Last November, the USA and China surprised the world by agreeing to co-operate on actions to tackle climate change. Both nations had previously resisted international moves to reduce their emissions of greenhouse gases. However, the deal suggests that the leadership of both nations are now taking climate change seriously. Rick Gould reports.

If these countries are successful in achieving their aspirations, then the USA and China can make a significant dent in the annual global emissions of carbon dioxide (CO2). Between them, China and the USA emit just over 40% of the world’s CO2 emissions.

China, for example, has pledged to reduce its emissions of CO2 per unit of gross domestic product (GDP) by 45% when compared to its unit emissions of 2005. However, as China’s GDP has increased and continues to do so, in absolute terms, this means that emissions would still increase. So China has also pledged to reduce the rate of growth in emissions, resulting in a projected peak in 2030, after which emissions should hopefully fall. Among other things, China intends to increase to 20% the proportion of energy generated from non-fossil fuelled sources, and use an emissions trading scheme (ETS) to lower emissions.

Indeed, the Department of Climate Change within the Chinese National Development and Reform Commission has stated that it plans to start a national ETS no later than 2016. This national scheme will follow several pilot programmes which, between them, have traded well over 10 million tonnes of CO2. This feature describes the challenges that China faces, and how the Chinese Government sees emissions trading as a means of meeting its pledge to start reducing its absolute CO2 emissions within the next 15 years.

China and carbon dioxide in context

According to the World Bank, China now has the world’s second largest economy. However, China’s growth rate — although it has slowed in recent years — is still around 7% per year. If economic prosperity can have significant social benefits, one major downside is that this growth is mirrored by rising CO2 emissions; not only have China’s CO2 emissions grown both dramatically and more than any other country, but according to the US Energy Information Administration, China is now the world’s largest emitter by far of CO2, and contributes about a quarter of the world’s annual emissions of this greenhouse gas. As this is not sustainable, the Government sees emissions trading as one of a number of measures to control CO2 emissions, based on the experiences of trading schemes elsewhere in the world.

So what is China’s own experience with emissions trading, and how will this influence the national scheme?

China’s pilot ETS

In 2011, as part of five-year plan, the Chinese Government committed itself to an ETS to reduce emissions of CO2. The National Development Reform Commission then specified seven cities and regions which would host pilot ETS; these cities and regions were Guangdong, Hubei, Beijing, Shanghai, Tianjin, Chongqing and Shenzhen. The first scheme started in the city of Shenzen, which is home to approximately seven million people and located in the southern Guangdong province. Shanghai was the next city to begin a pilot scheme, followed by the rest of Guandong province and then Beijing. The remaining cities and regions started their schemes during later in 2013 and 2014. How have they fared?

Collectively, the seven regions and cities had traded a total of 13.75 million tonnes of CO2 by last October, with a monetary value of 500 million Chinese Yuan, which is about £50 million. Additionally, China’s energy use per unit of GDP fell by just over 4.5% between January and September 2014, when compared to the same period from last year. This last statistic is important, because it reflects how the Chinese environmental regulators have applied to two-pronged approach to emissions trading. In simple terms, their schemes can mirror the cap-and-trade scheme used in the EU, while also using energy-use efficiency as a metric for regulation. Notably, these tools were applied in different ways amongst the seven areas with pilot ETS. Let us take a look at the differences.

Varieties of flexible ETS moving towards a common framework

In terms of things in common, all the pilot ETS focused on power generation and heavy industries. Also all applied a broadly common framework of monitoring, verification and reporting. That said, there were some significant differences due to regional differences in the types and density of sources of CO2.

The region of Guandong, for example, has a great deal of industry, mainly comprising the electronics sector, chemicals, bio-pharmaceutical, motor vehicle components, and the production of construction materials. The electronics sector, for example, contributes to about 40% of the region’s GDP. Guandong’s ETS is a cap-and-trade scheme with a limit of around 388 million tonnes of CO2, making it the largest ETS in China and the second largest in the world. It is alone among the pilot programmes in that it requires the regulated organisations to buy a small percentage of allowances through auctions, with the amount increasing from 3% in 2013 to 10% during 2015. The revenues from the auctions will finance reductions in emissions. This ETS mirrors the EU ETS in many respects; it also has a reserve for new entrants, while the Government has set up control mechanisms to intervene when the price of allowances needs to be stabilised. Shanghai is similar in its industrial density, while the ETS in this city has now expanded its scope to include six airlines.

The schemes in Beijing and Shenzhen are different because these cities have proportionately smaller industrial emissions and a greater proportion of emissions from the service sector. So in order to increase the percentage of emissions covered by their respective schemes, these two cities have required major companies in the service sector to join the ETS.

The two schemes then differ at this point: Beijing operates a cap-and-trade scheme, which requires companies in the industrial and service sectors to make absolute reductions in emissions. This does not apply to the power plants in and around Beijing. However, Beijing plans to switch to gas-fired power stations in the next few years, which will lower emissions of CO2 and other pollutants.

The ETS in Shenzhen, in contrast, is not a cap-and-trade scheme. Instead, companies have to lower their emissions of CO2 per unit of GDP, by 32% from 2013 to 2016, when compared to the emissions in 2010. At the same time, the absolute emissions must not grow by more than 10% over this time, using 2013’s emissions as a baseline.

Meanwhile, the seven regions and cities have agreed to share their experiences, so that a nationwide ETS can draw on the lessons learned. Currently, it appears that a nationwide ETS could have a common framework for processes such as monitoring, verification and reporting, while providing a degree of flexibility in the mechanisms of regulation, in order to cater for local variations in sources of CO2.

Last reviewed 7 January 2015