Carbon trading in PRC could spur others, lead to cross-border markets

Published on Tuesday, 10 November 2015

Published by Xuedu Lu on Tuesday, 10 November 2015

Smog shrouds skyline of Chongqing, PRC.
Smog shrouds skyline of Chongqing, PRC.

The People’s Republic of China (PRC)’s announcement that it will set up a national emissions trading market in 2017 is a game-changer that could prompt similar moves elsewhere.

Long mooted since the country has been testing out city/provincial schemes in Beijing, Tianjin,  Shanghai, Chongqing, Shenzhen, Guangdong and Hubei, putting a date to the start of a country-wide cap and trade scheme shows the country is serious about tackling climate change that also helps reduce the pollution that is darkening its city skies. Plus, it makes it more likely that the PRC will meet its stated target of ensuring its emissions of greenhouse gases to peak around 2030.

Taken together, this is a huge incentive for other governments from both developed and developing countries to step up to the plate when representatives of nearly 200 of them gather in Paris in December to hammer out a new global agreement on greenhouse gas emissions. In the past, many countries have shied away from making commitments on fighting climate change on the basis that their contributions are worthless without unequivocal action from the world’s biggest overall carbon polluter. That excuse is no longer there now.

The PRC’s national scheme—allowing less/non-polluters to sell their credits to over-polluters, thereby imposing a limit on total greenhouse gas emissions—will be market-leading in terms of scale, with some 4-5 billion tons of energy-related carbon dioxide (about almost half of the PRC’s total) to be traded. As such, it can act as a model for other countries inside and outside this region.

In Asia and the Pacific, New Zealand and the Republic of Korea already have functioning systems, as does Kazakhstan – albeit with little trade. Tokyo, Japan has a city-wide scheme and India has two markets in energy saving and renewable energy “certificates”. Indonesia, Thailand, and Viet Nam are also considering them, while unfortunately Australia abandoned its ETS scheme in 2014.

No doubt the PRC will face huge challenges, much like the European Union and the US state of California did before them. Foremost are the issues of the legality, data and monitoring, and implementation management.

Carbon credits must have a legal basis defining who can own them, use them, and for how long. Investors need clarity on the length of the credits to have the confidence to invest in generating credit-through investment in alternative low-carbon technologies. Ideally, this credit shall never expire, or at least be valid for more than 20 years to send a strong signal encouraging clean and low-carbon investment today for future.

High-quality data on emissions are vital to the success of any ETS, that requires high standards and strict requirements of data monitoring, reporting, and verification that ensures the confidence in the system, and a strong means of punishing non-compliance. Ideally this should be done by a third party, independent of government and users. Fortunately, the PRC has excellent experience in managing the world’s biggest market in certified emission reduction credits through local bodies that have the thumbs up from the United Nations.

Lastly, to ensure the full functioning of nationwide ETS, governments of provinces/cities will need to do large amounts of capacity building – intensive training will be a must on ETS-related issues like policies, guidelines, procedures, methodologies, so that all relevant government agencies can implement ETS in their region appropriately and rightly. Less developed western provinces will need more help to manage and improve monitoring of the schemes.

The PRC is a diverse nation. Emissions volumes vary across the country, and eastern provinces are generally more developed than those in the west. The government is likely to consider the scheme as part of its overall national development strategy, and may well push for stricter requirements in some provinces than others, which in consequence will enable the ETS function even better due to the enlarging the mitigation costs between regions by differentiating requirements.

It is unlikely to be a smooth process from the start, but within 1-2 year operations the PRC should have a well-functioning carbon market, showing that all countries—whether they are large or small emitters—can and should have one too – not only because it can support their climate policy goals, but because it can also benefit environment protection and promote sustainable development.

Then the next step will be to link schemes across countries. Once more and more countries have established their ETS, cross-board ETS will be possible due to variation of carbon reduction costs across countries, while  the effects of carbon emissions and climate change don’t respect borders. Cross-board ETS would lead to win-win cooperation, much like trade.