Summary: In 2016, the Chinese government plans to launch a national market for carbon permit trading. In preparation for this national system, the government rolled out seven test markets, which saw varying degrees of compliance. Overall, there have been no reductions in carbon emissions. But, the system is not doomed. There are several reasons for this poor performance, and once the Chinese government recognizes them and implements a variety of solutions, there is no reason why a carbon emissions trading market cannot work in the world’s most populated country.
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By Caroline Casey
In August of this year, the Chinese government announced that it would roll out a national market for carbon permit trading. This trading scheme is meant to be a big step toward reaching its pledge to reduce the amount of carbon it emits per unit of GDP to 40-45% below 2005 levels by 2020. This market, which will start in 2016, will be the world’s largest emissions trading market, dwarfing the current European system. The EU Emissions Trading System (ETS) is the largest market in the world and was designed to eliminate nearly 3 billion tons of carbon dioxide emissions from major emitters, such as manufacturing and power generation plants. On the other hand, the Chinese market is meant to cover 700 million tons of emissions per year. In preparation for this national market, the government has set up seven test markets across the country. Unfortunately, while success levels varied among the pilots (five of the seven actually saw a high level of compliance), they have generally failed to reduce emissions. In order for the national system to efficiently fight climate change, there will need to be a few serious changes.
Additionally, there were consistent problems with a lack of transparency in the test markets. Some companies are unable to provide “robust” records of their past emissions, making it hard for regulators to decide what level of emissions to place the cap at. Moreover, regulators lack the tools necessary to verify estimates of emissions provided by companies, potentially leading to fraud. For the market to be effective at all, transparency of emissions data and traded allowances is imperative. This could be done by requiring neutral, third-party review of any data.Many of the problems that came with the experimental markets stemmed from a lack of experience with trading on this type of marketplace. One report stated that many firms struggled to understand how to trade permits, and as a result traded only a few each day. Many expect this problem to disappear as traders become more familiar with the process. Another solution is to allow both private and institutional investors to take part in carbon trading. Experienced investors would improve the quality of the trading, as well as increase competition, thereby increasing prices.
Furthermore, there have been instances of over-supply in these seven test markets: Guangdong added 8 million permits to its scheme after companies threatened to refuse to participate in the second phase of the program. This oversaturation of permits does not require or even encourage reductions in emissions. The first step to solving this problem is to get accurate data from all emitters to set a realistic cap on emissions. Then, the number of permits given will have to be ratcheted down in increments over time. Certainly, it might be a few years before emissions decrease. However, the extra time needed to collect all the relevant information, as well as the several years of combined smaller decreases, will lead to overall greater reductions and a generally more efficient system.
One general solution to the so-far problematic system has been to take the most effective characteristics from the seven test markets to create a “best practices” national market. For example, the Shenzhen market allows foreign investors to trade on the market in their own currency. This practice increases participation and competition, which Chinese regulators hope will drive up the price of carbon.
Lastly, the Chinese markets simply need more time. The government is currently working through trial and error with each of the phases in the test markets. The system is new, and is still more of an experiment than anything else. However, it has the potential to have a major influence on the global market and on mitigating climate change overallit just can’t do so overnight.
Caroline Casey is a third-year student at Vermont Law School. Her studies focus on water law and land use law and she hopes to use her J.D. to help save the planet. Before coming to law school, Caroline earned a B.A. in Environmental Studies from Villanova University. When not reading for class or cite checking for VJEL, Caroline likes to listen to public radio, cook, and ride her bike.
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