IETA and CCF Event – The new experimental emissions trading Schemes in China

From Left: Mr. Dan Barry (BP), Professor Zou Ji (National Center for Climate Strategy and International Cooperation – NDRC), Mr. Henry Derwent (IETA), Dr. Anton Smitsendonk (CCF Chairman) (Moderator), Dr. Yang Fuqiang (Energy and Environment – NRDC], Mr. Hugh Kater (China Carbon Forum).

26^th April 2012

Following participation by China Carbon Board members and guests in a highly interesting two-day workshop arranged by IETA (International Emissions Trading Association) in Beijing, China Carbon Forum’s Chairman Dr. Anton Smitsendonk invited IETA’s President Henry Derwent and China Carbon relations from the public and the private sectors to a friendly gathering and light buffet in the “Serene Courtyard” residence.

The fact that it was probably also Henry Derwent’s last international mission in his present function added a personal farewell note to the event.

Around 30 representatives of government, NGOs, Industry and media joined. The discussion, like IETA’s preceding workshop, turned largely on China’s recently announced plans to launch pilot emissions trading schemes (ETSs) in five Chinese cities and two of its provinces. True to the prudent Chinese custom of working from factual experience, this could lead to a later nationwide market based emissions scheme and cap on emissions.

The bold initiative led to lively discussions in which i.a. the following points were raised:

• China’s 12^th Five Year Plan officially had already launched the development of China’s pilot ETSs across 5 cities and 2 provinces in a global context where many developed nations have struggled to establish such schemes.
• The primary aim of market based instruments is clearly to reduce carbon emissions. China needs to overcome a number of challenges before emissions trading could lead to effective emissions reductions – challenges which occur under the establishment of any emissions scheme. Seven were mentioned and discussed in particular:

1. Auctioning of trading units (emissions allowances) at a realistic level would be the best approach however difficult to implement. It is not yet detailed what role auctioning will get in the pilot plans or later.
2. MRV of CO₂ remains a challenge. Since CO₂ has no smell, or physical appearance, it makes it difficult to monitor and measure accurately. Different versions of inventory and accounting methodology would certainly be addressed. Yet it would be interesting to put MRV to the test through a free market.
3. Effective sanctions would have to be invented, and that might not be institutionally easy. This aspect would need further efforts to bring China toward a “governed by law” model. Some initial sanctions have been around for years like using blacklisting. But something more sophisticated and quantitative will have to be explored.
4. The timeframe set for the pilot ETSs to prepare the market (two years) may be too short to fully test the resilience of the schemes. For example, in the European Union’s (EU) ETS, floors in the registry system were not found until nearly three years after the scheme was established.
5. State companies’ price fixing on energy (without facility to pass on increased costs) make it difficult for renewables, carbon capture and storage technologies etc. to compete. Neither consumers nor producers could properly react to price signals for their investments or long term purchases.
6. Interaction of the pilot scheme with current participation in the clean development mechanism (CDM) would have to be clarified. There is a risk that if the pilots are not adequately designed and regulated, organisations may continue to benefit from project based activities, such as CDM. This would lead to double counting outcomes whereby organisations benefit from certified emissions reductions (CERs) revenues under the CDM, and also from being below the pilot ETS cap.
7. Increasing market liquidity would need to occur over time. However, even in the case of China’s stock exchanges, which have been operating for 30 years, equity and transparency issues remain to be addressed. China could learn from other schemes around the world in relation to all the challenges raised above and IETA could be helpful.

• If the aim of the pilots should be on how well industry can prepare itself for a nationwide scheme, a link with the ability to reduce emissions will have to be found. Perhaps we shall see reductions taking place on “low-hanging fruit” over the course of the pilot schemes. During the UK’s pilot ETS no coal fired power stations were knocked down or large investments made in renewables because stakeholders knew the scheme was going to be replaced. The government could consider providing extra incentives for companies to participate and prepare effectively through the schemes yet these incentives would need to be designed so they did not promote energy consumption.

• In this scheme municipal and provincial governments are largely left to themselves to establish the pilot ETSs. This will bring a wider range of practical experience. A few remarks were however heard whether some guidance on how to get to a national market could be built into the scheme.

• When might a nationwide scheme be expected? It seemed that expectations focused around the year 2020. By then, the markets may be mature enough to put policy instruments in place. The question whether a national cap for China had any relation to the international negotiations got some attention.

• A carbon tax was seen as having some capacity to play a role in abatement cost control in the shorter term. Government might issue a carbon tax with a progressive carbon price in order to incentivise people and organisations to support the carbon market.

• While for now developing China’s domestic market would be the focus, some interest was shown in opportunities to eventually link Chinese and international carbon markets. Experts are now exploring whether the EU ETS is the scheme nations should link to in the future. International linking opportunities may materialise this decade.

• In making choices between regional, municipal, or a national market instruments minimizing transaction costs might be one of the guiding elements.

• China is in a fortunate position to be able to benefit from other countries experiences to-date. Speakers welcomed assistance from IETA to help China learn from other schemes around the world, and to implement the pilot ETSs and future schemes efficiently and effectively.

Guests included:

Professor Zou Ji, Deputy Director, National Center for Climate Strategy and International Cooperation of China, NDRC.

Mr. Henry Derwent, President and CEO, IETA.

Dr. Yang Fuqiang, Senior Advisor on Climate, Energy and Environment, NRDC China Program.