Carbon Markets

December 23, 2015

China’s Cap-and-Trade Decisions

By Joseph Nyangon
How China Can Shape the Future of Carbon Markets

About 75% of current electricity supply in China comes from thermal power generation, mostly coal-fired power plants. In the above February 17, 2015 photo, a man cycles past cooling towers of coal-fired power plants in Fuxin, a prefecture-level city in northwestern Liaoning province, China (AP Photo/Greg Baker).

In the lead-up to the 2015 Paris climate change conference, policymakers stressed the need for creation of integrated carbon markets and called for linking new climate financing mechanisms with the United Nations-organized Green Climate Fund (GCF) based in South Korea. Both the U.S. and China have committed to accelerating the transition to low-carbon development internationally. Through a $3 billion per year pledge to GCF by the U.S. and a new $3.1 billion climate finance guarantee by China to support other developing countries to combat climate change, the two countries have committed to enhance multilateral climate cooperation. [1]

Carbon markets have emerged as part of the solution to the problem of climate change. Examples of these markets include the EU Emissions Trading System (EU ETS), the Regional Greenhouse Gas Initiative (RGGI) in the U.S., and the Western Climate Initiative (a joint program of California and two Canadian provinces – British Colombia and Quebec). New cap-and-trade schemes for 2016 have been announced by South Korea, Switzerland, Kazakhstan, and China (which will test models with seven ETS pilots).

While carbon markets are being used more frequently as a policy option, the question remains if such markets will actually reduce emissions and make development more sustainable. A common worry is how cap-and-trade decisions would be balanced with those stemming from often regulated markets governing carbon-intensive sectors, especially energy commodity markets, which have a clear growth orientation.

On his historic state visit to the U.S. in September 2015, Chinese President Xi Jinping announced new and strengthened climate actions, including the establishment of a national cap-and-trade program for carbon dioxide (CO₂) emissions by 2017. [1] The declaration made in Washington D.C. in a joint meeting with President Barack Obama builds on the historic November 2014 U.S.-China joint announcement on climate change, enhances bilateral and multilateral climate cooperation and together, provided momentum for securing the Paris Agreement—a historic climate change policy architecture to cut greenhouse gas (GHG) emissions and ramp-up mitigation and adaptation worldwide. This is truly a bright spot for cap-and-trade systems, especially considering the potential implications for China’s price-controlled energy sector. The nation accounts for nearly 30% of global GHG emissions, placing it as the world’s biggest emitting nation, followed by the United States.

China’s market-based carbon pricing system will be the world’s largest, and will apply initially to power generation, iron and steel industries, chemical firms, building materials, cement and paper-making industries, and non-ferrous metals manufacturing. The electricity sector is particularly important because China’s energy-related CO₂emissions are expected to grow until 2030. [2] For this reason, the discussion here focuses on the energy sector and how China can balance its domestic commitments in the electricity industry and the proposed nationwide ETS market to advance emissions trading as the most efficient policy instrument to address GHG emissions, in lieu of command-and-control or carbon taxes measures. While important details remain to be worked out, including the level of the cap, accreditation and verification systems, allocation of allowances, registry and market oversight, and regulations on the use of carbon offsets, the key takeaway is that China has signalled its commitment to achieving its post-2020 intention to move toward a low-carbon and climate resilient economy.

Here are six critical ways China can shape the future of carbon governance through reforms of its energy sector and a balanced ETS market development:

1. Develop a priority dispatch policy for renewable energy generation
This tool would enable China to prioritize power generation from renewable sources in its power sector. It would also establish distribution and dispatching guidelines to accept electricity from the most efficient and lowest-polluting fossil fuel power generators first. China has committed to implementing a clean electricity dispatch system. The 2005 landmark Renewable Energy Law includes a provision for a priority “green dispatch” system in the power sector but its actual implementation has been difficult because of the current structure of the power system. This is particularly critical for China because even though it now leads in global wind and solar energy manufacturing, 75% of its current electricity supply comes from thermal power generation, mostly coal-fired power plants.

2. Ensure state-owned and private energy companies have equal rights and liabilities in the ETS
Most state-owned Chinese companies enjoy monopoly positions due to the current political system and state capitalism policy, which give them a dominant position in the energy and power sector. Success of a nationwide cap-and-trade policy will depend upon rules in which state-owned and private energy firms have equal responsibility to avoid carbon emissions. Such a responsibility would obviate fears that the state industry sector would have undue control of the energy market and the potential to manipulate electricity prices.

