Carbon Cap-and-Trade in China

In 2013, China introduced a pilot cap-and-trade plan across seven economically varied provinces, including Beijing, Tianjin, Shanghai, Chongqing, Guangdong, Hubei and Shenzhen, that allows designated companies to buy and sell the right to use power, burn fossil fuels and release carbon dioxide into the air.

Cap-and-trade plan, by definition, would limit the amount of pollution that companies can emit and then let them pay competitive prices for a share of the quota. Companies that do not use their entire quota can sell the remainder, while those that need more than their quota have to pay additional permits.

So, how was this cap-and-trade plan going?

According to the data released by the National Development and Reform Commission, as of the end of August 2015, the cumulative transactions of carbon emissions trading quota from the seven pilot areas have achieved 40.24 million tons (about ¥1.2 billion). The total auction quota is about 16.64 million tons (approximately ¥800 million). The compliance rate (The proportion of the companies which adhere to this pilot plan) reached 96% and 98% in 2014 and 2015.

Based on the comparison with proposed outcomes, this plan failed to meet expectations.

But does this mean the cap-and-trade plan is not feasible in China?

I wouldn’t agree with it. Because from my point of view, it is not appropriate to measure success only through carbon trading volume. The main objective of this plan is to figure out whether such a carbon trading system could work smoothly, whether such a long-term plan could benefit both the economy and environment. It is hard to answer these two questions at this stage. But the trial plan did tell the government what the obstacles were. Like legal and administrative status issues, different quota allotments problem, determination of duration of the Cap problem, free allocation of allowances issues, etc.

Then, how to fix these challenges?

Although I am not an expertise in this topic, I do have some thoughts. The most important one is making cap-and-trade officially legal. Some difficulties faced in achieving compliance indicate the pilot plan may not have strong legal or administrative status. In many situations, local governments had to put a lot of efforts to ensure the high compliance rate with the plan. From my perspective, only a strong legal status can be served as a prerequisite for a successful cap-and-trade system. Besides this one, another recommendation I’d like to make is creating a standard nationwide framework. Let me give an example, based on the trial, different provinces have different modes to allocate quota. For provinces like Hubei, Shanghai, Beijing, Tianjin and Guangdong, the quota allotment plan was developed through the cooperation among government, companies, experts and third parties. But for Chongqing province, the quota allotment was largely decided by corporations themselves. And for Shenzhen province, it took a lot of other variables into account. Under this situation, the cap-and-trade plan became quite complex, nontransparent and inefficient. In order to face this challenge, a standard nationwide framework would help a lot. Because the standard nationwide framework would reduce a lot of duplication of work, increase the transparency of the system, and make cap-and-trade easy to implement. In conclusion, nationwide legal status and framework are highly needed in order to make carbon trading system work smoothly.

What to expect next?

Basically, the pilot cap-and-trade plan is playing a vital role to pave the way for the Sept. 2015 announcement by President Xi at the White House that China intends to inaugurate a nationwide cap-and-trade system in 2017. So will a nationwide carbon cap-and-trade work in China? We will see.

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