Navigant Research Blog

China Makes Strides to Curb Carbon Emissions

— April 26, 2013

China has now outpaced the United States as the world’s biggest emitter of greenhouse gases (GHG).  With a power sector that relies heavily on coal and continued aggressive construction of coal-fired power stations, the country currently accounts for almost 50% of global coal consumption.  According to the European Commission’s Joint Research Centre, China’s carbon emissions increased 9% in 2011 to 7.2 tons per person.   This figure is only slightly less than the European average of 7.5 tons – though significantly less than the average American at up to 17.3 tons per person.

Realizing the need to address the country’s serious GHG emissions problem – especially with record smog levels in Beijing – the Chinese government is taking a number of steps.  It plans to add 49 GW of renewable energy capacity this year and develop an energy plan with the goal of gradually transitioning from fossil fuels to cleaner energy sources, such as hydropower and intermittent resources like wind and solar power.  In 2012, about 15 GW of wind and 3 GW of solar energy capacity were added.

New Lows

Most noteworthy is the government’s effort to curb CO2 emissions by initiating a new carbon emissions trading pilot scheme.  It is set to launch seven such pilots in various cities and provinces this year that are expected to eliminate at least 700 million tons of annual emissions.  The first pilot will be kicked off on June 17 in Shenzhen (southern China) to initially include 635 companies that were responsible for 38% of the city’s total GHG emissions in 2010.  This pilot scheme will create the second-largest carbon trading scheme in the world, after the European Union Emissions Trading System (EU ETS).  Beijing and Shanghai may soon follow suit, though neither city has scheduled a launch date yet.

It remains to be seen if the Chinese carbon trading program will be as successful as the EU ETS scheme, which has indeed reduced carbon emissions since it was initiated in 2005.  But will China, like the EU, eventually face the challenge of a growing surplus of allowances?  Recently, the European Parliament proposed to delay the release of 900 million CO2 emission permits in order to stop over-flooding an already saturated market (mainly caused by the economic recession, which has depressed emissions more than anticipated) – a decision that was narrowly defeated soon thereafter in a parliamentary vote because of fear of raising costs for businesses in a sluggish economy.  Earlier this year, permits traded at below €3 ($3.90) a ton – compared to €7 ($9.10) a ton last year and €25 ($32.50) a ton in 2008.  Shortly after the vote, carbon allowances dropped to €1.70 ($2.20).  It is clear that carbon trading can be fraught with problems, and the Chinese market will undoubtedly face its own unique issues in the years ahead.  Still, China should be able to draw upon the EU’s experience and its hard-won lessons.


In Shanghai, Carbon Goes on the Market

— August 30, 2012

This month Shanghai began an ambitious emissions trading system (ETS) intended to curb carbon dioxide emissions.  Approximately 200 local companies will participate in the program, which targets industrial firms that produce more than 20,000 metric tons of carbon annually, and non-industrial firms that produce more than 10,000 metric tons a year.  Carbon permits will be free during the program’s initial phase, but then market forces will set the price.  The scheme will be based on the mechanics of the Shanghai Environmental and Energy Exchange, with significant funding from the Asian Development Bank.

Similar programs are planned in Beijing, Chongqing, Hubei, Guangdong, Shenzhen, and Tianjin.  While the nuances of each program will vary, these initiatives will act as pilot projects for a nationwide carbon trading scheme, set to be implemented by 2015.

Shanghai’s energy demand is forecast to nearly double by 2020 and, considering the country’s vast coal reserves, a corresponding increase in greenhouse gas emissions would be inevitable without some effort at reduction.  The question becomes: by choosing an ETS, has China selected the most effective policy to combat pollution while minimizing the social impact?

The two most popular policies for emissions reductions are carbon trading schemes and carbon taxes.  They are fundamentally different, and therefore, neither is considered a “one size fits all” solution.

Carbon trading, as in the Shanghai scheme, creates an absolute maximum to the emissions of a region or company (the “cap” in “cap and trade”) and allows the market to sort out the most efficient means for achieving that goal.  Trading systems create dynamic economic efficiency by allowing companies with the lowest abatement costs (the cost of reducing their pollution) to do so, and then profit by selling their unused permits.  Companies with high abatement costs can purchase these credits if the credits costs less than retrofits required to meet the cap.  The European Union launched its Emissions Trading System in 2005.  The scheme aims to reduce total emissions 21% below 2005 levels by 2020; results so far have been mixed.  California plans to roll out a carbon ETS in 2013 that will cover approximately 85% off all carbon emissions in the state, including utility and transportation fuels.

