By Julian Wong Oct.13.2009
In: capital and finance
3 comments

Carbon trading, taxes and putting the cart before the horse

There have been mixed messages lately about whether China will soon adopt a carbon emissions trading scheme.  On the eve of President Hu Jintao’s speech at the UN Climate Summit in New York last month, Times Online ran a sensationally misleading story suggesting that China would adopt a carbon emissions trading scheme that would “for the first time, place limits on the amount of greenhouse gases Chinese industries are allowed to emit.”  The article went on to say:

A delegation from the China Beijing Environmental Exchange (CBEEX), a government-backed platform for trading environmental equity, will outline the details in New York this week at a UN conference on climate change.

Obviously, this turned out to be a complete non-event.  CBEEX is just one of a handful of private entities (see previous post “Tianjin to Win the Environmental Exchange Race?“) seeking to be launch pilot pollution credit trading platforms.  The truth is that they are no where near to launching the kind of economy-wide carbon emissions trading scheme that Times Online suggests.  China does not even have a mandatory cap on emissions, without which a “cap-and-trade” system would be meaningless.

Yes, CBEEX and their new French partner, Blue Next, did make a showing at the UN climate summit, but only at the sidelines, and merely to promote their own efforts to develop their own standard for voluntary carbon offsets, kitschily called the “Panda Standard“.  Nothing about a mandatory trading scheme, and certainly nothing even in the nature of a liquid secondary market of emissions trading–the fact that the Panda Standard speaks to voluntary carbon offsets indicate they are only considering the primary market.  (For a distinction between primary and secondary carbon markets, see previous post “China Carbon Forum 2008 Review.”)

CBEEX made the news in August when it announced that it had brokered the first ever domestic voluntary carbon offset transaction.  A “green commuting” campaign launched during the Beijing Olympic Games last year generated 8,026 tons of carbon credits, and they were bought by the Shanghai-based Tianping Auto Insurance at $5 per ton.  One carbon analyst I spoke to observed that the current effort to develop a voluntary offset standard is a reaction to the criticism that the transaction received for lack of transparency and lack of, particularly, conformity to established standards.  With intentions to participate in more voluntary offset transactions, it is probably a good idea that CBEEX establishes some sort of standard.

Simply Not Ready

The CEO of CBEEX, Mei Dewen, himself, has lamented to Reuters that the lack of sophistication of China’s financial markets stands in the way of creating a vibrant carbon trading market in China:

It is like a farmer selling eggs just after China began to ‘reform and open up’ [in 1978 as part of economic and social reforms initiated by Deng Xiaoping]…He doesn’t know who to sell to. He doesn’t know at what price he should sell, or who, in fact, is the most reliable buyer.

According to Mei, says Reuters, the Chinese government has “already rejected proposals to create a secondary CO2 market, saying it was not appropriate given China’s role as a supplier rather than a buyer of CERs.”  (CERs stand for “certified emissions reductions,” which are carbon credits generated through a global primary carbon market created under the Kyoto Protocol called the clean development mechanism, or CDM.)

So just when can we expect the Panda Standard to be finalized so China can at least get the voluntary offset market moving more quickly?  Unfortunately they are just beginning.  Mei Dewen was actually in Washington, D.C. on Sept 26 to say a few words about the Panda Standard where I herd him equivocate between next year and the year after as the target date for completion.

Pilot Schemes for Next Five Year Plan?

While any semblance of an economy-wide carbon emissions trading systems seems way off the cards, the door is still open to experiments at the pilot phase.  In fact, the Ministry of Environmental Protection recently circulated a statement at a news conference in Beijing about two weeks ago that included “Carry out trial work on trading emission and pollution permits, and ecological transformation” as one of its priorities for the next five year plan.  As this Emma Graham-Harrison notes, officials have been coy about commenting whether these pilot schemes would involve greenhouse gases.

We’ll just have to see. My hunch is that these pilot schemes are more likely to cover SO2 and COD (chemical oxygen demand, a measure of water pollution), for which there already exist nationwide caps at absolute levels in the current five year plan. On the other hand, if the pilot schemes are limited in scope and scale, the lack of a nation-wide cap on CO2 may not be a stumbling block to enact a demonstration emissions trading systems for CO2, say for a certain specific sector in a specific geographic area, e.g. iron smelters in Shanxi province.  Still, given that the central government has only very recently started to consider directly managing carbon emissions (see previous post “China’s Carbon Intensity Plan and its Impact on Climate Progress“), one might imagine prevailing political sensitivities around launching into a CO2 emissions trading scheme.

What about a Carbon Tax?

In thinking of alternatives to cap-and-trade type systems to manage carbon, one also has to consider the viability of a carbon tax.  It seems like there’s a ways to go for China on this one as well.   I reported almost a full year ago that (see last paragraph of previous post “China Carbon Forum 2008 Review“) carbon taxes were on the table.  Last month, regulators from various ministries were considering a proposal for emissions taxation from the the Energy Resources Institute, a government think tank affiliated with the mighty NDRC.

Jiang Kejun a researcher of ERI said it would be another four to five years before a tax of greenhouse gas emissions could be implemented. Again, it was a matter of not putting the cart before the horse-other resource taxes have yet to be launched, so until China gains experience in implementing those, a carbon tax would be premature.

So what can China do now?

So if its too early to enact carbon taxes or implement carbon trading, what are some actionable step China can take now?  Well, in a sense, it has already started to mitigate carbon emissions growth through its efforts in energy intensity reduction and renewable energy deployment.  But another key policy tool at the central government’s disposal is energy price reform.  At the G20 in Pittsburgh last month, the leaders agreed to phase out subsidies to fossil fuels in the “medium term.”  The impact of such a plan, if implemented, is projected to reduce greenhouse gas emissions by 10 percent by 2050.

Beijing has already attempted to do its part with fuel pricing.  Since middle of last year, it has started to move the pricing of gasoline (see previous posts “China Announces Dramatic Energy Price Reforms” and “More Petroleum Price Reforms: Move towards the Market and Higher Fuel Tax“), which has traditionally been kept artificially low, towards market prices through a somewhat complicated pricing formula.  Retail prices still do not fully reflect market prices of crude oil so as to allow some level of price cushioning when oil prices exceed $80 per barrel.  According to a recent explanation:

China would adjust domestic fuel prices when global crude prices reported a daily fluctuation band of more than 4 percent for 22 working days in a row.

The commission [NRDC] said refiners would enjoy “normal” profit when global crude prices are below 80 U.S. dollars per barrel, but would face narrower profit margins when the crude prices rise above 80 U.S. dollars per barrel.

However, fuel prices would not go further up, or only be raised by a small margin, when crude prices rise above 130 U.S. dollars per barrel, and fiscal and tax tools would be used to ensure supplies

So while the government continues to maintain control over fuel prices to maintain relative affordability and minimize social disruption, it is at least more responsive to global oil prices.  Even with recently heightened fuel taxes, gasoline prices remain lower to that of major oil importing countries, although it is currently higher that that of the United States.

Progress must also be made on electricity price reform.  That process has already started (again, see previous post “China Announces Dramatic Energy Price Reforms“) but utilities need to be better able to pass down its costs to end-users (current law allow it to pass down 70 percent of cost chnages, but this is not always followed).  As mentioned before, a key feature of the draft comprehensive energy law under consideration is the reform of energy prices towards more market-oriented mechanisms, a transformation that would be a boon to efforts in promoting energy efficiency and renewable energy in China.

Picture Credit: Who is Tom Stack

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