Sweetening the Dragon's Breath

CEF Director Jennifer Turner quoted in Nature Climate Change (NCC)

Apr 30, 2012

About a decade ago, after more
than 20 years of economic reform,
China had three provinces with a
gross domestic product (GDP) of more
than US$100 billion, which is roughly the
current GDP of Bangladesh or Vietnam.
By 2009, the vast majority of China’s
22 provinces had joined this club.
By 2020, under conservative
assumptions, six will have economies of
US$1 trillion. In other words, each will
have economies at least as big as Mexico’s
is today. 2020 is also the deadline by which
China intends to cut its carbon-emissions
intensity — the carbon dioxide emitted for
each dollar of GDP — to 40–45% below its
2005 levels (Fig.1).
How that will happen is unclear.

In January, the possibility of a nationwide
carbon tax generated headlines, but it failed
to hit the radar at this spring’s meeting of
the National People’s Congress. Nonetheless,
China’s voluntary commitment to carbon intensity
cuts is earnest enough to have
trickled into the provincial targets laid out
in the 11th and 12th five-year guidelines
(formerly termed five-year plans).
The National Development and Reform
Commission (NDRC) in Beijing has given
China’s provinces and municipal cities
rigorous carbon-intensity targets to meet
by 2015 (Fig. 2). Guangdong province, for
example, facing the most stringent target,
has to reduce its carbon intensity by a
whopping 19.5% from the 2010 level. To
meet these targets, a number of schemes are
in the works.
In one scheme, eight cities and five
provinces will test the options for low-carbon
development. In another set of pilots, five
cities and two provinces (often those also
running the low-carbon development trials)
have been given a free hand by the NDRC
to design carbon emissions trading systems,
which will be locally introduced once the
NDRC has approved them in 2013 (ref.3).
these carbon-trading pilots will serve as
experiments to inform a system for the whole
country after 2015. Officials involved in the
best of the seven schemes can look forward
to glory and political favour.

So how are they doing? On the whole,
information is fuzzy. In each location, three
bodies have been brought together to work
up an emissions trading plan. They are
the regional office of the NDRC, a nearby
university (sometimes represented by just
one professor) and a local (and often newly
formed) exchange — which in China tends
to be more akin to a brokerage than to a
complex stock exchange.
At present, only wealthy Guangdong
province has put forward a cap as the basis
of its emissions trading. It is hard to see how
the others will manage without, but perhaps
Guangdong’s progress is eased by the fact that
central planners in Beijing ‘merely’ expect 8%
economic growth from it, a much lower target
than almost everywhere else in the country.
“Guangdong has been concentrating on
greenhouse-gas accounting for three to five
years,” says Haibing Ma, the Worldwatch
Institute’s China Program Manager. “It’s
way ahead of other provinces and cities. I
don’t see how the others can build up such
capacity in such a short time.” But even in
Guangdong the picture is vague. Hu Tao,
the Senior Environmental Economist of the
Policy Research Centre in China’s Ministry
of Environmental Protection, visited
Guangdong in February and found that his
own bureau’s regional representatives didn’t
know what the emissions-trading pilot
would entail.

