China has confirmed that it will launch its national emissions trading scheme.
In a joint US-China climate statement, issued as part of President Xi Jinping’s state visit to the United States, China confirmed that its new trading sytem will cover “key industry sectors such as iron and steel, power generation, chemicals, building materials, paper-making, and nonferrous metals”.
Below, our experts react to the development.
John Mathews, Professor of Strategic Management, Macquarie Graduate School of Management, Macquarie University
Xi Jinping is scoring a propaganda coup by announcing China’s intention to introduce a national cap-and-trade scheme in 2017, while he is a guest of Obama at the White House. It will not be lost on observers that China will be introducing the very kind of scheme that failed to get through the US Congress, passing the House but being defeated in the Senate.
How interesting that China the communist country is introducing the kind of market-based emissions trading scheme that the United States was unable to launch.
There are two further points to make. The first is that China is introducing its national scheme after trying out various options as local and city-level experimental schemes over the past couple of years. In 2012, pilot programs were initiated in seven provinces, and have been closely monitored since. Here China is teaching the world a lesson in how to introduce reform: first try it out at a small scale in a variety of forms, and then scale up the most successful.
Second, China is not relying on these market-led cap-and-trade initiatives alone. It is also reducing coal consumption in its power sector through direct state intervention, and has been actively promoting solar photovoltaic and wind power through state-guided targeted investment, national planning, and local promotion programs. So the new scheme will take its place as an initiative that helps to solidify China’s trajectory towards greening its energy systems – after direct state action has done the heavy lifting.
Anita Talberg, PhD candidate, Australian-German Climate and Energy College, University of Melbourne
China’s greenhouse gas emissions represent a quarter of the global total. For this reason alone, any tangible progress on Chinese climate action is encouraging. However, what is more promising is what a Chinese emissions trading scheme could mean for the world.
To date we have only seen pockets of emissions trading across the globe; most notably the EU has had a scheme since 2004 and a Californian system has been operating since 2013. Despite concerted efforts, there has been very little headway in linking regional emissions trading schemes. This is because carbon credits would become fungible.
So if one market crashes, so do the connected markets. The entire system is only as strong as the safeguards in the weakest market. The environmental effectiveness of the entire system is only as credible as the monitoring and verification in the least stringent scheme.
The EU and the rest of the world will be looking closely at the integrity and robustness of the Chinese market’s design. If China gets it right, and can elicit enough buy-in, it could represent a turning point for climate change.
Peter Christoff, Associate Professor, School of Geography at University of Melbourne
The announced introduction of China’s national emissions trading scheme in 2017 places irresistible pressure on Malcolm Turnbull to revisit the issue of an Australian ETS.
When China joins the European Union (the world’s third biggest aggregate emitter) and a number of other major emitting countries and states using cap-and-trade schemes to help cut emissions, some 40% of total global emissions will be covered by carbon markets.
Tellingly, Chinese President Xi Jinping made his announcement at a joint White House Press Conference with President Obama. Together they emphasised how the world’s two largest emitters are now collaborating closely to tackle global warming. Pressure is building within the US to create a national integrated scheme on the foundations of its regional efforts, and other major emitters, like Brazil and Russia, are contemplating similar measures.
Australia’s Direct Action Plan cannot easily be linked to this growing global carbon market. Its underfunded “reverse auction” process cannot acquire sufficient emissions to meet even Australia’s 2020 target. Its “safeguard mechanism” is unlikely to require major Australian emitters to reduce their emissions significantly. Australia is now transparently out of step with global trends and, relying only on current measures, incapable of meeting the tougher mitigation targets which will be required of it in the near future.
John Mathews, Professor of Strategic Management, Macquarie Graduate School of Management; Anita Talberg, PhD student in the Australian German Climate and Energy College, University of Melbourne, and Peter Christoff, Associate Professor, School of Geography, University of Melbourne
Malcolm Turnbull, it seems, cannot escape the emissions trading scheme (ETS) bogey. This time, it comes in the form of China’s plan – which had been foreshadowed but is now confirmed – to introduce a national ETS.
