MARKETS:

7 Chinese pilot programs make final preparations for emissions trading

SHANGHAI -- China's search for ways to use market forces to combat climate change has taken another step forward, with a major Chinese city unveiling its version of a cap-and-trade market in greenhouse gas emissions.

Shenzhen, population 14 million, is one of five Chinese cities and two provinces selected to launch pilot emissions trading programs. Its effort, announced last week, is intended to apply to nearly 800 facilities across 26 economic sectors and is preparing to start next year.

Shenzhen's plan sheds more light on the evolution of China's carbon market, which has remained in the talking stage for years. The plan of the coastal city, located just north of Hong Kong, also appears to boost renewable energy capacity in less-developed western China because emitters under the system will be allowed to buy credits in western wind power, for example, to offset their emissions.

Shenzhen's system will reduce emissions from sources that contribute to more than half its carbon dioxide emissions. That will help the city achieve its carbon reduction goal.

The city has pledged a 21 percent cut in its emissions per unit of economic output by 2015 compared with 2010 levels. A team of experts is working to translate that cap into specific amounts that those facilities could emit. Wu Delin, who leads the interagency committee drafting the proposal, explained the plan at a news conference.

Fred Krupp, president of the Environmental Defense Fund, a New York-based environmental group that has been working with China for several years, said the city's action is the latest step toward the development of a national emissions trading system in China.

"We see clear evidence of China's commitments to carbon and conventional pollution reduction, and an eagerness to embrace the possibilities of doing so through a cap-and-trade program -- both at the national level and in key local areas," Krupp said in an interview with ClimateWire. "The goal is to establish a national trading system by 2016. Today's seven trading pilots in China cover nearly 250 million people."

Price floors and ceilings, or not?

Shanghai and the province of Guangdong, which includes the city of Shenzhen, recently revealed their plans, and the rest are in the final stages of drafting.

The emerging regional carbon markets follow the same criteria in many aspects. But they accommodate local characteristics, too. For instance, because Shanghai's emissions have been largely driven by fast-growing nonindustrial sectors, the city's system covers hotels, airports and other energy-guzzling service providers. The manufacturing hub Guangdong, on the other hand, targets its factories only.

While the big picture of China's carbon markets is gradually taking shape, some crucial details are still missing. For one, it is unclear what penalties will be imposed if facilities exceed their emission quotas or caps but refuse to pay the fees. Another unknown is the extent to which the Chinese government should influence carbon trading.

"Scheme drafters are debating whether to set up a ceiling price and floor price for carbon credits," said Chen Hongbo, an associate professor at the Chinese Academy of Social Sciences, a key government think tank in Beijing. As Chen explained, saving the emerging carbon market from price surges and slumps is of great concern to Chinese leaders, but there are concerns about whether such controls would interfere with basic free market operations.

Chen says he personally believes the best option is to establish a government-controlled fund that can be used to buy carbon credits when the price is too low and sell them otherwise. Shanghai has opted for this solution.

Another problem that planners are wrestling with is that deciding emissions caps requires historical data, but few facilities have complete records on what they have emitted, said Qi Shaozhou, a professor at Wuhan University who is helping to draft the emissions trading system for Hubei province.

Those difficulties may also help explain why some planners are revising their market approaches. Two years ago, when Guangdong and Hubei provinces were designing their emissions trading systems, there were talks about linking them but that has since been dropped, said Chen, who oversaw the proposal.

Roots in the U.S.

Chen also mentioned that smoothing the transition to carbon trading will be the emphasis in the coming years to help emitters get familiar with the new mechanism and to develop the infrastructure needed for monitoring, reporting and verifying emissions data.

The recently released emissions trading systems echoed such thoughts. While still not included in the upcoming carbon trading, hundreds of emitters in Guangdong and Shanghai are being required to monitor and report their emissions, a move designed to prepare them for serious trading.

The basic concepts of cap and trade were originally devised by the world's second-largest emitter, the United States, where a program in California will soon be launched.

But the chances of a national U.S. program seem remote at the moment. Republicans in the Reagan and George H.W. Bush administrations developed cap and trade to generate Republican backing to remove lead from gasoline and cut down emissions of sulfur dioxide. The plan was that the use of free-market forces would find the lowest-cost ways to reduce emissions either directly or through buying offsets.

The idea was to avoid government mandates, and it appealed to market traders and utility companies, but later, when cap-and-trade legislation was proposed for use against greenhouse gases, it was defeated by Republican conservatives and fossil fuel industries, which rebranded it as a hidden tax, or "cap and tax."

"It is exceptionally ironic that an idea and an approach born and bred in the United States by a series of Republican administrations is taking root to address climate change not in Washington, D.C., but in Europe, New Zealand, Australia, Korea and China," said Robert Stavins, an economist at the John F. Kennedy School of Government at Harvard University. Stavins helped work out the details for the initial U.S. versions of emissions trading.

Reporter John J. Fialka contributed from Washington, D.C.