Abstract
Putting a price on carbon is considered a crucial step for China’s endeavor of harnessing the market forces to reduce its energy consumption and carbon emissions. Indeed, aligned with China’s grand experiment with low-carbon provinces and low-carbon cities in six provinces and thirty-six cities, the Chinese central government has approved the seven pilot carbon trading schemes. These pilot trading schemes have features in common, but vary considerably in their approach to issues such as the coverage of sectors, allocation of allowances, price uncertainty and market stabilization, potential market power of dominated players, use of offsets, and enforcement and compliance. This article explains why China turns to market forces and is opt for emissions trading, rather than carbon or environmental taxes at least initially, discusses the five pilot trading schemes that have to comply with their emissions obligations by June 2014, and examines a wide range of design, implementation, enforcement and compliance issues related to China’s carbon trading pilots and their first-year performance. The article ends with drawing some lessons learned and discussing the options to evolve regional pilot carbon trading schemes into a nationwide carbon trading scheme.
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Notes
This is an exceptionally ideal case. In reality, not all countries will commit to a 450 ppm target and act in a coordinated manner. This suggests that China’s emissions will continue to grow even higher than the allowed level derived from the exceptionally ideal case and beyond 2020.
With increasingly stringent energy-saving and carbon intensity goals, China started experimenting with low-carbon city development in the batch of five provinces and eight cities on July 19, 2010. This experiment is further expanded to the second batch of 29 provinces and cities on December 5, 2012 (Wang et al. 2013). While it is not mandated by the central government, all these pilot provinces and cities set CO2 emissions peak in 2030 or early. 15 pilot provinces and cities even aim CO2 emissions peak in 2020 or early, with Shanghai publicly announcing its peak year in 2020, Suzhou in 2020 and Ningbo in 2015, respectively (Zhang 2014c). Zhang (2009, 2010b, 2011a, b) argue from six angles that China could cap its greenhouse gas emissions around 2030. The practice and ambition of these piloted regions set the good examples of keeping their emissions under control, make the positive contribution to the overall low-carbon development in China, and thus could make China’s carbon emissions peak occur even earlier than the aforementioned timeline. This suggests that China’s recent commitment to cap its carbon emissions around 2030 is ambitious but achievable.
Rep. Bill Archer (R-Texas), Chair of the House Ways and Means Committee, for example, said that “It is another form of foreign aid” (Congressional Quarterly, 29 November 1997).
This point is somewhat related to the aforementioned first point, but they discuss different issues. The first point focuses on why China should take on greenhouse gas emissions caps—a prerequisite for international emissions trading, whereas this point touches on the technical difficulty in setting emissions caps for countries like China. The first issue is more fundamental and this one is of technical nature.
Using the model based on marginal abatement costs of 12 regions, Zhang (2001) analyzed the economic effects of the EU proposed concrete ceilings both on the U.S. and on developing countries. That study was the first to quantify the implications of the EU proposal for restricting the use of emissions trading on the basis of 35 individual national communications to the United Nations Climate Convention Secretariat.
For sectors that are not identified to be at a significant risk of carbon leakage, the revised EU ETS Directive 2009/29/EC suggests that 80 % of allowances are handed out for free in the initial year of the third phase (2013–2020), with the share of free allowances declining to 30 % by 2020, the end year of the phase. Such free allocations are based on the ex ante benchmarks that are set at the average performance level of the 10 % most efficient installations in a given sector or subsector in the EU in the years 2007–2008 (European Commission 2009). This suggests that such benchmarks represent a challenge for some installations because they are set at the level of the best performers, but they are achievable by definition because they are derived from real practice in recent years.
To support energy-saving technical transformation projects, the Ministry of Finance and NDRC (2007) awarded enterprises in East China Yuan 200, and enterprises in the Central and Western part of the country Yuan 250 for every tce saved per year since August 2007. Since July 2011, such awards are increased to RMB 240 for enterprises in East China, and RMB 300 for enterprises in the Central and Western part of the country for every tce saved per year (Ministry of Finance and NDRC 2011). China also introduces market mechanism, developing energy management company (EMC) to promote energy saving. The National Development Reform Commission and the Ministry of Finance of China award EMC Yuan 240 for every tce saved, with another compensation of no less than Yuan 60 for every tce saved from local governments (The State Council 2010).