The Tax Option

Carbon taxes, on the other hand, place a fee on every ton of carbon produced by specific industries, or on all emissions in a country, region, or state.  Taxes are simpler to implement because their mechanisms are already well understood by both politicians and the general public, and they are relatively easy to enforce.  Unlike a cap and trade system, taxes incent carbon emitters to reduce pollution as much as possible, whereas an ETS only requires reductions to a specific level.

Furthermore, some creative manipulation of the existing tax code can result in minimal economic impacts.  British Columbia has a revenue neutral carbon tax in place, which it has recently increased to $30 per ton.  Revenues from the carbon tax, levied against all the carbon from fossil fuels, are used to reduce corporate and individual income taxes; which have resulted in some of the lowest rates in the G8.  Despite economic growth, the tax has significantly reduced carbon output and fossil fuel demand.

China’s ETS is another signal of the country’s slow but steady shift to free-market capitalism.  From an economic perspective, a trading scheme may be the most logical path to curtail China’s carbon emissions, given the rapid economic expansion of the country, and the corresponding exponential demand for energy. True, the ETS introduces some complications into carbon emission compliance, but its smaller economic impact on businesses, compared to a carbon tax, should help bolster China’s continued growth.  If structured correctly, the scheme will allow China to integrate its carbon markets with Europe, Australia, and others, further incorporating the once-secluded Middle Kingdom into the world economy.

(Photo Copyright Douglas Janson)


A Glimmer of Hope for a Cap-and-Trade Scheme in the United States?

— June 9, 2012

Without the support of a national policy and having faced numerous obstacles over the years, U.S. cap-and-trade programs have lingered, most of them managing to survive despite many setbacks.  With California’s upcoming launch of the nation’s first economy-wide carbon market, new vigor (and hope) is being injected into the struggle to develop and foster a carbon trading scheme in this country.

In 2010, Californians reaffirmed by a vote of 61% to 39% their intention to implement cap-and-trade auctions for greenhouse gas (GHG) emissions by 2012.  They are getting ready to hold a “practice” carbon allowance auction in August, followed soon by the first official auction in November.  A few months later, the state’s cap-and-trade program will formally kick off in January 2013, when GHG emissions will start to be counted against the cap.  But this achievement has not been without difficulties and court battles, with various neighborhood and environmental justice groups claiming that the program will allow industrial plants to avoid installing much tougher pollution controls. Originally scheduled to start in January 2012, the program was delayed one year to give the state’s Air Resources Board (ARB) extra time to make sure that all the necessary steps had been taken and to protect the program from potential market manipulation and fraud.

Championed by former Governor Arnold Schwarzenegger, the cap-and-trade program is the cornerstone of California’s effort to reduce GHG emissions to 1990 levels by 2020.  It will affect 600 power plants, factories, and other industrial facilities and accounts for one fifth of the planned cuts under the state’s 2006 Global Warming Solutions Act, AB 32.  In 2015, the state will include transportation fuels.  Besides setting an emissions limit on sources responsible for 85% of the carbon footprint, ARB is providing a financial incentive for investments in clean technology and energy efficiency initiatives.

But as the August auction is rapidly approaching, one key issue is emerging.  What is the state going to do with the revenues from this and future auctions held on a quarterly basis?  Considering that these auctions could generate as much as $1.8 billion in the first year and the state already has a $16 billion budget deficit, this revenue question has become a very serious matter indeed.  Although the law requires that the money be invested in carbon reduction programs, a fierce debate is already going on among the state’s lawmakers and other stakeholders, along with intense lobbying from various clean energy and environmental groups. Both ARB and the utility companies want the money to help offset the rate increases that will result from the trading scheme, while the California’s public utility commission proposes to return 90% of the revenues to customers as rebates and use the remaining 10% for energy efficiency upgrades in buildings.  Other proposals have included funding for California’s high-speed rail project, establishing a “green bank” for alternative energy projects, and (not surprisingly) reducing the state’s budget deficit. To complicate matters, the California Chamber of Commerce claims that the allowances are a form of tax, so ARB has no legal right to impose it.

As these debates and arguments continue to rage in the coming months along with new amendments, California’s cap-and-trade program should send a strong message to the U.S. government that the time has come to reconsider a national carbon trading scheme and join other major economies, such as the European Union (with the world’s first and largest cap-and-trade system), Australia (which passed a carbon tax in 2011 that will shift into an emissions trading scheme in 2015), and China (which plans to start seven pilot carbon emissions trading programs in five major cities and two provinces in 2013). The success of the California carbon market could have a significant impact on the future policy decision-making of adopting a nation-wide carbon trading scheme in the United States.


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