Carbon Trading and Taxes

2newhangon  Carbon Trading and Taxes

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 storysuggesting that China would adopt a carbon emissions trading schemethat would “for the first time, place limits on the amount ofgreenhouse gases Chinese industries are allowed to emit.”  The articlewent 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 onclimate 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.  Thetruth is that they are no where near to launching the kind ofeconomy-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 standardfor voluntary carbon offsets, kitschily called the “Panda Standard“. Nothing about a mandatory trading scheme, and certainly nothing even inthe nature of a liquid secondary market of emissions trading–the factthat the Panda Standard speaks to voluntary carbon offsets indicatethey are only considering the primary market.  (For a distinctionbetween 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 Gameslast year generated 8,026 tons of carbon credits, and they were boughtby the Shanghai-based Tianping Auto Insurance at $5 per ton.  Onecarbon analyst I spoke to observed that the current effort to develop avoluntary offset standard is a reaction to the criticism that thetransaction received for lack of transparency and lack of,particularly, conformity to established standards.  With intentions toparticipate in more voluntary offset transactions, it is probably agood 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 beganto ‘reform and open up’ [in 1978 as part of economic and social reformsinitiated by Deng Xiaoping]…He doesn’t know who to sell to. He doesn’tknow at what price he should sell, or who, in fact, is the mostreliable buyer.

According to Mei, says Reuters, the Chinese government has “alreadyrejected proposals to create a secondary CO2 market, saying it was notappropriate given China’s role as a supplier rather than a buyer ofCERs.”  (CERs stand for “certified emissions reductions,” which arecarbon credits generated through a global primary carbon market createdunder the Kyoto Protocol called the clean development mechanism, orCDM.)

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

Pilot Schemes for Next Five Year Plan?

While any semblance of an economy-wide carbon emissions tradingsystems seems way off the cards, the door is still open to experimentsat the pilot phase.  In fact, the Ministry of Environmental Protectionrecently circulated a statement at a news conference in Beijing abouttwo weeks ago that included “Carry out trial work on trading emissionand pollution permits, and ecological transformation” as one of itspriorities 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 aremore likely to cover SO2 and COD (chemical oxygen demand, a measure ofwater pollution), for which there already exist nationwide caps atabsolute levels in the current five year plan. On the other hand, ifthe pilot schemes are limited in scope and scale, the lack of anation-wide cap on CO2 may not be a stumbling block to enact ademonstration emissions trading systems for CO2, say for a certainspecific sector in a specific geographic area, e.g. iron smelters inShanxi province.  Still, given that the central government has onlyvery 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 managecarbon, one also has to consider the viability of a carbon tax.  Itseems like there’s a ways to go for China on this one as well.   Ireported almost a full year ago that (see last paragraph of previouspost “China Carbon Forum 2008 Review“)carbon taxes were on the table.  Last month, regulators from variousministries were considering a proposal for emissions taxation from thethe Energy Resources Institute, a government think tank affiliated withthe mighty NDRC.

Jiang Kejun a researcher of ERI said it would be another four tofive years before a tax of greenhouse gas emissions could beimplemented. Again, it was a matter of not putting the cart before thehorse-other resource taxes have yet to be launched, so until Chinagains 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 carbontrading, what are some actionable step China can take now?  Well, in asense, it has already started to mitigate carbon emissions growththrough its efforts in energy intensity reduction and renewable energydeployment.  But another key policy tool at the central government’sdisposal is energy price reform.  At the G20 in Pittsburgh last month,the leaders agreed to phase out subsidies to fossil fuelsin the “medium term.”  The impact of such a plan, if implemented, isprojected 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 ofgasoline (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 marketprices through a somewhat complicated pricing formula.  Retail pricesstill do not fully reflect market prices of crude oil so as to allowsome level of price cushioning when oil prices exceed $80 per barrel. According to a recent explanation:

China would adjust domestic fuel prices when globalcrude prices reported a daily fluctuation band of more than 4 percentfor 22 working days in a row.

The commission [NRDC] said refiners would enjoy “normal” profit whenglobal crude prices are below 80 U.S. dollars per barrel, but wouldface 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 asmall 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 fuelprices to maintain relative affordability and minimize socialdisruption, it is at least more responsive to global oil prices.  Evenwith recently heightened fuel taxes, gasoline prices remain lower tothat of major oil importing countries, although it is currently higherthat 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 toend-users (current law allow it to pass down 70 percent of costchnages, but this is not always followed).  As mentioned before, a keyfeature of the draft comprehensive energy law under consideration isthe reform of energy prices towards more market-oriented mechanisms, atransformation that would be a boon to efforts in promoting energyefficiency and renewable energy in China.

Picture Credit: Who is Tom Stack

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