Climate Compass Blog

Carbon trading in China: short-term experience, long-term wisdom

Last week, Hubei Province became the sixth jurisdiction in China to launch a pilot carbon emissions trading program, joining Shenzhen, Shanghai, Beijing, Tianjin, and Guangdong Province. In the coming months, two additional programs will be introduced in Chongqing and Qingdao. In total, the eight pilot programs will cover an estimated one billion metric tons of carbon dioxide (MTCO2), second only to the European Union’s Emissions Trading System. The pilot trading programs are part of the strategy laid out in China’s 12th Five-Year Plan (2011-2015) to reduce carbon intensity (CO2 emissions per unit of GDP) by 40-45 percent from 2005 levels by 2020.

As the world’s largest energy consumer and emitter of carbon dioxide, China’s efforts to rein in emissions are significant at both the global and national level. In addition to the carbon trading pilots, China recently announced measures to limit coal to 65 percent of primary domestic energy consumption by 2017, down from 69 percent in 2011, while also banning new coal generation in Beijing, Shanghai, and Guangzhou.

To meet its 2020 emissions goal, China is expected to introduce a timeline for a national carbon emissions trading program in its 13th Five-Year Plan (2016-2020). The plan, in addition to supporting China’s domestic targets, could also complement broader goals that will be outlined in a new post-2020 international climate agreement that countries will formulate in late 2015. In February, the United States and China pledged to strengthen bilateral cooperation in developing their respective post-2020 climate commitments. In the lead-up to 2015, China’s pilot trading programs will present policymakers with a set of unique policy options and data points to use in crafting a national program. So, it is worth exploring some key elements.

The most notable distinction between China’s pilot programs and other existing carbon trading programs — such as the European Union’s Emissions Trading System, California’s program, and the Regional Greenhouse Gas Initiative — is the use of carbon intensity targets, rather than absolute carbon emissions caps. The targets range from an 18 percent reduction in carbon intensity in Beijing to 21 percent in Shenzhen. With intensity targets, carbon emissions may actually increase over time. A report released by the Australian National University illustrates that a 6-9 percent annual GDP growth rate in China between 2013 and 2020 would lead to a 9-36 percent net increase in carbon dioxide emissions, even while achieving the 40-45 percent emissions intensity target.

At their core, each pilot operates along similar allowance allocation procedures. Each program has established an emissions allocation supply based on emissions data reported by covered industries. Allocation of allowances, however, varies across each program, with free allocation being lowest in Shenzhen, Tianjin, and Hubei at 90 percent. To stimulate trading activity, each program allows trading not only among covered entities, but also with certain third-party participants.

The threshold for compliance ranges from annual emissions of 5,000 MTCO2 in Shenzhen, to 20,000 MTCO2 and above in Shanghai, Guangdong and Tianjin, to 60,000 metric tons of coal consumption annually in Hubei. As China’s fastest growing municipal economy, Tianjin has set aside 15 percent of its credit supply in reserves to adjust for increased demand from new entrants and third-party investors. As the rules currently stand, offsets can be used to satisfy only 5 percent of a company’s obligation amount in Shanghai, but more than 15 percent of an obligation in Hubei. Further, Hubei varies from the other pilots in that it prohibits firms from setting aside allowances for future compliance, a process known as banking.

Differences among the programs reflect the unique economic structures of each municipality or province. Shanghai, for example, is the only pilot to include domestic aviation under its scope of compliance, whereas Chongqing will cover energy-intensive industrial sectors exclusively. Further, the Beijing program will account for indirect, cross-border emissions, given that 70 percent of Beijing’s electricity is generated outside of the municipality. As the program with the largest emissions coverage, Guangdong’s most closely reflects China’s national carbon dioxide emissions portfolio due to its vast expanses of urban and rural environments.

Taken together, these pilots represent a substantial effort by China’s government to employ market-based policies to reduce carbon emissions. Trading is already taking place, most notably in Shenzhen. In the first week of April, prices on the Shenzhen Emissions Exchange held slightly below $13/MTCO2. In Beijing and Guangdong, prices hovered between $9-10/MTCO2, with prices in Tianjin and Shanghai settling around $5.50-6.20/MTCO2. Inaugural trading in Hubei saw the lowest price of the six existing programs at $4.29 per credit.

Naturally, each pilot program must overcome challenges to ensure efficient levels of carbon abatement. In doing so, China has taken the right steps by issuing a mandate requiring all companies with emissions over 13,000 MTCO2 in 2010 to begin surrendering future emissions data by 2015. This data will help China develop a national carbon emissions inventory, thereby improving the accounting accuracy of each pilot program in the short-term, while avoiding structural instability due to allowance over-supply in the long-term.

