China Plans for National Climate Emissions Trading in the Next Five Years

As part of China’s strategy to reduce carbon intensity and improve its energy efficiency, China is moving toward a national carbon emissions trading scheme as part of its 12th Five Year Plan (2011-2015).  China aims to meet its goal of reducing carbon intensity by 40-45% by 2020, and needs to implement aggressive measures to reduce carbon emissions while economic growth and demand for resources continue to grow.  The International Energy Agency states that China’s energy consumption for 2009 totaled to approximately 2.132 billion tons, which account for 17% of the world demand for energy. In the next 25 years, China will account for 22% of world energy demand.

One of the key initiatives in place to reduce carbon intensity is through the Top 1,000 Enterprises Program, which requires the top 1,000 energy consumers to sign a contract with the government to improve their energy efficiency. The Lawrence Berkley Lab reports that the Top 1,000 Enterprises Program “could contribute to somewhere between approximately 10% and 25% of the savings required to support China’s efforts to meet a 20% reduction in energy use per unit of GDP by 2010.”  Additionally, in August of 2010, China ordered 2,000 highly polluting, unsafe, or inefficient energy plants to close down within two months.  This measure is in line with China’s 11th Five Year Plan (2006-2010), to reduce energy intensity by 20% from the 2005 level. By the end of Oct. 2010, China had achieved its energy efficiency goal by phasing out inefficient production capacity of 87.12 million tons of steel, 60.38 million tons of iron, and 214 million tons of cement in 2006-2010. Yet, at the same time, Chinese industries use 20% to 100% more energy per unit of output than their US, Japanese, and other counterparts.

While the reduction in energy use is a substantial improvement, China recognizes the need to establish a national market-based carbon trading system to further reduce its carbon emissions and stimulate low-carbon growth.   This national domestic carbon trading system would be self-imposed and separate from the Kyoto Protocol.  The challenge is: how should a carbon emissions program be implemented in China?  Which industries should be selected to participate first? Should absolute caps on emissions for certain industries be imposed? Unlike the United States and Europe, China lacks experience in financial and environmental trading markets, and will need to draw on the experience from other countries to ensure quality and reliability of emissions data that would be included in a carbon trading system.

In August of 2008, the first voluntary carbon trade was sealed when a Shanghai based automobile insurance company purchased more than 8,000 tons of carbon credits through a green commuting campaign during the Beijing Olympics.  The trade was carried through the China Beijing Environment Exchange, “a professional market platform to trade environmental equities.”

With regard to implementing a domestic carbon trading program, China will most likely launch pilot projects in certain cities or industries, such as steel, cement, and aluminum, before implementing the program nationwide.  In August of 2010, China launched a low carbon pilot in select cities and provinces to test how to implement low carbon growth in cities.  China’s National Development and Reform Commission chose to implement the low-carbon province and low-carbon experiment in five provinces- Guangdong, Liaoning, Hubei, Shaanxi, and Yunnan, and eight cities: Tianjin, Chongqing, Shenzhen, Xiamen, Hangzhou, Nanchang, Guiyang, and Baoding.

While the design and structure of China’s national carbon trading system is being developed, China’s entry into the carbon trading market would significantly impact businesses and the environment.  If China installs a system to cap emissions of its industries, carbon credits would stimulate growth in the clean energy industry, amidst the restructuring of domestic energy companies.

The Chinese government can pass new policies quickly, but the major challenge will be implementing an emission system that is measurable, reliable, and verifiable.  There is a great need for institutional capacity building and knowledge sharing between the East and the West if China is to develop a sound national carbon trading scheme.

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