3. Ensure transparency in allocation of allowances and trading rules
For the success of a nationwide carbon market, China must encourage full participation of companies, especially energy and power firms, by addressing current concerns that ETS will increase their production costs or reduce profits. The experience of the EU ETS demonstrates that cap-and-trade as a policy instrument can fail if there is insufficient political will to limit the number of available allowances to energy-intensive production sectors.

4. Establish independent carbon market monitoring systems
The central government selected the National Development and Reform Commission (NDRC) and the Provincial Development and Reform Commissions (PDRCs) as the lead authorities responsible for managing its ETS pilots. Because energy and power sectors are controlled by the National Energy Administration (NEA), [3] a department affiliated with NDRC, establishing an independent carbon market monitoring body could help to promote the development of the ETS in China and diminish potential institutional imprinting challenges from the old system.

5. Increase the share of non-fossil energy sources and establish a carbon intensity cap
Economic restructuring to promote low-carbon development, promoting technology advancement and improving energy efficiency are essential strategies for mitigating GHG emissions. These strategies as well as implementing measurable targets for CO₂ intensity would help China to explicitly address climate protection concerns (e.g., increasing the share of non-fossil energy composition in the mix of primary energy sources, and creating carbon trading exchanges). In addition to improving energy efficiency and increasing renewable energy generation, establishing a carbon intensity cap would be an important step toward an eventual introduction of a nationwide ETS.

6. Establish inter-regional carbon trading
China’s twenty-three provinces differ with respect to economic strength, industrial composition and related energy demands, making implementation of a national carbon trading a daunting challenge. The initial pilot ETSs (begun in 2013) did not allow inter-regional carbon trading. At the national level, this would be critical to carbon governance in China and should be developed via a bottom-up approach to achieve numerous mandatory intensity and efficiency targets.

China has a unique opportunity to shape the future of carbon markets. Its pilot carbon trading experience, industrial structure, economic development and capacity to link its national ETS with other schemes give the country a distinguished advantage. A future well-linked Chinese national ETS with other schemes internationally will require harmonisation of rules, reliable emissions accounting, mutual acceptance of the scheme caps, and enforcement of trading regulations in all participating jurisdictions. Although China’s pilot ETSs are at a very early stage and assessing them in terms of impact on emissions reduction and regional integration of carbon markets would be immature, certain problems are apparent when one examines the potential of the carbon market. These issues concern transparency in allocation of allowances and the effectiveness of legal enforcement, lack of unified ETS framework at the inter-regional level, and incentive-inducing policy tools.

Final Remarks
China’s pledge to create the world’s largest market-based carbon pricing system is an exciting step and demonstration of its commitment to achieve a unified ETS market and to pursue a low carbon economy. Can China innovate on both economic and environmental fronts, bringing these key factors together to boost the next phase of climate-resiliency? Any change in the Chinese energy sector will surely have a global impact, and striking the right balance to realize just and sustainable solutions to the problems of climate change will place the country in a strong carbon leadership position.

Notes
[1] White House Joint Presidential Statement: https://www.whitehouse.gov/the-press-office/2015/09/25/us-china-joint-presidential-statement-climate-change
[2] The Chinese ETS Pilots: An IETA Analysis: https://www.ieta.org/assets/China-WG/ieta%20china%20pilots%20analysis%20feb%2026.pdf
[3] Chinese Government Releases Major Policy Guidance on Renewable Integration and Related Issues: https://www.raponline.org/featured-work/chinese-government-releases-major-policy-guidance-on-renewable-integration-and-related

December 16, 2015

Paris Agreement: A Landmark Climate Change Policy Architecture Reached

By Joseph Nyangon

“History is written by those who commit, not those who calculate,” declared François Hollande, France’s president, after all nations reached a new climate change agreement in Paris. The 21st UN climate conference opened in Paris on November 30, 2015 and ran over its original deadline, closing a day late on December 12. Unlike previous conferences the mood among the negotiators and ministers from nearly 200 countries was celebratory. A historic action, the “Paris Agreement” was struck on the last day, ushering in a new policy commitment to ramp-up climate mitigation and adaptation worldwide.

