By Jeff Swartz (Director, International Policy, IETA)

China is now implementing an American-led climate policy idea proposed under the first Bush Presidency but floundered under congressional opposition in the Obama administration: cap-and-trade to control and reduce greenhouse gas emissions.

An American-led climate policy embraced by China

China has decided to adopt a cap-and-trade programme to help it reduce greenhouse gas pollution and decarbonise its economy. In June last year, ahead of the UN meeting to adopt the Paris Climate Change Agreement, China announced it would aim for a 60-65% reduction in carbon intensity by 2030. In comparison, the US is seeking an economy-wide reduction in emissions of 26-28% below 2005 levels by 2025, which goes beyond its current 2020 target of 17% below 2005 levels by 2020.

Cap-and-trade, also referred to as ‘emissions trading’ is an idea first put into practice in the early 1990’s under then President H.W. Bush to reduce acid rain pollution in the midwest, northeast, and Pacific northwest regions of the United States. The policy has evolved from an original think-piece from a British economist named Dr. Ronald Coase who argued in The Problem of Social Costs in 1960 that environmental pollution is a problem of social costs and polluters out to pay for the damage they create. The (first) Bush administration touted the idea because it created a cap on pollution with a market-based solution requiring polluters to pay a market-determined price on the NOx and SO2 pollution created from coal-fired power plants. It was a pioneering, elegant solution to solving our acid rain problem in an era where both sides of the aisle were interested in creative solutions to environmental and climate policies. Plus, it allowed for President H.W. Bush to maintain his ‘Read my lips, no new taxes’ pledge in his 1992 run for re-election.

China has had problems with acid rain, but not to the same extent the US faced. It does, however, have serious air pollution which has made daily life for the average citizen notoriously smoggy. Up until the mid-2000’s, China has taken a stance of inaction on environmental policies. Through China’s period of rapid development the common position of the Government was that they would address pollution after they catch up with the developed world. But now China is starting to take climate change incredibly serious. Its ability to grow its economy and feed its people requires it to have enormous access to food, water, and a long list of raw materials, which could all be affected by climate change.

A live policy experiment: cap-and-trade in China

China is no newbie to the concept of Emissions Trading Scheme (ETS). In fact, it was one of the most active participants of the Kyoto Protocol’s carbon market mechanism-the Clean Development Mechanism (CDM). Over the last 10 years, China developed close to 4,000 clean energy projects that generate carbon offsets through the United Nations.  China’s government at the national and local level, along with its major industries, had a largely positive experience with the CDM. This manifested itself in 2011 when the Chinese government decided to ‘pilot’ seven carbon markets across China. Over the last three years, 5 cities and 2 provinces in China have implemented cap-and-trade programmes which collectively cover 18% of China’s population and 28% of its GDP. These experiences have helped China’s policymakers get ready for a national cap-and-trade programme.

Earlier this year, China’s National Development and Reform Commission

circulated a notice about their national ETS to all provincial governments, government administrations, the civil aviation administration, state-owned enterprises (SOE’s), and major industry associations.  The notice, available in Chinese here, specified that companies from 8 sectors and 15 sub-sectors which consume +10,000 tons of coal equivalent per year would be included in China’s national ETS. Those sectors include:

1. Power (generation, heat-power cogeneration, and grid operators);
2. Petrochemicals (crude oil refining and processing, ethylene);
3. Chemicals (methanol, ammonia, carbide);
4. Iron & Steel;
5. Non-ferrous metals (copper smelting, electrolytic aluminium);
6. Building production and materials (clinker, plate glass);
7. Pulp & Paper
8. Aviation (civil commercial, cargo, and airports)

The notice specifies that companies in each of these sectors should establish an internal ‘compliance plan’ for the national ETS this year and finish their historical data reporting and submit a third-party verification of their historical emissions data by the end of June 2016. The 7 ETS pilots will be allowed to opt-in to the national ETS starting in 2017.

This is not the first time China has opted for American policy proposals.  During China’s ‘reform and opening-up’ era in the 1980’s and 1990’s they adopted  Western commerce policies and fine-tuned them to the Chinese economy. China is now embarking on a carbon pricing strategy, where it will again take on American-led policy thinking and adapt it to the Chinese context.