Chinese President Xi Jinping has announced an ambitious vision to implement a market-based cap and trade system to limit China’s emissions from its largest sectors. The announcement was made jointly with U.S. President Barack Obama as both countries prepare for the Global Climate Agreement in December. The cap and trade system will initially encourage emissions reductions in the following industries: power generation, iron and steel, chemicals, and building materials (such as cement, papermaking, and non-ferrous metals).
While specifics to China’s program have not been released, a typical cap and trade system operates as follows:
- An annual nationwide limit is set for maximum allowable emissions. This is typically capped with the intent to reduce overall emissions from 5% to 15% compared to the previous year.
- Individual emitters will be allowed an annual allowance of emissions totaling the nation’s cap.
- Emitters are penalized if they exceed their allowances.
- If an emitter has excess allowances at the end of the year, it can sell extra allowances to over polluters that want to avoid penalties.
Generally, the system allows companies to plan ahead for annual reduction targets. Companies are incentivized to sell excess allowances and are punished for excessive emissions. China also intends to generate 20% of its electricity from renewable sources by 2030. The carbon tax will help promote investment in renewable technologies and incentivize industries to help achieve this target.
Emissions Reduction Potential
China is currently the world’s largest emitter of CO2. In 2013, China emitted 10.3 billion tons of CO2, which accounted for 29% of global CO2 emissions. If China can reduce its annual CO2 emissions by 15%, the reduction would total more than the annual CO2 emissions from all of South and Central America.
Current Status of Global Emissions Trading Programs
The cap and trade system has been applied in many locations around the world with mixed results. The European Union implemented the first phase of its Emissions Trading Scheme (EU ETS) among 27 countries in 2005. The ultimate target of this program is a 20% reduction in emissions from 1990 levels by 2020 and 50% reduction by 2050. However, initial phases of the program did not achieve significant reductions and lacked control in distributing carbon allowances. Modifications for phase 2 and 3 aim to further reduce emissions and to manage auctioning of carbon allowances.
In the United States, emissions trading was utilized in the late 1980s to reduce impacts of acid rain. Emissions trading became law as part of the Clean Air Act of 1990. The Acid Rain Program has been effective in reducing the total amount of sulfur dioxide emissions to a 50% of 1980 levels by 2010. The current Regional Greenhouse Gas Initiative cap and trade program is effective in 10 states and allows some states to auction all of their emissions allowances. In the first 2 years with the auction program, six states raised $38.5 million and $106.5 million dollars. The states and electricity utilities intend to invest funds for energy efficiency and renewable energy technologies to further reduce fossil fuel-based emissions.
How China decides to structure its cap and distribute emissions allowances will be critical to achieve significant cuts in emissions and to promote investments in efficiency and renewable technologies. Regardless, China’s emissions trading system should be an important step toward reducing global carbon emissions and increasing investment in renewable technologies.