New Study Reveals the Workings of China's Pilot Emissions Cap-and-Trade Systems

Environmental and ecosystems degradation – air pollution in particular, most recently – has become a hot-button issue for the Chinese government and society. With increasingly polluted lakes, rivers and coastal waters, desertification and land degradation, and toxic air, perhaps nowhere in the world are the profund and far-reaching costs of an unconstrained, unregulated quest for rapid economic growth better illustrated.

Responding to rising public alarm and protest, China's government earlier this month pledged to tackle its pollution an environmental problems. Declaring a “war on pollution” in his first speech in office to open this year's session of the National People's Congress, Chinese Premier Li Kequiang stated, “Smog is affecting larger parts of China and environmental pollution has become a major problem, which is nature’s red-light warning against the model of inefficient and blind development.”

Pioneered by the European Union (EU), the Chinese government is turning to emissions cap-and-trade systems as a foundational element in its war on pollution. With pilot markets now up and running in seven major Chinese cities and provinces, Beijing-based consulting firm Environomist and contributing organizations recently released the first comprehensive study of China's nascent emissions cap-and-trade systems.

Ongoing urbanization in China

Urbanization in China has been taking place at an unprecedented rate, fueled by government policies and business investment. Six Chinese cities had populations of more than 10 million and 10 had populations between 5 million and 10 million. The number of urban residents exceeded that of rural areas for the first time in 2011, Bloomberg Businessweek highlights in a recent report.

Along with announcing a “war on pollution,” Chinese Premier Li Keqiang in his first speech in office also established urbanization as a national priority -- an announcement that assures China's cities will continue to expand, both in terms of population and their collective impact on China's ecosystems, environment and natural resources.

According to the government's “National New-type Urbanization Plan (2014-2020)," 60 percent of Chinese will be living in cities by 2020, up from 53.7 percent today.

China's "war on pollution"

China's State Council in June 2013 unveiled a package of 10 anti-pollution measures intended to reduce carbon and greenhouse gas emissions. At the top of the list is a pledge to cut pollution “from six smog-producing industries at least 30 percent per unit of output by 2017,” China's state-controlled Xinhua news agency reported.

New regulations seek to reduce polluting emissions across economic sectors that account for over 70 percent of national emissions, including the thermal electric power, iron and steel, petrochemicals, cement, non-ferrous metals, and chemicals sectors. The aim is to bring them into compliance with international standards established in 47 Chinese cities.

Looking to put more bite into these initiatives, the Chinese government is placing greater emphasis and more resources on requiring more in the way of measuring and monitoring emissions, business disclosure and enforcement. Focused and dependent on spurring economic development and growth, enforcement at the provincial and local levels, in particular, "has long been lax and superficial in China,” Xinhua has pointed out.

Emissions trading: Seven pilot systems

The Chinese government is also betting on emissions cap-and-trade systems as an effective means of curbing pollution and improving environmental health and integrity, particularly in China's burgeoning cities. Pilot emissions cap-and-trade systems are now operating in seven major cities and provinces: Beijing, Chonqing, Guandong, Hubei, Shanghai, Shenzen and Tianjin.

Scientists have long counseled policymakers to take steps to drastically reduce carbon and greenhouse gas emissions, deeming such measures the most effective means of improving air quality. Additionally, scientists argue, such measures maintain the health and integrity of environmental processes and ecosystems upon which society ultimately depends, as well as mitigate the costs and threats posed by climate change.

Employing market-based mechanisms such as emissions cap-and-trade markets as a means of incorporating market externalities and factoring unaccounted-for environmental and social impacts into market prices has become fashionable among the international development community and economists.

Though reviews and analysis of the performance and results of the EU's Emissions Trading System (ETS), the first such initiative in the world, have been decidedly mixed, the ETS, and other such market-based mechanisms launched around the world since, are viewed as an initial step in an evolutionary process -- one that can be effective.

Drawing on contributions from Centre Testing International Corp., China Carbon Forum, the Shanghai Environmental and Energy Exchange, South Pole Carbon Asset Management and the United Nations Development Programme (UNDP), the Environomist's, “China Carbon Market Research Report 2014,” offers detailed insight and analyis of the workings of China's nascent emissions cap-and-trade system, as well as a comparison with the EU's ETS.

The comprehensive and groundbreaking report should prove a valuable information resource to policymakers, businesspeople, scientists and NGOs, as well as anyone concerned about and interested in efforts to curb ongoing increases in carbon and greenhouse gas emissions -- whether in China or elsewhere in the world.

Image credit: Flickr/NASA Goddard Space Flight Center