Update on China: China Steps into Leadership Role as it takes Action on Climate Change

 
In his first comments as China’s prime minister, Li Keqiang recently laid out a vision of a more equitable society in which environmental protection trumps unbridled growth and government officials put the people’s welfare before their own financial interests.  While the Prime Minister was short on specifics, his comments represent an encouraging acknowledgment of some of the pressing issues facing China.

Traditionally, China has been used as a carbon scapegoat and excuse for inaction by countries such as Canada and the U.S., whose per capita emissions are much higher.  However the tables are turning with China beginning to take a leadership role in addressing climate change.  China’s emergence as a climate leader means that Canada and other countries can no longer point their fingers at China as an excuse for not taking action to reduce their own greenhouse gas emissions.

China to roll out Cap & Trade in 2013

As the world’s largest emitter of carbon dioxide, China is preparing to gradually roll out cap-and-trade pilot programs in seven major cities and provinces starting in 2013.  This initiative is part of a larger goal to reduce carbon intensity – or the amount of carbon dioxide emitted per unit of economic output – by 40% to 45% below 2005 levels by 2020.

In November 2011, the Chinese government decided to implement cap-and-trade pilots in two provinces and five cities (including Shanghai, Beijing and Shenzhen) beginning in 2013 with the final goal of implementing a nationwide exchange program by 2016.  In less than two years, officials have designed and started to implement seven trading trials that cover around one-third of China’s gross domestic product and one-fifth of its energy use.  If successful, the schemes could demonstrate that an emissions trading system will be an effective way for China to manage its greenhouse gas emissions.  In addition, China’s activities may spur policy makers in other countries such as the US to act.

Bloomberg New Energy Finance previously estimated that the regional pilots would cumulatively cover 800 million to 1 billion tonnes of emissions in China by 2015, meaning that the market would become the world’s second largest after the European Union.  It has been reported that at the beginning, regional and city-wide markets will remain separate with unique rules and criteria. For example, some of the markets will cover factories and industrial operations exclusively, while others will focus on power generation or non-industrial sectors.

The first trades took place in September 2012 in Guangdong province, when four cement-manufacturing companies invested several million dollars to acquire carbon pollution permits (allowances). The Guangdong scheme is expected to cover more than 800 companies that each emit more than 20,000 tonnes of carbon dioxide a year across nine industries, including the energy-intensive steel and power sectors.  These firms account for more than 40% of the power used in the province.  The Guangdong carbon market alone will regulate some 277 million tonnes of CO2 emissions by 2015.

China plans to open six further regional emissions-trading schemes in 2013, in the province of Hubei and in the municipalities of Beijing, Tianjin, Shanghai, Chongqing and Shenzhen.  It plans to expand and link them until they form a nationwide scheme by the end of the decade. A nationwide scheme could then link to international markets.

Until now, China’s experience with carbon trading has been limited to the Clean Development Mechanism under the Kyoto Protocol.  While China’s political system could let a carbon market grow faster than anywhere else because changes can be implemented quickly, the carbon market faces challenges in China.  In particular, China needs to develop and enforce proper legislation and regulations to measure, report and verify carbon emissions from industrial sites.  It also needs to build an effective framework to oversee the reporting and trading of carbon credits.

At this stage, the most urgent issue that needs to be addressed is how China collects and analyzes data on carbon emissions.  The credibility of China’s statistics on energy use and carbon emissions has been questioned partly because of the large discrepancies between numbers calculated using top-down data and numbers calculated using bottom-up data.  Without accurate numbers, the first transaction of the Guangdong trading scheme was based on expected future carbon emissions, rather than historical data.  Improved statistical methodology and political action will be required to boost the reliability of carbon emissions data in China.  China will also need specific laws to ensure transparent reporting and strong enforcement to prevent fraudulent or misleading claims about carbon emissions.

Chinese Carbon Tax on the Horizon

On the climate front, the Chinese government appears to be on the verge of taking a critical step which has been demonized by politicians in Canada and the USA – that is, implementing a carbon tax.  Although the carbon tax is expected to be modest, China plans to also increase coal taxes.

According to Jia Chen, head of the tax policy division of China’s Ministry of Finance (MOF), China will proactively introduce a set of new taxation policies designed to preserve the environment, including a tax on carbon emissions.  In an article published on the MOF web site in February 2013, Jia wrote that the government will collect an environmental protection tax instead of pollutant discharge fees, as well as levy a tax on carbon emissions.  The local taxation authority will collect the taxes, rather than the environmental protection department.  The article did not specify the level of carbon tax or when the new measures will be implemented.  In 2010, MOF experts suggested levying a carbon tax in 2012 at 10 yuan per tonne of carbon dioxide, as well as recommended increasing the tax to 50 yuan per tonne by 2020.  These prices are far below the 500 yuan (US $80) per tonne that some experts have suggested would be needed to achieve climate stability.

It is not anticipated that China’s plan will have a significant impact on global climate change, although the tax may have some beneficial impact within China itself, where air pollution is a serious problem.  A paper from the Chinese Academy for Environmental Planning suggests that a small tax could still raise revenue and provide an incentive to reduce emissions, thus bolstering China’s renewable energy industry.

To conserve natural resources, the government will push forward resource tax reforms by taxing coal based on prices instead of sales volume, as well as raising coal taxes.  A resource tax will also be levied on water.  In addition, the government is also looking into the possibility of taxing energy intensive products such as batteries, as well as luxury goods such as aircraft which are not used for public transportation.