The Center for Energy and Environmental Policy (CEEP) at the University of Delaware is an official observer organization and participant in the UN Convention on Climate Change (UNFCCC) process. It participated at the 21st Conference of the Parties (COP 21) to UNFCCC conference, focused on the promotion of a “polycentric strategy” to initiate and implement programs to realize just and sustainable solutions to the climate change. Its proposal is based on ideas and models developed at the Center. The CEEP delegation included its director, Dr. John Byrne, and Dr. Job Taminiau (a postdoctoral research fellow). The Center’s position paper submitted to the UNFCCC is titled: “A Polycentric Response to the Climate Change Challenge Relying on Creativity, Innovation, and Leadership.”

Dr. Byrne presenting findings from a study on the financeability of large urban solar plants in Amsterdam, London, Munich, New York, Seoul, and Tokyo. Photo by IISD/ENB

The Paris Agreement promises a flexible, ambitious and rule-based climate policy regime that represents a break from the past. The agreement commits all nations—developed and developing—to hold the increase in the global average temperature to “well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5°C above pre-industrial levels”—a more ambitious goal than had been expected based on efforts outlined in the pledges on climate action—“intended nationally determined contributions.” It reflects a consensus built over the previous year among the leaders of China, the U.S. and India, which contributed to the political support needed for adoption of the Paris Agreement. CEEP co-sponsored a side event with representatives from the Climate Alliance of European Cities with Indigenous Rainforest Peoples (or simply “Climate Alliance”), the Global Covenant of Mayors, and others at the COP 21. Climate Alliance works with more than 1,700 cities and municipalities spread across 26 European countries to reduce their greenhouse gas emissions. The event discussed the importance of cities in making meaningful contributions towards more aggressive national targets to reduce emissions.

Dr. Taminiau offered CEEP’s perspective on subnational climate change innovation, leadership, and governance. Other speakers at the event included Camille Gira, Secretary of State, Luxembourg European Union Council Presidency; Magda Aelvoet, Minister of State, President, Federal Council for Sustainable Development, Belgium; Tine Heyse, Deputy Mayor of Ghent, Belgium; Josefa Errazuriz, Mayor of Providencia, Chile; Julie Laernoes, Vice-President of Nantes Metropole, France; Marie-Christine Marghem, Belgian Federal Minister of Energy, Environment and Sustainable Development; and Ellý Katrin Gudmundsdottir, Chief Executive Officer and Deputy Mayor of Reykjavik, Iceland.

CEEP also worked with the Climate Change Center (Republic of Korea) to present a side event on “Preparing for the Action Plans on Post-2020 Climate Change Regime in Asia,” attended by former prime ministers and senior government officers from Asia. The event was well attended. Dr. Byrne presented a talk on “financeability of large scale solar.” His talk focused on technical assessment and financing feasibility tools to show that megacities can use a modest portion of their rooftops to generate over one-third of their electricity needs. Duck-Soo Han, Chair of the Board of Directors of the Climate Change Center and Former Prime Minister of Republic of Korea called for stronger cooperation and partnerships in Asia to combat climate change. Richie Ahuja, Regional Direct for Asia, Environmental Defense Fund (EDF) summarised his organization’s work in Asian region on clean energy and clean cooking systems as low-carbon solutions. Professor Haibin ZHANG of Peking University and a Member of the Global Advisory Board of the Center for Climate and Sustainable Development Law and Policy (CSDLAP) offered a Chinese perspective on climate policy governance. And Dr. Oliver Lah of Wuppertal Institute for Climate, Germany examined EU-Asia climate partnerships.

The Center has actively participated in proceedings of the UNFCCC since Cop 3 in Kyoto, submitting position papers and attended 8 if the COP meetings. In 1998, CEEP pioneered an equity- and sustainability-based strategy for resolving conditions of socioeconomic and environmental inequality if full international participation in negotiating legally binding climate architecture is to be expected. In a journal article, CEEP researchers, Dr. Byrne and Dr. Young-Doo Wang joined Dr. Hoesung Lee (the current chair of the Intergovernmental Panel on Climate Change—IPCC), and Dr. Jong-dall Kim (current president of the International Solar Cities Initiatives) in proposing a global benchmark of CO2 to realize aims on sustainability and justice.

