbon
dioxide that can be released every year. It will force firms to buy or sell
allowances to meet their emissions limits, providing a monetary incentive for
them to reduce emissions.
“The recent joint
announcement strengthens the common ground shared by both sides on climate
change and may make them a model for other developed and developing nations to
follow,” said Teng Fei from Tsinghua University’s Institute of Energy,
Environment and Economy during a recent interview with caixin.com.
In addition to
announcing 20 billion yuan (US$3.1bn) to support other developing countries in
combating climate change, roughly the same as the U.S.’s pledge of US$3 billion
to the Green Climate Fund, Xi made another significant announcement in the
joint statement: China plans to establish a national “cap-and-trade” program,
the world’s largest emissions trading system (ETS), by 2017.
As the world’s largest
greenhouse gas polluter every year, and its second-largest economy, China’s
domestic efforts to slow climate change could see it play a leadership role in
helping the developing world slow and adapt to climate change.
Joshua P. Meltzer of
the Brookings Institution wrote a commentary in late September describing China’s ambitious
ETS as the “most noticeable element” of the joint statement. “The decision by
China to introduce a national cap-and-trade system stands in increasingly stark
contrast to the absence in the US at the federal level of a national program
(or even a serious political debate) on pricing carbon,” he wrote
Pilot Performance
In a pledge submitted
to the U.N. ahead of the Paris meeting, China committed to making sure its
annual greenhouse gas emissions stop increasing by 2030, but the absolute
ceiling at which its pollution will peak has yet to be announced.
According to estimates by the Paulson Institute, an independent think tank located at the
University of Chicago, the cap for China’s carbon emissions may range from
three to four billion tons — far higher than the current annual carbon
emissions of around one billion tons. The group estimates that the Chinese
carbon market’s size may be 64 billion yuan (US$10.1bn) per year.
China’s National
Development and Reform Committee (NDRC) has predicted the national carbon
market to cap at two to three billion tons, which still allows China to eclipse
the EU as the world’s largest carbon market.
China’s experience
with carbon trading dates back to October 2011, when it declared it would set
up seven pilot regional carbon markets. They are located in Shenzhen, Beijing,
Shanghai, Tianjin and Chongqing, as well as the provinces of Hubei and
Guangdong.
Since mid-2013, the
seven pilot schemes have been rolled out successively, and about 2,000
companies have participated so far. By July 31, carbon allowances permitting
more than 50 million tons of CO2 to be released have been traded under the
pilot programs, at a combined value of about US$300 million, according to the
Paulson Institute.
Yet as these pilot
programs have been operating, each region’s market has performed differently.
The 2015 China Carbon Pricing Survey, which was conducted by China Carbon Forum and
ICF International, showed that prices in the seven pilot schemes have
fluctuated significantly.
“Prices in many
schemes temporarily rose following their establishment in 2013 and 2014 (prices
in Shenzhen even exceeded 100 yuan/ton for a short time in October 2013), but
then declined and stabilized throughout late 2014 and early 2015,” reads the
report. “In May and June 2015 prices in most schemes dropped sharply, largely
due to oversupply of allowances.”
When the survey was
taken in mid-2015, prices ranged from 9 yuan (US$1.42) per ton in Shanghai to
42 yuan (US$6.61) per ton in Beijing.
“For a healthy, intact
carbon market, once the price runs too low, it may indicate there’s a surplus
of allowances and that the overall emission cut target is lethargic,” said
Jiang Enjun, senior researcher at Energy Research Institute.
“However, in China, so
far the market is in its trial period, and prices, largely manipulated by some
market forces rather than being adjusted by emission allowance demand, cannot
fully indicate the present condition of the carbon market,” Enjun said.
As pilot projects, the
seven different places can hardly be judged to be performing well or poorly
either based on price or trading volumes.
Hubei Province appears
to have traded the largest amount of allowances, but that is only because it
allows for intermediary companies to trade allowances between themselves, while
the other six pilot schemes do not allow this practice. By contrast, the city
of Chongqing has been reluctant to participate, fearing economic impacts, and
some days have passed by in that pilot program with very little trading at all.
Company Reaction
When the pilot schemes
launched, most of the affected companies had no conception of what carbon
trading was. Dimitri de Boer of China Carbon Forum said that, despite local
governments’ mandates that high-emission enterprises take part in the carbon
market, there were some who simply refused to buy allowances.
In Hubei Province, 138
coal power plants, chemical plants, cement producers and other enterprises that
use as much energy every year as would be produced using 60,000 tons of coal
were included in the pilot scheme. The director of a science and technology
department within a large petrochemical company in Hubei said she started to
take government-organized training programs on the carbon market in March 2013.
The petrochemical
company executive, who spoke on condition of anonymity so she could speak
honestly about government policies, said it was not difficult for her company
to fulfill its compliance in 2014 with free allowances issued to the company by
the government. (Most allowances in China have so far been free — a common
approach when carbon trading programs are first being established).
“Through the
application of a new waste gas recycling technique last year, not only is our
company producing an extra 10,000 tons of natural gas annually, we’re also
making an extra 1 million yuan (US$157,000) by selling our saved allowances on
the market,” she said.
“An unwillingness to
participate in the carbon market is a universal attitude amongst enterprises,
particularly when most industries are facing overcapacity,” said Wu Changhua,
director of the greater China office of the Climate Group, an NGO. “Thus, it’s
very important for the government to have the proper policies in place to
stimulate enterprises’ enthusiasm.”
“Wait and See”
National ETS will
cover such key industry sectors as iron and steel, power generation, chemical,
building materials, papermaking, and nonferrous metals when it launches in
2017. These sectors were selected for two main reasons, according to Wu
Changhua.
“First of all, these
key industry sectors accounts for about 60 percent of [China’s] total emissions,”
Changhua said. “Secondly, data collected during the past decade for these
sectors is comparatively complete.”
The petrochemical
executive from Hubei Province said that when the national ETS is formed, her
company’s biggest concern will be the system’s fairness in terms of how it
allocates allowances.
“To conclude whether
China’s ETS is going to be effective or not, we need to see whether there is
real trading within its system, whether the trading can stimulate technological
innovation, and push companies to take measures to cut emissions,” Changhua
said. “We need to wait and see.”
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