Published daily by the Lowy Institute

China's emissions-trading announcement is a signal to the world

China's emissions-trading announcement is a signal to the world
Published 28 Sep 2015   Follow @frankjotzo

The US and China have jointly announced their vision for the Paris climate talks and the steps they will take at home. But what took the headlines was China's announcement to introduce a national emissions trading scheme in 2017.

The announcement is no surprise. The Chinese government has been foreshadowing a national emissions trading scheme for years. But its inclusion in this high profile announcement means we can expect that it will in indeed be done. The announcement also makes clear that the scheme will cover electricity generation and heavy industries including iron and steel, chemicals, building materials, paper-making, and nonferrous metals. These are the main sources of emissions and the most cost-effective options to cut emissions using pricing instruments.

But don't expect emissions trading to become the mainstay of China's climate policy overnight. It will take time to become fully effective, and it may not be the biggest factor in China's climate change policy toolbox for some years. One reason is that other policies — such as mandated closures of highly polluting plants, regulations for minimum energy efficiency, and state-directed investment in renewable power — have strong effects. Another reason is that large parts of heavy industry and the electricity sector are still run by state regulation or as state-owned enterprises.

China's embrace of market-based approaches to cut emissions is significant because it is being done in an economy where command-and-control approaches are still highly prevalent, and where market prices are only beginning to play the key role in the energy sector. China has a challenge on its hands making emissions trading work well in that context, but the introduction of emissions trading provides an opportunity to push ahead with faster market reform in China's heavy and energy industries.

If successful, emissions trading can grow into playing a major role in facilitating China's objectives for a cleaner energy and industrial system over coming decades, and for achieving its longer term emissions reductions targets. [fold]

A recent expert survey in China by the China Carbon Forum found that a third of respondents expected major business investment decisions to be influenced by a carbon price in 2016, and over 80% expected an influence from emissions trading on investment in 2020.

However, it is clear that there will need to be energy sector reform, especially towards more market-based settings in the electricity sector, to make a carbon price work properly. This has been extensively researched.

Seven pilot trading schemes have been in operation. Their effect on emissions has been very limited, but that was not really their objective. They have shown that cap-and-trade can be made to work in China. That would have given the central government confidence in moving towards a national scheme. It is also expected that China's provinces will play an important role in the administration of the national trading scheme.

As part of the recent announcement, China also reiterated its target to reduce the emissions intensity of its economy by 60 -65% from 2005 to 2030, announced forestry measures and said there will be low-carbon measures for buildings and transport. It also announced a move to 'green power dispatch', giving priority on the grid to renewable power generation and high-efficiency fossil fuel power plants, which will help make emissions trading effective.

The launch of China national emissions trading scheme will have a major signaling effect globally. The world's largest economy is putting in place a price on carbon emissions, and this will be noted the world over. If China's experience is a positive one, its model will be emulated in many other countries, especially by emerging economies.

The US-China joint announcement, following last year's joint announcement in Beijing, also sends a strong message to other nations: the presidents of the two largest economies are united in their push for meaningful climate policy. It gives support to any nation that wants to see strong global climate action, and helps the argument of domestic constituencies in favour of action. A number of industrialising and developing countries may consider following China's example. In fact, many middle- and low-income countries have already made significant climate action pledges, or Intended Nationally Determined Contributions.

There is also a fascinating aspect to this for the US-China relationship. It is ironic that presidents Obama and Xi are united on the issue of emissions trading even though Obama is unable to implement such a scheme nationally in the US, where cap-and-trade was invented. The Chinese leadership may find some quiet satisfaction in this.

Photo by Flickr user Kaj17.

You may also be interested in