China Cannot Lose the Initiative in Carbon Trade

On July 21, 2009, a forum on low-carbon enterprise innovation was sponsored held by the World Wildlife Fund (WWF) and the China Entrepreneur Club (CEC). Officials from the WWF stated that China should launch a platform for carbon trading to achieve a low-cost and highly efficient means of reducing greenhouse gas via economic means.

At present, the major prevention and control measure for air pollution in China is state-driven energy conservation and emissions reduction. During the 11th five-year plan, GDP energy consumption per unit is set to reduce by 20%, which is the equivalent of reducing carbon dioxide emissions by 1.5 billion tons by 2010. However, can energy conservation and emissions reduction initiatives alone curb the emission of greenhouse gases? The experiences of the US in the 1970s and 1980s provide us with the best answer. 

In the 1970s, the American government was resolute in curbing air pollution, but the results turned out to fall short of expectations. The cost-effectiveness was not worthwhile and the negative economic consequences were underestimated. In the 1980s, the Reagan Administration applied market mechanisms to pollution control in a reversal of the blind administrative control that was adopted in the 1970s. In 1979, the policy of Bubbles was launched, allowing adjustments between the discharge amount of exit in companies provided that a certain amount was exceeded overall. This was a reversal of the directive control imposed by the 1970 Air Clean Act in which enterprises had to adopt prescriptive processing technologies for each of their exits. This policy achieved noticeable results. Later on, internal reduction expanded to reduction between enterprises, and became the rudiment of the pollution discharge trade systems established in the US.

The idea of applying market mechanisms to solve environmental problems was also reflected in the Montreal Convention. The US also insisted that it was written into the Kyoto Protocol. The Protocol stipulates that three market mechanisms, namely (IET), (JI) and (CDM), can be used to promote the global flow of capital and technology so as to reduce emissions of greenhouse gases. This established the present framework for global carbon trading.

The interesting thing is that the key advocate of this, the United States, eventually quit the Kyoto Protocol; while the European Union, who originally had huge doubts about the role of market mechanisms, has become of the protagonists of the climate framework, which includes emission trade, and has achieved the transition to a high-earnings low-carbon model. With this, Europe has seized the initiative in emissions reduction.

However, 8 years later, the United States, facing economic slowdown, structural transformation and the challenge of rebuilding national competitiveness, has been forced to advocate the low-carbon economy, and is seeking to take the lead in global climate negotiations. To fulfill its goal, the trading of carbon emissions has become its key means.

China has now replaced the United States to become the world’s largest carbon emitter. Emissions goals cannot be achieved by relying on administrative orders alone. The 11th five-year plan put forward a reduction of 20% in energy consumption per unit GDP. However, judging from the present situation, GDP energy-consumption in 2006 and 2007 dropped by only 1.79% and 3.66% respectively, both falling short of the projected 4%. Since the Protocol came into force in 2005, China has already become the largest export country in the Clean Development Mechanism (CDM). However, since China does not have the pricing right in the amount of carbon emissions reduction, it is subject to fluctuation in the international market. One of the important reasons for this is the lack of a platform for carbon trade. The effective management and utilization of China’s carbon assets is a long term issue.

The advantage of carbon trading is that it solves the above issues. It is true that establishing a transaction platform for carbon dioxide means a shift from the mode of intensity control that is being employed at present, to overall control. Only when the total amount is fixed can the targets be distributed to each reduction unit for trading. But this is where the biggest problem lies.

It may be difficult for China, a developing country, to make any commitment to emission reductions at present. But from a long-term perspective, under the condition that the CDM mechanism has already become mature enough, the Indian modal can be adopted, wherein the CDM emissions reduction generated from bilateral projects can be traded as a commodity on the stock exchange. This can at least contribute to the formation of a location to discover prices. (Source: Beijing News)