China Launches a Cap-and-Trade Program to Cut Carbon Emissions

From Environmental Leader, Published on 21 December 2017

China launched a cap-and-trade program in December 2017 that will initially just cover its electricity industry, which is powered mostly by coal-fired generation. In due course, it will expand and involve its transportation and industrial sectors.

Cap-and-trade is a free market plan in which businesses that can meet the limitations on carbon releases are able to bank credits or to sell them to those entities that are unable to do so. As the ceilings are gradually lowered, the rate of those releases will fall.

Here in the United States, California has one set up as do the Northeastern states. While the format can differ, many such plans use the sale from credits to fund new technologies that serve to reduce emissions further.

California has raised $4.4 billion since 2012 from selling credits, the state has said. In the Northeast, CO2 emissions arising out of the power sector are already 50% less than in 2009. The money raised from selling credits — $2.7 billion — is plowed into a fund that invests in new technologies to control pollution levels.

As for China, President Xi has pledged to fulfill the terms of the Paris climate agreement to keep temperatures in check. The country, however, has said that 2030 will mark the year in which it will go all-in. But the national carbon market is a sign of its commitment, although its system must still mature and the price per carbon credit must rise to have a true impact.

“The average price of carbon across seven markets in 2017 was between $3-$10 per ton of CO2, raising roughly $680 million in total transactions,” Hal Harvey and Hu Min of Energy Innovation write in Forbes. If China can get the price up to $10 — and keep it there — they say that its emissions would drop by quarter or more by 2030.

Carbon Tracker has said that carbon output will continue to escalate; the United States and China, for example, are responsible for 42% of the globe’s greenhouse gas emissions.

It also says that in the first decade of this century that China’s emissions had grown by 110%. However, from 2010 to 2015, they were only 16% greater. Key to the effort, it adds, is China’s commitment to reduce its reliance on coal. Along those lines, sustainable energy is on track to rise from 10% of the country’s electricity mix today to 15% in 2020 and by 2050, they will be 30%.

To that end, China is forcing heavy industry to improve its environmental performance, or shut down until it does; as much as 40% of the factories have had to close at least temporarily as a result, say experts. A key reason is because the products that it makes are sold to such American retailers as WalMart, Target and Costco that require their supply chains to live up to certain sustainability standards.

China has looked to California as an example, whose program started out slowly and expanded over time. Over the summer, Governor Jerry Brown met with Chinese leaders to discuss expanding their carbon markets. And while that may be logistically impossible, China said it had much to learn from California. The California state assembly voted in August 2017 to extend its cap-and-trade program until 2030 — eventually gaining the support of the business community. It did lose the support of some environmental groups, though, because it has to woo oil and gas interests.

California has said it will step up its leadership efforts as the US federal government steps back. China, too, has said it will assume an international leadership position on climate change now the Trump administration has decided to withdraw from the climate agreement.

The California Air Resources Board had initially set up its program in 2011. It subsequently won the first legal challenge in the district court, although businesses challenged it and said it was a tax enacted by an unelected state board. But an appeals court said that the buying and selling of credits is not the same as taxing companies; companies can choose to reduce their emissions in a number of ways that include purchasing offsets or buying permits from other companies.

That case, though, will head to California Supreme Court.

But the lawsuits have been just one issue. The other has been an oversupply of credits that has kept the price down to around $13 a metric ton — far below the $30-$40 a ton that is need to maintain a viable market; if the price per ton is too cheap, it may be cheaper to buy credits than to invest in new pollution controls. That is the general issue with which China must also contend.

California’s original goal had been to bring down carbon emissions to 1990 levels by 2020. In 2017, the aim is to reduce those releases by 40% by 2030 from 1990 levels.

And by 2050, California hopes to have cut its greenhouse gas emissions by 80%, which would not just make it an example for other states but also for other countries. In the end, it will be a job creator, say advocates. To get there, the state will also employ other strategies such as vehicle emissions limits, energy efficiency standards and renewable portfolio standards.

Europe, meanwhile, began its emissions trading scheme in January 2005 with 27 participating nations. Prices have fallen in the EU’s carbon market from about $30 a ton in 2011 to about $5.29 a ton in 2017. Such a small cost means that utilities have little incentive to wean themselves from dirtier sources.

That’s because the European Union started off by giving away too many credits, say experts. Now, the EU has a surplus of carbon allowances.

China’s participation in a national carbon market is a good news for climate activists. If China can learn from the United States and Europe, which have endured growing pains, then it could become a model for both developing and developed countries alike.

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