'Cap-and-Trade' in China

Despite the refusal of conservatives in the United States Congress to believe in the harmful effects of rising greenhouse gases, the rest of the world seems to be trying to do something about it, particularly China, which has surpassed the US as the world’s biggest emitter of carbon dioxide gases.

The latest development came earlier this week when the Asian Development Bank announced it would provide a US$750,000 equivalent grant to help China establish a pilot provincial emissions trading system that could pave the way for a national scheme and lower greenhouse gas emissions in the country.

“Emissions trading encourages companies to increase energy efficiency and renewable energy supply, which would ultimately result in reduced greenhouse gas emissions. This pilot will provide valuable lessons for the design of a nationwide system to reduce the carbon intensity of the Chinese economy,” said Pradeep Perera, Senior Energy Specialist in ADB’s East Asia Department.

The United States turned away decisively from cap-and-trade, as the system is known, after November 2010 elections that brought a majority of Republicans to the House of Representatives, which must pass such legislation.

“Distrust of markets, overly complex regulatory features, scientific uncertainties and errors publicized in “Climate-gate” coupled with poor explanations about emissions trading enabled opponents to characterize cap-and-trade as “cap-and-tax” and to prefer “command-and-control” or no GHG regulation at all,” wrote Andy Van Horn of Van Horn Consulting. “The failure to understand offsets, misplaced concerns about “leakage,” the touting of auctions as a ubiquitous revenue source for government and for redress of inequities, combined with loudly-voiced bias against profits, which are essential to provide incentives for improved technologies, have obscured the reasons for global GHG reduction and confused the essential role of markets.”

The US, however, is crucial in any worldwide attempt to reduce greenhouse gases. The country is expected to remain the largest source of petroleum-related carbon dioxide emissions for many years, emitting 2.6 billion metric tons to China's 2.2 billion in 2035, according to the U.S. Energy Information Administration although China far out-produces the US in carbon admissions from coal – 55 percent of the world’s total.

China’s pilot project is to be established in the Tianjin municipal area, which could begin operations as early as 2013, according to a press release by the Asian Development Bank, which will help to design the platform, including the trading rules and regulatory framework, as well as support the commissioning of the trading platform.

“Cap-and-trade based emission trading allows market participants to turn emission savings into a tradable commodity and provides market-based incentives for industries to reduce their use of carbon-emitting fossil fuels,” the bank said. “It is economically more efficient than a carbon tax, as the carbon price is determined by the market and intended emission reductions are stipulated by the market regulator. Europe has a well-developed cap-and-trade based ETS, which will provide useful lessons for the design of the Tianjin ETS.”

Under China’s current five-year national development plan to 2015, it has set significant carbon and energy intensity reduction targets and is looking at developing market platforms that can provide companies with economic incentives to cut emissions. The government has also earmarked similar pilot emission trading schemes for development in Beijing, Shanghai, Chongqing municipalities, and in Guangdong and Hubei provinces.

ADB’s assistance will include a $200,000 grant from its Technical Assistance Special Fund, as well as a $550,000 grant from the Climate Change Fund. The Fund, established by ADB in 2008, aims to stimulate investments in developing member countries which address the causes and consequences of climate change.