China Braces for a Carbon Market

Last week, China’s National Development and Reform Commission reportedly directed seven regions to set overall emissions control targets and submit proposals for how caps should be allocated. The directive, which encompasses the cities of Beijing, Chongqing, Shanghai, Shenzhen and Tianjin and the provinces of Guangdong and Hubei, aims to establish cap-and-trade pilot projects for the country’s carbon market, meant to be in place by 2015.

The Chinese government had signaled at the COP17 climate negotiations in South Africa last December that it could adopt a more ambitious emissions reduction policy by 2015 and 2020. As part of the Copenhagen Accord, it had already committed to reducing carbon emissions intensity by 40-45 percent between 2005 and 2020.

That (albeit non-binding) commitment is reflected in the nation’s 2011-2015 five-year plan, which sets a 16-17 percent reduction target for carbon intensity.

(Related: “In China’s Icy North, Outfitting Buildings to Save Energy“)

China has never committed globally to actions that were not already a part of its ongoing domestic policies. The carbon intensity targets pledged under the Copenhagen Accord were decided internally way before Prime Minister Wen Jiabao closed a deal with the United States and other countries in Copenhagen in 2009. Now, China is poised to implement a new stage of its emissions reduction policies with fixed emissions caps.

Chinese leaders are apparently more willing to sign multilateral agreements, provided they are not a constraint on domestic policies. The way to do that is to use the Chinese planning structure to their advantage. By formulating the future stages of their policies ahead of the international agenda of negotiations, especially in the environmental realm, Chinese leaders can shift from a veto position towards a cooperative one, while maintaining complete sovereignty over domestic decision-making.

China has plenty of reasons of its own to reduce pollution, resource use and greenhouse gas emissions. It needs no outside push. The impact of land, air and water pollution on public health and well-being justifies the adoption of a more ambitious environment and climate policy. The major problem is, and will continue to be, how to balance the goals of cutting pollution and boosting efficiency with economic growth.

Carbon intensity targets pose no constraints at all on growth. Emissions can still increase while intensity decreases. China is implementing the world’s most ambitious renewable energy program, with very aggressive targets. Although solar and wind power generation are growing at staggering rates, the use of fossil fuels, particularly coal, have also increased.

(Related Interactive: The Global Electricity Mix)

This means that while China’s green energy sector is becoming very significant, its grey energy sector remains an enormous one and keeps growing, though at falling rates. The difference is that in the new Chinese policy guidelines, the gray energy sector comes with a negative sign for growth, and the green energy sector comes with a positive one. Each new plan aims at further reducing the gray sector, and increasing the green one.

The caveat is, again, the scale here. Even with downward movement at each new five-year plan, the Chinese gray economy will remain huge for decades to come. Carbon emissions associated with fossil fuel use will be on the rise well into the 2020s if not the 2030s.

Emissions caps are no guarantee that emissions will decrease faster. The experience with cap and trade systems shows they require additional measures for emissions to fall significantly. The good news is that China is also investing more in efficiency and quality improvement. Increasing the efficiency of clean energy along with energy-saving technologies can shift the economy toward more efficient patterns of energy and resource use, accelerating emissions reductions.

The best of all news is that China is abandoning the policy of growth without environmental constraints that led to the vast pollution and resource scarcity problems the country now faces. Chinese plans still aim at rates of growth far above the world average, but at the same time  they are adopting progressively greater constraints on the use of resources and fossil fuels.