Red China Going Green: The Emergence and Current Development of Carbon Emissions Trading in the World’s Largest Carbon Emitter

by Xiaotang Wang

CCCL has posted a new working paper by Xiaotang Wang that examines China’s emerging carbon emissions trading program. As a part of the effort to curb its soaring carbon emissions and realize “green growth,” China officially approved pilot carbon emissions trading schemes in seven provinces and cities in November of 2011. These pilot sites—Beijing, Guangdong, Tianjin, Shenzhen, Shanghai, Hubei, and Chongqing—were selected to reflect the regional diversity in terms of economic activity and development, thereby allowing China to test various emissions trading models and gather experience on both a municipal and provincial level before any such scheme is scaled up to a national level. All seven pilots are due to launch later this year, and the hope is that these programs will eventually link with each other and pave the way to a national carbon trading scheme by 2015-16.

This paper closely examines the rules and designs of the seven aforementioned schemes, each scheme offering something unique as a result of the respective province or city to which its policies have been tailored. In addition to considering the possibility of a national carbon market in China serving as the basis for a global trading system, this paper also identifies several challenges to successful implementation and national integration. First, aside from setting a realistic emissions cap, each pilot scheme must also decide if an absolute or intensity-based cap will be imposed. An absolute cap has the advantage of making emission reductions predictable, while a carbon intensity cap is less controversial within China because it is seen as more compatible with the needs for continued GDP growth. Second, China needs to build an effective and accountable regulatory framework to oversee monitoring, reporting, and verification (MRV), because the country’s current carbon emissions data are woefully inadequate and unreliable with regard to supporting implementation of a carbon trading scheme. Furthermore, the question of which sectors to include in carbon trading also deserves careful consideration. Usually energy intensive sectors and large emitters, such as the electricity sector, are incorporated into trading programs first. However, electricity prices are currently set by the Chinese government, which would limit a power plant’s ability to absorb a carbon price, i.e., by passing on higher costs to customers. Finally, substantial differences exist in economic structure, energy consumption and carbon emissions across Chinese provinces, making it difficult to allocate emissions allowances based on a uniform methodology. The paper concludes by calling on international communities with relevant expertise to provide support and advice for China’s fledgling carbon emissions trading schemes.

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