By Ed King
A nationwide Chinese emissions trading scheme is likely to be operational by 2020, but faces considerable challenges ahead of its launch, a World Bank carbon finance expert has told RTCC.
Last week the mayor of Shenzhen economic zone revealed it would be the first of seven pilot projects to come online in June.
The remaining six, which include Shanghai and Beijing, are likely to be rolled out through 2013 and 2014, with a view to a final assessment on how they have performed in 2016.
The worldâs largest emitter plans to reduce the CO2 intensity of its Gross Domestic Product by 40â45% from its 2005 level by 2020 â an ambitious target when you consider emissions doubled in the last decade, reaching seven billion tons of CO2 in 2010.
To put it in another context, those seven pilots alone will make it the largest such market outside Europe.
âI do hope that by 2020 a functioning emissions trading scheme (ETS) can be put in place â this will give them eight years to do testing, build infrastructure and eventually make it work – thatâs my personal assessment,â the World Bankâs Xueman Wang told RTCC.
2020 is a significant year as it is when a new UN binding emissions deal is expected to come into force. For it to have any environmental integrity it will need to ensure China makes substantial commitments to cut its carbon footprint.
Industries falling under the ETS pilots include power generators and producers of cement, steel and petroleum.
Shenzhen has fewer âheavy emittersâ, so the sectors covered have been expanded to ensure that 50% of total emissions are covered.
The relatively short timescale for the worldâs most populous country to construct and implement a complex trading scheme poses a number of problems. Data quality is top of the list â and is an area Wang says Chinaâs policymakers know needs to be improved. Cap and trade doesn’t work if you don’t know what you’re capping.
New measuring, reporting and verification (MRV) guidelines have been introduced, but given the potentially huge money transfers involved, proving these work will underpin trust in the system.
âThe seven pilots will be a good example of how well this can be done within the framework,â she says. âIt needs to be done before anything else â the establishment of infrastructure will be essential before any launchâ.
New legislation which is under construction will complement these guidelines. Wang stresses that a regulatory system is vital to ensure companies will hand over confidential data.
Command and control
A critical goal for the pilots will be integrating electricity producers into the system. Fumes from coal generators are responsible for much of the choking air pollution that afflicts Chinaâs cities, and account for around 40% of Chinese emissions.
Their âcommand and controlâ operating structures will need to be relaxed in order for trading to work efficiently across the whole country, allowing individual power stations the flexibility to experiment with different technologies and choose how and when they trade within the ETS.
Itâs a significant step for Chinaâs leaders to take, with Wang suggesting that steps to loosen the stateâs grip on the electricity sector can perhaps only occur if they are linked to a âmuch bigger reformâ.
Equally, Chinaâs government will need to fundamentally reassess its economic model, which is based so heavily on resources that could be penalised under the trading scheme.
âPursuing low carbon development and green growth is an essential part of Chinaâs economic restructuring and growth pattern transformation,â Wang says.
âAn ETS can play an important role in pushing through such a transformation.â
Ironically, the tight central control Beijing maintains over its citizens and economy could ensure ETS success where others have failed or stagnated.
Qiang Wang from the Chinese Academy of Sciences points out that the structure of government means programmes agreed at a high level can be rolled out faster than in democracies.
âStable policies are crucial to the success of emissions trading, which â unlike most markets â grows from the top down,â he says.
But in contrast to many of the countryâs vast infrastructure projects, and perhaps in recognition of the mixed record emission trading has so far, China has taken its time over plans for its own market.
National Development and Reform Commission (NDRC) deputy director Wang Shu says it has drawn on its experiences with the United Nationsâ Clean Development Mechanism (CDM), together with the Europeâs ETS, which has been operational since 2005.
Both markets have struggled from an oversupply of credits, driving prices down and reducing their effectiveness.
âTo incorporate lessons learnt from these markets, we have included more elements such as a price containment mechanism and participation of financial institutions in our MRP [Market readiness proposal],â he writes in a blog for the World Bank.
Some observers have cast doubt over the effectiveness of pilot schemes, arguing that companies wishing to remain competitive could leave the seven selected areas, but application levels indicate these fears may be misplaced.
Greater concerns may be how seriously participants take their involvement, and whether the authorities can ensure it remains relatively free from corruption â a problem new premier Li Keqiang recently warned is holding the countryâs development back.
Initial reports are positive, and the World Bankâs Wang says she is surprised at how enthusiastic businesses have been at getting to grips with the new regulations.
âThey are learning fast â they do have concerns about domestic and international competitiveness, especially those companies that are inside pilot areas,â she says.
âBut on the other hand the dynamic compared to other parts of the world is that people know that a carbon constrained world is here to stay, and itâs better to be prepared for that.â
VIDEO: China climate chief Li Junfeng