This is different from those in the Trial Measures. The latter specified that in the initial trading phase, the amount of allowances that are allocated for free accounts for at least 90 % of the total amount of allowances, and that the amount of allowances allocated through auctioning cannot exceed 3 % of the total amount (SMLAO 2013).
Feng et al. (2013) show that more than 75 % of emissions associated with products consumed in Beijing-Tianjin occur in other regions. Shanghai, Tianjin, and Beijing are net importers of embodied emissions, with a proportion of imported emissions embodied in finished goods up to 62 % in Tianjin. While it would be ideal to include all indirect emissions, in practice all the pilot regions only cover indirect emissions released in generating the amount of imported electricity because it is straightforward to measure the amount of electricity generation and its flows across China.
Since the tax-sharing system was adopted in China in 1994, taxes are grouped into taxes collected by the central government, taxes collected by local governments, and taxes shared between the central and local governments. All those taxes that have steady sources and broad bases and are easily collected, such as consumption tax, tariffs, vehicle purchase tax, are assigned to the central government. VAT and income tax are split between the central and local governments, with 75 % of VAT and 60 % of income tax going to the central government. As a result, the central government revenue increased by 200 % in 1994 relative to its 1993 level. This led the share of the central government in the total government revenue to go up to 55.7 % in 1994 from 22.0 % in the previous year. In the meantime, the share of the central government in the total government expenditure just rose by 2 %. By 2009, local governments only accounted for 47.6 % of the total government revenue, but their expenditure accounted for 80.0 % of the total government expenditure in China. On the one hand, to enable to pay their expenditure for culture and education, supporting agricultural production, social security subsidiary, etc, local governments have little choice but to focus on local development and GDP. On the other hand, local governments seek off-budget funds from land concession to cover a disproportional portion of the aforementioned government expenditure. Objectively speaking, this tax-sharing scheme in China plays a part in driving local governments to seek higher GDP growths and off-budget funds from land concession at the expense of the environment (Zhang 2008, 2010a, 2011b).
Based on the existing tax system in China, the origin of tax is different from the collecting place. Enterprises are mandated to pay the business taxes to the places where they are registered, not to the places where these taxes occur. Take the project of natural gas transmission from West to East China as a case. When natural gas is transmitted from the western part of China to Shanghai, 40 % of the business tax revenues are in Shanghai where the enterprises are registered, and 60 % of the revenues go to the central government. But more than ten provinces along this transmission line hardly receive any business revenues, although they spend a lot of money for services. With some provisional measures on the distribution of business revenues among sub-entities across provincial borders implemented since 2008, there has been some progress but this issue has not been completely settled (Wu 2014).
In March 2014, Chinese Premier Li Keqiang said to about 3000 delegates to China’s legislature that China will “declare war against pollution as we declared war against poverty” after nearly every Chinese city monitored for pollution failed to meet state standards in 2013.
For example, the Atmospheric Pollution Prevention Action Plan (The State Council 2013) sets more stringent concentration targets for hazardous particles for more-developed areas, with Beijing-Tianjin-Hebei region, Yangtze River Delta and Pearl River Delta required to cut by 25, 20 and 15 %, respectively.
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Acknowledgments
An earlier version of this paper was presented at Shanghai Carbon Finance Workshop: The Role of Financial Institutions, Shanghai, 16 March 2013 and the International Symposium on Theoretical Advances and Empirical Lessons on Emission Trading Schemes, Beijing, 10–11 October 2013. Part of the paper was presented at the International Workshop on Economy of Tomorrow—Building the Good Society in Asia and Europe, 25 November 2014, Berlin and at the invited seminar in the headquarters of the German Federal Ministry for the Environment, Nature Conservation, Building and Nuclear Safety, 26 November 2014, Berlin. This work is financially supported by the National Natural Science Foundation of China under grant No. 71373055. The views expressed here are those of the author and do not necessarily reflect the views of the grant provider. The author bears sole responsibility for any errors and omissions that may remain.
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Zhang, Z. Crossing the river by feeling the stones: the case of carbon trading in China. Environ Econ Policy Stud 17, 263–297 (2015). https://doi.org/10.1007/s10018-015-0104-7
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DOI: https://doi.org/10.1007/s10018-015-0104-7
Keywords
- Pilot carbon trading schemes
- Low-carbon development
- Environmental taxes
- Market stabilization mechanism
- Carbon offsets
- Enforcement and compliance
- China