Administrators of China’s pilot programs are likely to collaborate and explore regional linkages with each other, and even with voluntary programs like Qingdao. To be sure, China’s implementation of pilot-level emissions trading programs will provide invaluable information and technical experience when the time comes to scale up to a national emissions trading program — one that is poised to become the world’s largest in the coming years.

States look to “green banks” to leverage private investment in clean tech

Clean energy and energy efficiency can save wear and tear on the environment and climate, but sometimes it takes money to take action. And in a time of tight government budgets, where will that money come from?

A new and growing solution to this energy finance problem is called the “green bank” or “clean energy bank” -- government-created institutions that help facilitate private sector financing for clean technology projects. States have used a variety of tools and incentives over the years to promote technology deployment. Green banks put many of the tools used to encourage private investment in one place.

Connecticut was the first state to open a green bank in 2011, and the idea is catching. New York opened a green bank in February. California state Sen. Kevin De Leon has proposed creating a green bank in his state. And U.S. Rep. Chris Van Hollen (D-MD) plans to introduce legislation to establish a federal green bank.

Green or clean energy banks can leverage a small amount of public money to significantly increase private investment in clean technologies. This leads to accelerated deployment of solar power, energy efficiency upgrades, and other clean technologies without creating a large burden on public budgets.

Climate science is clear: Earth is warming

A recent op-ed in the Wall Street Journal dredges up debunked conclusions drawn from a cherry-picked set of temperature measurements to try to call into question the reality and potential severity of climate change.

In a nutshell, authors Richard McNider and John Christy argue that warming in the upper atmosphere since 1979 is less than models had predicted and, therefore, models can’t be trusted and climate change shouldn’t be a concern.

In fact, virtually all climate data and research show that the Earth is warming. And it will continue to do so if we keep pumping greenhouse gases into the atmosphere. And this warming will bring an increased risk of more frequent and intense heat waves, higher sea levels, and more severe droughts, wildfires, and downpours.

To get at the facts, we can draw on recent climate assessments, including the State of the Climate report compiled by National Oceanic and Atmospheric Administration (NOAA), the Intergovernmental Panel on Climate Change (IPCC) Working Group I report, and the National Research Council’s America’s Climate Choices, plus other recent research (Thorne et al., 2011, Santer et al., 2013).

Based on this research, here are three things to keep in mind:

This winter was cold for some, not for all

A lot of folks in the eastern half of the United States are breathing a sigh of relief that spring is just around the corner. Average temperatures this winter were among the Top 10 coldest in some parts of the Upper Midwest and South. More than 90 percent of the surface of the Great Lakes is frozen, the highest in 35 years.

But while East Coast and Midwest kids have been sledding and their parents have been shoveling, it has not been cold everywhere. In fact, many areas are unusually warm.

In Alaska, January temperatures were as high as they have been in 30 years. The Iditarod dogsled race was especially treacherous this month because of a lack of snow. Crews had to stockpile and dump snow on the ground at the finish line in Nome, where temperatures earlier this winter broke a record.

Globally, January was the fourth warmest on record – really – despite pockets of well-below-normal temperatures in parts of the United States. According to the National Oceanic and Atmospheric Administration (NOAA), most areas of the world experienced warmer-than-average monthly temperatures. For example:

  • China experienced its second warmest January on record.
  • France tied its warmest January.
  • Parts of Brazil and Australia saw record heat.
January temperatures were above normal for much of the globe.
January temperatures were above normal for much of the globe.

Why we shouldn’t throw out flood insurance reform

It’s not surprising that homeowners in flood-prone areas are asking their representatives in Congress to protect them from higher flood insurance bills.

Here’s the question. Who is going to protect them from higher floods?

Congress in 2012 did the right thing in fixing a broken flood insurance system that has fallen $24 billion in debt, largely because the price of flood insurance hasn’t for many years matched the risk of a flood. Now, both the House and Senate have passed bills that would undo many of these reforms.

Congress should find a way to address both the immediate and long-term concerns of their constituents, and the rest of the nation. We can’t ignore the plight of families facing hefty insurance increases, and we must ensure that the process of making flood insurance reflect flood risk is fair and transparent. But we also can’t ignore the increasing costs and risks associated with growing coastal development in an era of rising seas and heavier precipitation.

Among the problems with the National Flood Insurance Program (NFIP) that we outlined in a C2ES brief: