Xi Jinping Is Set for a Big Gamble With China’s Carbon Trading Market

Source: By CHRIS BUCKLEY, New York Times • Posted: Monday, June 26, 2017

The Wujing Coal-Electricity Power Station on the Huangpu River in Shanghai. China’s cap-and-trade carbon emissions market will most likely start with three industries: coal-fired power plants, cement and aluminum. Johannes Eisele/Agence France-Presse — Getty Images

BEIJING — As other countries look to China to take the lead in fighting global warming after President Trump’s rejection of the Paris climate agreement, President Xi Jinping is pushing ahead with an ambitious plan to build the world’s largest market for carbon emissions permits.

The start of a national carbon trading market in China by late this year has been years in the making, but is now shaping up as Mr. Xi’s big policy retort to Mr. Trump’s decision to quit the Paris accord. The Chinese government said in a greenhouse gas policy guide released on Wednesday that the 2017 start was on track.

“Carbon trading on a national scale will send a signal to the world that China is serious about this,” said Wang Yi, a professor at the Chinese Academy of Sciences in Beijing who also belongs to the national legislature and advises the government on climate policy.

But this is a high-visibility, high-stakes gamble for Mr. Xi. He seems eager to take the initiative from the United States on trade, multilateral cooperation and climate change. His record on the environment and market reforms, though, is mixed, and China’s carbon trading plan is not a sure bet to succeed.

Europe and California already use this cap-and-trade approach, which sets a ceiling for greenhouse-gas emissions and allows businesses to buy and sell emissions permits in the hope of unleashing market competition to save energy and embrace clean technology. But no one has tried this on the scale the government envisions for China, the world’s leading source of carbon emissions.

Making the trade run smoothly could take years and test Mr. Xi’s vows to let markets expand and to curtail polluting industries. Major setbacks in the nascent market could embarrass China and undermine global support for using cap-and-trademeasures to reduce the greenhouse gases that are causing warming.

Mr. Trump’s renunciation of the Paris agreement could also drag on China’s expansion of emissions trading by making powerful companies and industry associations more reluctant to accept pollution cuts, Mr. Wang said.

“It’s a really complicated task,” he said. “That’s precisely why China must work on this in a steady way and mustn’t fail. If China’s carbon market fails, that will be a big blow not just to China but also to global carbon markets.”

The idea behind cap and trade is that companies that cut pollution are rewarded, while laggards pay a higher price. The government sets a ceiling on the amount of pollution allowed and divides that into emissions permits issued or sold to businesses. Participating factories, power plants and other enterprises can use their permits to discharge pollution; cut pollution and sell or save leftover permits; or buy more permits, often at punishing prices, if they use up their allotment.

Governments can over time lower the allowed emissions, making permits scarcer and magnifying price pressures on companies to cut pollution.

A construction worker at a building site in Wuhan, Hubei Province. The steel and construction materials industries were initially to be part of the cap-and-trade market, but were dropped because of a lack of reliable information. Kevin Frayer/Getty Images

“Every ton of emissions that’s going up the stack becomes potentially money lost,” said Dan J. Dudek, vice president for Asia of the Environmental Defense Fund, who has advised the Chinese government on its market. “It changes people’s minds about what was once fundamentally free.”

Before Mr. Dudek began working with China, he spent decades advising American politicians on using cap and trade to limit pollution, among them President George H. W. Bush, who used it to reduce the sulfur dioxide and nitrous oxide causing the acid rain that was harming forests.

But creating a government-mandated market has rarely been easy. Even mature economies have encountered problems in setting the rules for greenhouse gas markets. Chinese policy makers have studied Europe, as well as California, which started its emissions trading program in 2013.

Moreover, China has a huge industrial sector dominated by state conglomerates that can outgun regulators and ignore laws. Officials habitually meddle in markets. Local protectionism often stymies domestic competition, and pollution and energy data can be unreliable or outright fake.

“One of the problems they have had is getting realistic numbers,” said Deborah M. Lehr, a senior fellow at the Paulson Institute who has advised Chinese officials on climate-friendly financial policies. “To move to emissions trading, you need to have realistic numbers on how to start to price these emissions.”

If China gets past these problems, it will create the world’s biggest emissions market, overshadowing the European Union’s, and that could deepen China’s influence over developing new energy technology, Chinese policy advisers said.

“A successful start of a carbon market will greatly enhance China’s international standing in responding to climate change,” said Zhang Xiliang, a professor at Tsinghua University in Beijing who is advising the government on the market.

For now, Chinese officials are planning a relatively modest start and have retreated from their initially high ambitions.

After 2015, when Mr. Xi announced a national emissions trading plan as part of a formal pledge with the Obama administration to support a new climate agreement, policy makers in Beijing assembled plans for a market that would at first cover eight sectors, including steel, petrochemicals and construction materials.

But several months ago, the National Development and Reform Commission, the government agency preparing for the market, decided that it still lacked reliable information for many industries, according to experts involved in the planning.

The commission abruptly reduced the number of industries most likely to join at the start to just three: coal-fired power plants, cement and aluminum, according to experts and preparatory remarks from local governments. These industries have relatively simply production processes, making it easier to collect data. Aviation may also be included.

Heavy smog over Beijing International Airport in December. The aviation industry may also be included in the carbon-trading market. Andy Wong/Associated Press

“It’s a good idea to start with a narrow range of sectors, even if that wasn’t the original plan,” said Stian Reklev, a Beijing-based co-founder of Carbon Pulse, which provides information on greenhouse gas markets and climate change policy.

“It’s still going to be a massive challenge to make it work,” he said. “Anyone who thinks that the Chinese scheme will be effective in making big cuts in emissions from the start is going to be disappointed.”

Still, China is by far the world’s leading carbon dioxide emitter — releasing about 10.4 billion metric tons of the gas from factories and other human sources in 2015. And even in its scaled-back form, the fledgling market will cover roughly half of those emissions, Mr. Dudek said.

A basic challenge will be persuading thousands of Chinese companies to put their trust and capital in a limited market for carbon dioxide, which most have discharged without weighing the environmental cost.

Since 2013, China has run seven pilot carbon-trading programs, including in Beijing, Shanghai and the central province of Hubei. (Fujian Province on the east coast announced an eighth last year.)

Some observers said that even with this trial run, China’s lax statistics and enforcement of rules could hobble the national market. But others said the trade itself would amplify pressure for reliable numbers.

“You start to create vested interests in local government, in industry associations and in other parts of the private sector for more accurate data,” said Huw Slater, research and projects manager for China Carbon Forum, a group in Beijing that monitors emissions trading. “In China, you can’t really wait until you’ve got perfect data, because it will never happen.”

Even now, though, many company managers outside the pilot programs have little idea how the market will work, and could bridle at the paperwork and inspections used to monitor emissions, said Wang Ke, a professor of environmental economics at Renmin University of China in Beijing, who has been advising officials.

After the national market officially opens, it will be more a test exercise until around 2020, while officials and companies work out how to allocate permits and regulate the market. Companies are likely to receive generous initial allocations of permits, meaning that they will have to buy or bid for only a fraction of the allowances they need to emit. Market purchases will expand only gradually.

Several experts advising the Chinese government said that officials have resisted proposing a carbon tax in the face of public resentment over current tax burdens. Last year, China’s legislature authorized a new environmental tax that will start from 2018, but policy makers resisted including the explicit authority for a carbon tax.

“The realities of the political process are that a carbon tax is unlikely in the short term,” Mr. Wang said. “Politically, this is more difficult than launching the carbon market.”