China’s carbon markets push: Huge potential, but daunting challenges

A barge carries coal down the Yangtze River. Coal fuels a large share of China’s energy supply. Flickr/Rose Robinson.China observers have rightfully called attention to the country’s new interest in market-based approaches to reducing the energy- and carbon-intensity of its economy. It is a major policy shift, and given that China is the world’s top carbon emitter, it has potentially huge implications for global efforts to slow climate change.

But can carbon trading succeed without a mature free-market economy? That is a key question raised in the report, China’s Carbon Emission Trading: An Overview of Current Development, by SEI’s Guoyi Han, Marie Olsson and Karl Hallding, and David Lunsford, founder of the Hong Kong-based consultancy Energy Environment Solutions. The report was released today in Brussels at a seminar with several Members of the European Parliament.

“If China’s carbon markets experiment succeeds, it could be decisive,” says Martin Ådahl, director of FORES, which co-sponsored the report. “Not only could it slow China’s rapid emissions growth, but it would be an important step towards global carbon pricing. A great deal is at stake.”

An ambitious experiment

Last November, the National Development and Reform Commission (NDRC) launched seven carbon trading pilots, in Beijing, Chongqing, Guangdong, Hubei, Shanghai, Shenzhen and Tianjin. The seven pilots will be the first true domestic carbon markets in the country, and their success or failure is likely to determine the future of Chinese carbon markets. Some of the pilot regions could start trading as early as 2013/2014 with the intention of establishing a national carbon trading system by 2015.

While this is a “sincere and ambitious” effort, the report’s authors find, the plans also “are extremely bold and face considerable difficulties”. Even after three decades of market-oriented reforms, China is still far from a true market economy, with heavy government control and intervention, significant state ownership of enterprises, tight price controls, widespread corruption, and a culture of distrust in business.

In addition, carbon trading in China is still in its infancy, with much experimentation but few results to date. By any real measure, there is no functional carbon market in China, aside from activities related to the Clean Development Mechanism (CDM).

An effort worth supporting

Despite these concerns, the authors find that China’s carbon trading experimentation should be viewed positively.

“Carbon markets are data-hungry and require robust legal oversight,” says Lunsford. “Thus it will take time for China to develop markets that make a significant impact on its emissions.  But the fact that China is now taking this step is quite encouraging, as it could support the eventual emergence of a new international climate change treaty and the expansion of carbon markets more broadly.”

Several crucial tasks lie ahead: emission targets, selection of the sectors to be covered, and the necessary legislation and regulations, plus accountability systems and effective bureaucracies to enforce them.

“This is a critical juncture to influence the future carbon market development in China,” says Han. “While China would no doubt benefit from the international lessons and experiences such as EU ETS, there should also be strong interest from the international community to support China in this endeavour.”

Read the report, China’s Carbon Emission Trading: An Overview of Current Development, or a policy brief summarising the findings.