Turnbull’s desire to do a deal with prime minister Kevin Rudd in 2009 for an ETS triggered the leadership contest that installed Tony Abbott as leader. The push against an ETS came from conservative Liberals, many of them climate change sceptics, and the Nationals.
After he was toppled as opposition leader Turnbull continued to strongly defend an ETS. Later, as a shadow minister and a minister he had to get fully on board with Abbott’s Direct Action.
More recently Turnbull went further. To win the vote of some conservative Liberals, who were needed for him to have the numbers to topple Abbott, Turnbull made it clear that as prime minister he would stick with the present policy and not contemplate an ETS.
When he got the leadership, he had to commit in writing as part of his Coalition agreement with the Nationals that he would maintain existing policies on climate change, carbon taxes and emissions reductions targets.
Sacrificing his views brought him support, but has left him looking on the wrong side of history – after earlier being on the right side of it. It is embarrassing, to say the least, that his expediency has been highlighted so quickly.
In terms of domestic politics, China’s decision should give some assistance to Labor, which has promised an ETS although it has not yet released the details.
Environment Minister Greg Hunt, who also used to believe in an ETS, is left arguing that Australia, with its taxpayer-funded emissions reduction fund, has “the best, most effective scheme in the world”, a claim that does not pass the credibility test.
Turnbull has a double problem. He knows Australia doesn’t have a gold-standard anti-emissions policy. And he is wide open to the charge of hypocrisy.
The Climate Institute’s John Connor says that with other countries broadening their emissions-reduction policies, “the prime minister is dancing around the reality that our policy toolbox is going to need a whole lot more in it”.
This will present problems for Turnbull as he approaches the election and – if the government is re-elected – beyond it.
In the run up to the poll is he just going to deny his past and go for an all-out attack on Labor’s ETS?
Will he at some point augment or change Direct Action to ensure that it has more bite and is fit for purpose as other countries ramp up their efforts? If so, how and when would that be done?
And what room to move will the Liberal conservatives and the Nationals give him to make necessary adjustments?
Frank Jotzo, director of the Centre for Climate Economics and Policy at the Australian National University, thinks Turnbull will look for a way through.
“The plan may well be to gradually reform the Direct Action scheme to make it work a bit like an ETS – for example by giving the present ineffective safeguards regime some teeth. But that would be very much inferior compared to a proper carbon pricing scheme.”
Connor believes the move by China and others “will give Turnbull more flexibility in arguing for stronger policies within his own team. He can point to much more robust policies abroad and dispel fantastic notions, popular amongst conservatives from 2009-12, that Australia was at risk of leading the world.”
As Connor points out, the irony is that if Turnbull had prevailed in the 2009 leadership vote and carried the deal with Rudd, Australia would have had an ETS policy, alongside stronger renewable energy and energy efficiency policies he supported with Rudd, leaving it in a better position with its climate policy now.
Abbott’s ascension not only stopped that ETS deal but ensured the Gillard government’s emissions reduction scheme – which never got the chance to reach its full form as an ETS – was repealed after he won government.
Now, from beyond the political grave, Abbott’s inadequate climate policy still reigns, a challenge for his successor into the future.
Chinese President Xi Jinping has made a landmark commitment on climate change during his state visit to the United States. A Chinese cap-and-trade carbon pricing program is scheduled to begin in 2017, and will be the world’s largest carbon market.
In a US-China joint climate statement issued yesterday, China pledged to lower carbon dioxide emissions per unit of gross domestic product (GDP) by 60-65% from the 2005 level by 2030, and introduce a national emission trading system covering key industry sectors such as iron and steel, power generation, chemicals, building materials, paper, and non-ferrous metals.
China is the world’s largest emitter of greenhouse gases, producing 25.9% of the world’s total carbon dioxide emissions in 2012.