Dr. Byrne has contributed since 1992 to Working Group III of the Intergovernmental Panel on Climate Change (IPCC). His work is published in IPCC assessments which led to greater global awareness of the problem and the award of the 2007 Nobel Peace Prize to the Panel. The Center developed the Sustainable Energy Utility (SEU) model to address energy and environmental crises in an environmentally, socially and economically sustainable manner. The White House in an announcement made by President Obama recognized the Delaware SEU for its successful $70.2 million bond offering which received a AA+ rating by Standard & Poor’s. Dr. Byrne was the architect of this pioneering climate finance structure and with State Senator Harris B. McDowell III, led the Delaware SEU in adopting this and other innovations to dramatically lower energy and carbon requirements while improving state economic development.

The Paris Agreement marks an unprecedented inflection point in the global response to climate change. Unlike the Kyoto Protocol (adopted for action at COP 3 in Kyoto, Japan), it puts emphasis on registering commitments at all scales—global, national, provincial/state, local, and corporate—and tracks national performance over time. It covers a number of key issues: financing support—including technology transfer and financing amounting to US$ 100 billion annually by 2020 for mitigation and adaptation for developing nations to deal with climate change impacts; adaptation—to strengthen ability of countries to deal with the impacts of climate change; mitigation—to reduce emissions fast enough to achieve the temperature targets; loss and damage—to strengthen ability of countries to recover from extreme weather events and slow onset events; and global stock-take—to account for climate action. It also recognizes the efforts of all non-party stakeholders to address and respond to climate change, including those of “civil society, the private sector, financial institutions, cities and other subnational authorities” [2]. Studies conducted by the Center over the years have demonstrated the need for a polycentric policy approach to “bend the carbon curve” as Dr. Byrne often says. Implementing the Paris Agreement will require rethinking the role of cities and sub-national actions for climate finance so that the advantage for decentralized, small-scale and community driven initiatives is realized.

Additional Resources
[1] “A Polycentric Response to the Climate Change Challenge Relying on Creativity, Innovation, and Leadership.”
[2] Adoption of the Paris Agreement, FCCC/CP/2015/L.9/Rev.1. Available at: https://unfccc.int/resource/docs/2015/cop21/eng/l09r01.pdf
[3] Byrne, J., Taminiau, J., Kim, K.N., Seo J., and Lee, J. (2015). “A solar city strategy applied to six municipalities: integrating market, finance, and policy factors for infrastructure-scale photovoltaic development in Amsterdam, London, Munich, New York, Seoul, and Tokyo.” Wiley Interdisciplinary Reviews: Energy and Environment. Available at: https://ceep.udel.edu/wp-content/uploads/2015/11/2015_WIRE_EnergyEnvironment_paper_6-city-solar-financing_jb-jt-knk-js-jl_WENE-182_10.1002_FINAL-1.pdf
[4] Byrne, J., Wang, Y-D., Lee, H., and Kim, J. (1998).“An Equity- and Sustainability-Based Policy Response to Global Climate Change.” Energy Policy. Vol. 26, No. 4: 335-343. Available at: https://ceep.udel.edu/wp-content/uploads/2013/08/1998_ge_sustainability_equity_climate_change_2.pdf
[5] Byrne, J., and Taminiau, J. (2015). “A Review of Sustainable Energy Utility and Energy Service Utility Concepts and Applications: Realizing Ecological and Social Sustainability with a Community Utility.” Wiley Interdisciplinary Reviews: Energy and Environment. Available at: https://ceep.udel.edu/wp-content/uploads/2015/03/2015_ge_WIRE_Energy-Environ_seu-esu_jb-jt_WENE-171_FINAL.pdf
[6] White House recognizes SEU Model developed at CEEP. White House Press Release. December 02, 2011: https://ceep.udel.edu/wp-content/uploads/2013/08/2011_SEU_Oversight-Board_bond_press-release_White-House_excerpt4_Dec-21.pdf

September 22, 2015

Two Very Different Perspectives on Carbon Emissions Trading

By Jeongseok Seo

In an effort to address climate change, carbon emissions trading schemes (hereafter, ETS) have been widely championed as an instrument for mitigating greenhouse gas (GHG) emissions. Currently there are about 40 countries where a regional or national scheme is in operation, including 31 countries in Europe. Several states in the United States, the world’s second largest emitter of GHGs, are participating in state- or regional-level ETS, such as Regional Greenhouse Gas Initiative (RGGI) or Western Climate Initiative (WCI). The world’s biggest emitter, China, also plans to roll out its national ETS in 2016, which is expected to dwarf the EU ETS [1].

