Carbon Trading with Chinese Characteristics

To control greenhouse gases the Chinese government is experimenting with pilot programs in seven cities and regions that use markets

By Mark Nicholls

NEW CITY: On June 17, companies in Shenzhen will have to meet greenhouse gas emission targets as part of a new cap and trade market experiment. Image: Courtesy of Discover Shenzhen

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On June 18 China?s pioneering city of Shenzhen is set to notch up another first. From that day 635 companies in the Shenzhen Special Economic Zone?which in 1979 became the vanguard for China?s capitalist revolution?will start using the markets to help meet greenhouse gas emissions targets.

This year, alongside the cities of Beijing, Shanghai, Tianjin and Chongqing as well as the regions of Guangdong and Hubei, Shenzhen is imposing greenhouse gas targets on hundreds of companies, ranging from power plants to airport operators. The goal is to develop a national carbon market over the next decade that could help put the brakes on the world?s largest carbon dioxide emitter.

?China has internationally pledged 2020 climate targets,? observes Chai Hongliang, an analyst at Thomson Reuters Point Carbon, an Oslo-based information-provider specializing in carbon markets. He is referring to a commitment first made by China ahead of the 2009 Copenhagen climate talks to reduce its economy?s overall carbon emissions per unit of GDP to 40 to 45 percent below 2005 levels by 2020. ?It has two ways to reach the target: shut down factories in the last months of 2020 or use more market-based approaches like emissions trading,? Chai adds.

As with emission-trading programs elsewhere, polluters in China?s pilots have two options: First, they can meet their targets by reducing their own emissions?by investing in energy efficiency, say, or curbing production. Alternatively, they can buy carbon allowances or credits from companies that have spare allowances or from projects elsewhere in China.

Shenzhen faces the toughest target. The companies in its pilot emitted the equivalent of 31 million metric tons (Mt) of CO2 in 2010. They will be allocated around 100 Mt of allowances for the duration of the three-year trial, although expected economic growth means they will have to reduce their carbon intensity by an estimated 30 percent by 2015 compared with 2010.

Balancing the need for economic growth with carbon control is a challenge. Emissions in China are expected to rise for years, given the importance China?s political elite continue to place on economic growth. Some observers question how much pressure China?s planners are prepared to put on its big emitters. The pilots set emission limits from January 2013 through the end of 2015. ?I think the emissions caps will be relatively lenient,? Chai says.

Certainly the regulators will be eager to avoid any ?carbon leakage??that is, driving industry out of their jurisdictions through imposing too stringent targets ahead of any national program. But at this point Chai can only speculate about their stringency. Limited information is available about participating companies, their historical emissions?and even the rules under which the pilots will operate. And part of the reason is that some of these data do not exist.

The problem with data
To run effectively markets rely on an unimpeded flow of information, clear rules and rigorous oversight. China could both benefit from the lessons of earlier efforts, such as Europe?s flagship carbon market?the world?s largest, known as the European Union Emissions Trading System, or ETS. It is under fire from some environmentalists because of its relatively lax targets and low carbon prices, along with its vulnerability to fraud and abuse.

For the regulators drawing up targets, ?there are existing processes and mechanisms on energy consumption which could be drawn on, as well as local exercises in creating GHG [greenhouse gas] inventories,? says Lina Li, a Beijing-based carbon markets expert at Netherlands-based consultancy Ecofys. Her firm has advised local regulators and international donors on creating carbon market regulations and infrastructure in China. ?But there are still challenges regarding emissions data at the company level.?

Source: http://www.scientificamerican.com/article.cfm?id=carbon-trading-experiments-in-china

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