By Anders Hove
Yesterday, in a joint announcement with the U.S., China officially committed to launching a national carbon emissions trading system (ETS) by 2017 and taking additional steps to ensure the electric power sector uses more low emissions energy sources other than coal. While China had previously announced plans for a national emissions trading system, the joint announcement is significant because it reinforces China’s commitment at an international level and adds a new layer of certainty to the plans. Market mechanisms that place a meaningful price on carbon are an essential part of the policy toolkit.
The Paulson Institute supports efforts in both countries to tackle global warming and we believe it is essential for both nations to lead on this issue – one of common ground. The symbolic value of the two countries jointly announcing plans such as this—less than a year after the joint U.S.-China announcement on climate change—is especially significant considering that just a few years ago both countries were locked in a “wait-and-see” mode on the climate change issue.
This earlier posture did not make economic sense for either country, for several reasons. Both the U.S. and China are individually responsible for a large fraction of global carbon pollution, together accounting for over 30% of such emissions. The countries already have ready access to economically-competitive energy efficiency and renewable energy technologies needed to start solving the problem. Most crucially, both the U.S. and China face stark economic and public health risks and costs due to climate change that is already occurring.
Just earlier this week, as part of our Stronger Markets, Cleaner Air series, the Paulson Institute published a paper in collaboration with Josh Margolis and Daniel Dudek of the Environmental Defense Fund which reviews progress in China’s seven carbon trading pilots and suggests broad attributes that a national carbon should have to be effective. Among the key attributes are a clear and well-communicated emissions reductions goal and a relatively long time horizon with transparency about rules and cap levels well in advance of when emissions reductions should be achieved. Transparency and longer time horizons give businesses more flexibility on how to achieve reductions, while promoting innovation and investment in new technologies.
A carbon ETS can work best in tandem with other market reforms. Currently, the energy sector and the most high-polluting industries—including steel and cement—are dominated by state-owned enterprises (SOEs), which often have preferential access to low-cost financing from SOE banks. Speeding green finance reforms to reduce the flow of investment in dirty industries and promote investments in energy efficiency and renewable energy could be one complementary market reform.
Another one is electric power market reform, as embodied by the China State Council’s 2015 Document #9, which could help the country’s electric power sector make a larger contribution to emissions reductions. Such reform could ensure that the dispatch of power plants is based on their full market cost, including emissions costs, instead of based on equalizing operating hours across coal plants as has been the case in the past. We wrote about this issue in detail together with the Regulatory Assistance Project in another Stronger Markets, Cleaner Air paper published this week.
Policies that put a price on carbon help eliminate risky economic distortions that favor older, dirtier technologies and fuels that are associated with costly public health problems such as air and water pollution. By acting now, the U.S. and China are both helping themselves, as well as demonstrating the leadership the world needs ahead of Paris, to encourage others to work together to solve the problem.
Anders Hove is Associate Director for China Research at the Paulson Institute.