Carbon pricing creates incentives for cutting greenhouse gases. According to the World Bank, 39 national and 23 subnational jurisdictions are putting a price on carbon through emission trading schemes (ETSs) and carbon taxes. These schemes and taxes cover 12% of the annual global greenhouse gas emissions: 8% from ETSs and 4% from carbon taxes.
China’s pilot schemes
China’s decision to run a domestic ETS was made in a closed-door meeting as early as 2010. Since 2013, pilot ETSs have come into operation in seven major cities and provinces: Beijing, Shanghai, Chongqing, Tianjin, Shenzhen, Hubei and Guangdong. Carbon prices vary across these pilot sites, ranging from US$1.9 per tonne in Shanghai to US$7.3 per tonne in Beijing (as of September 14-18, 2015).
The Chinese carbon markets have developed faster than expected. The pilot ETSs were approved in 2011, and China took only two years to get them up and running. Now, another two years later, President Xi has confirmed a crucial move towards a national scheme.
Meanwhile, the pilot schemes continue to tighten their regulations. For example, Guangdong Province plans to include more sectors, such as transport and construction, in its pilot ETS, which is the largest one in China. Chongqing City has reduced its cap at a greater rate than anticipated, lowering the number of freely allocated carbon allowances by 7%. There are plans for linking up ETSs across regions and creating new schemes in other provinces and cities, such as Hangzhou City and Anhui Province.
The blossoming of Chinese carbon markets stands in contrast to Australia’s stepping back from the transitory carbon tax, which would have become an ETS this year if it hadn’t been repealed by the Abbott government. While President Xi declared the climate change commitment on US soil, US President Obama himself failed in 2010 to get the Senate’s support for a similar cap-and-trade program. As a so-called “socialist market economy”, China seems to be more proactive than the neoliberal states such as the United States and Australia.
Hurdles to overcome
But there are still a lot of uncertainties about China’s scheme. The initial plan for a national ETS was scheduled in 2015, later deferred to 2016, and finally now confirmed for 2017.
Officials know all too well that any time sooner is unrealistic. Market regulation and infrastructure are far from complete. Companies are not active in the domestic carbon market. Local government officials and enterprises have limited capacity and expertise to manage trading activities.
Financial institutions are interested but concerned about the small scale of the market and the low trading volume. This is an issue because even small cities and counties have set up their carbon exchanges to reap benefits from carbon trading (and have closed down prematurely). Building a national cap-and-trade system will be a steep learning curve for China.
The falling coal consumption in China has made room for capping emissions. China used to be highly sceptical of emissions trading because it requires an absolute emissions cap to function properly, which would pose limits on the use of coal for power generation.
At the same time, car ownership in China is increasing, meaning that petrol use is likely to increase too. The Beijing government could keep cars off the roads by forcing car owners to drive only on alternate days (depending on their licence plate number), as it did during the APEC Summit held in Beijing in 2014 and the Tiananmen parade in 2015. Some heavy industries were forced to shut down their plants temporarily to meet emissions targets.
It may turn out that 2017 is too soon for China to develop a national ETS without an outdated “command-and-control” approach. A better way forward may be to develop an interim carbon tax scheme before moving to an ETS, as Australia previously attempted to do.
Experts have indicated that carbon taxes are a better option than ETSs. In 2011, UK climate economist Nicholas Stern, the principal author of the influential Stern Review, along with a group of prominent economists and senior academics from Chinese official think tanks, said:
…a carbon tax is probably the more robust instrument than a cap-and-trade system for cutting carbon emissions at this stage of China’s development, and it is also the favoured option of China’s policy-makers.
China needs a lot more time to build up a fully functioning carbon market, but it doesn’t have time to get it wrong. Covering more than a quarter of the world’s greenhouse gas emissions, the Chinese carbon market will be a game-changer, but it will also be too big to fail.