There are informed rumours about the
other pilots from advisors to the regional
and municipal governments. For example,
Guangdong and Hubei (the other province
drawing up an emissions-trading pilot)
intend to link up at some stage, but they are
at present working independently. Techsavvy
Shenzhen, in Guangdong province,
is apparently mulling over some kind of
coordination with the Hong Kong markets
(although how it might do this is confusing,
because Hong Kong itself is not running a
pilot). Chongqing, a city in central China,
is said to be concentrating on the design
of an onset protocol for agriculture and
forestry"— a bit like “picking out the car’s
paint job before designing the chassis”
according to one advisor.
Invariably, observers are sceptical.
Although the broad pattern of introducing
economic empiricism in a few places
before top-down orders for all is a routine
policy path in China, when it comes to
carbon trading, the sticks and carrots and
means are missing. A flourishing carbon
market requires solid legal capacity and
a liberalized market infrastructure"—
two things that China lacks. There’s
very little, if any, trading of complex
financial products in China, points out
Jeff Swartz, International Policy Director
of the International Emissions Trading
Association. Moreover, the pilot carbon trading
schemes are insistently ‘voluntary’
and about ‘carbon intensity’ as opposed
to ‘carbon emissions’. So why should
companies bother?
China has an unhappy history with
emissions trading. Back in the 1980s,
Shanghai and Jiangsu province had a
go, unsuccessfully, at controlling sewage
through a trading scheme. More recently
and instructively, a small scale, voluntary
carbon emissions trading scheme failed to
catch on soon after it was set up in Beijing
about three years ago 4,5, and seven regions
started sulfur dioxide emissions trading
around 2003."A 2011 study of the city
of Taiyuan’s sulphur dioxide programme
concluded that it “does not seem to be
functioning anything like a theoretically
ideal model” and based on the findings
“it appears that carbon trading may not
necessarily be suitable for China to achieve
ambitious carbon reductions at this stage.”
the problem for sulfur dioxide, says
Hu, has been that “trading depends on
credibility. If we can’t believe companies
about the contents of powdered milk, how
will we believe them about carbon?”
Local governments’ long history of
fudging the numbers might make it
impossible for the NDRC in Beijing to learn
from the carbon-trading pilots. Ming Meng

and Dongxiao Niu, of North China Electric
Power University, who have published
several papers measuring and projecting
China’s carbon emissions, have recently
turned their attention to the incentives
bearing down on regional governments.
“China’s provincial protectionism has
powerful reasons and means to obstruct
the implementation of carbon dioxide control
policy,” Meng explains. “Economic
growth has always been the most important
indicator to assess provincial government
records, and carbon dioxide emissions
control often brings an economic cost.” In
China’s case, elective emissions control
means exports will take a hit: exported
products account for 30–35% of its carbon
dioxide emissions. And the likelihood of
more expensive Chinese imports is one
reason why foreigners should care about
Beijing’s carbon-cutting preferences.
Would a tax be a better option? It would
certainly be simpler to set up. And a version
of one already exists on cars — those with

big engines have a fatter sales tax slapped on
them, says Jennifer Turner, Director of the
China Environment Forum at the Woodrow
Wilson Center in Washington DC. At
present, different arms of government in
Beijing are pushing different kinds of tax,
according to Hu. The NDRC — if it has to
go down the path of a tax rather than cap
and trade — wants a straight carbon tax.
The Ministry of Environmental Protection
prefers that a tax include other pollutants
such as sulfur dioxide and nitrogen oxides.
The Ministry of Finance is happy with either
of these ideas. Meanwhile, the Ministry of
Land and Resources would rather a tax be
paid on resources such as coal at the point of
extraction, rather than combustion.
So, although a tax may be economically
simpler, the politics look turgid. But no
matter the details and the difficulties, China
should be recognized for its ambition
to clean up its economy. And even if, as
anticipated, the pilot carbon-trading schemes
fall short of success by many measures, they

achieve one thing of value: they will have
accustomed a long list of important legislators
and businessmen to the idea that carbon
is money. And that educational premise is
the first step to getting anything done on
emissions reduction.

References
1. Zhiming, Z. Inside the Growth Engine: A Guide to China’s Regions, Provinces and Cities (HSBC Global Research, 2010); available via http://go.nature.com/Tj2K8W.
2. Lin, A. & Fuqiang, Y. China’s carbon tax is very real. China
Dialogue (27 January 2012); available via http://go.nature.com/dt8Pyt.
3. Lin, A. & Fuqiang, Y. Design tips for a carbon market. China Dialogue (8 March 2012); available via http://go.nature.com/
gTKzHH.
4. Mao, Z. Carbon Trading in China: A China Environmental Health Project Research Brief (China Environment Forum, Woodrow Wilson Center, 2009); available via http://go.nature.com/G9USY7.
5. Hille, K. Bluenext in China carbon venture. Financial Times (19
June 2009); available via http://go.nature.com/jbVIXN.6. Lu, Z. Sustain. Account. Manage. Policy J. 2, 27–44 (2011).
7. Meng, M., Niu, D. & Shang, W. Energ. Policy 42, 468–475 (2012).
Disclaimer: The opinions expressed by Hu Tao are his own, and not those of the Chinese government.

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