Despite its popularity, however, there are concerns about whether ETS is an effective vehicle to reduce carbon emissions as many have claimed. As evidenced in the EU ETS, emission trading has so far failed to meet the core objective of effective emission reduction. For example, recent empirical study finds that the share of emission abatement due to the EU ETS is a mere one-eighth of the total reduction recorded by the EU-25 Member States from 2005 to 2012, but the rest of the region’s emission reduction attributable to the 2008 global financial crisis [2].

With growing risks arising from climate change and the coming 2015 Paris climate change negotiations, it may be timely to evaluate the effectiveness of ETS, potentially its impact on equity and sustainability. To effectively address an unprecedented crisis involving every country, social equity and ecological sustainability would be critical factors to incorporate into our strategies or tools.

Environmental economics is often cited as a supportive theory behind existing carbon emissions trading platforms. Central concepts of this framework are externality and cost efficiency [3]. Externalities occur when a choice made by one person affects other people in a way that is not accounted for in market prices. From an environmental economics perspective, climate change is an example of externalities and a result of market failure. Therefore, this school of thought argues that externalities like climate change can be solved through an efficient market mechanism, and reductions in carbon pollution could be achieved at least cost in carbon markets where polluters can sell and buy their emissions [4][5].

On the other hand, some criticize the ETS model. Byrne and Glover argue that ETS has been used to reinforce the commodification of nature [6]. By treating the atmosphere as a commodity and trading it in the form of pollution permits via a marketplace, i.e. carbon markets, ETS turned the part of the global commons into saleable pieces of property [see also 7]. Heavy polluters like the steel and cement industries often escape the need to actually reduce carbon emissions through mechanism, such as grandfathering or free allowances. This school of thought argues that an institutional reform or ‘techno-fix’ approach wouldn’t be sufficient to address the problems inherent in ETS [8]. Instead, some propose that climate change requires us to tackle the root causes of climate change, such as modernity’s pursuit of “economics first” ideology.

A new global climate regime requires strategies and tools to address the crisis as effectively as possible since we may have limited time [9]. In this vein, there are valid concerns about the social and ecological effectiveness of ETS. Hopefully the Paris talks open the dialogue about such concerns and identify timely and more appropriate actions.

Notes
[1] Reuters (2014). China’s National Carbon Market to Start in 2016 – official. Accessed on 06-13-2022. https://www.reuters.com/article/idUSL3N0R107420140831
[2] German Bel and Stephen Joseph (2015). Emission Abatement: Untangling the Impacts of the EU ETS and the Economic Crisis. Energy Economics Vol 49, May 2015, pages 531-539
[3] John Dixon, et al. (1994). Economic Analysis of Environmental Impacts (London: Earthscan Publications). Page 27
[4] EEA (2006). Application of the Emission Trading Directive by EU Member States. Technical Report No. 2/2006, European Environment Agency (EEA), Denmark, p. 54
[5] UNFCCC. Accessed on 2014-11-30. https://unfccc.int/kyoto_protocol/mechanisms/items/1673.php
[6] John Byrne and Leigh Glover (2000). Climate Shopping: Putting the Atmosphere Up for Sale. TELA: Environment, Economy and Society Series: 28 pp. Melbourne, Australia: Australian Conservation Foundation.
[7] Martin O’Connor (1994). “On the Misadventure of Capitalist Nature,” in Martin O’Connor, ed., Is Capitalism Sustainable?: Political Economy and the Politics of Ecology (New York: The Guilford Press). Page 126
[8] John Byrne and Noah Toly (2006). Energy as a Social Project: Recovering a Discourse. In John Byrne, Noah Toly, and Leigh Glover, eds. Transforming Power: Energy, Environment, and Society in Conflict. New Brunswick, NJ and London: Transaction Publishers. Pp. vii-xii.
[9] IPCC (2014). Climate Change 2014: Synthesis Report. Contribution of Working Groups I, II and III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change

Photo: The Huffington Post

China’s Cap-and-Trade Decisions

Paris Agreement: A Landmark Climate Change Policy Architecture Reached

Two Very Different Perspectives on Carbon Emissions Trading

Connect

Search FREE