China to Implement a Carbon Trading Scheme in its Battle Against Rising Emission

No one would argue that pollution is a major problem in China.

As the world’s largest emitter of carbon dioxide, it will be interesting to see how rigorously Beijing enforces its latest experiment to curb greenhouse gas emissions.

The NY Times used the announcement of China’s trials with a carbon trading market to take a pop at US reluctance to adopt the idea, but the real story is whether China will be able to make a market-based system to incentivize reductions in emissions (which has descended into a farce in Europe) work effectively in a communist country – wouldn’t that be irony?

The system is to be piloted first in the southern city of Shenzhen, while six more regional pilot programs are said by the NYT to be planned for next year. The paper reports that under the Shenzhen program, the government will set limits on carbon dioxide discharges for 635 industrial companies and 197 public buildings that together account for about 40% of the city’s emissions.

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Polluters whose emissions fall below the limit can sell the difference in the form of pollution allowances to other polluters. These companies must decide whether it is cheaper to reduce emissions or pollute above their limit by buying allowances, whose price will be set by supply and demand. But as the paper points out, the pressure will be on, because the limits will decrease over time.

One of the problems in Europe is that in an effort to limit the damage to European emitters when competing against those outside the EU, the major firms have been awarded large numbers of credits, reducing the incentive to invest in CO2-controlling technologies. In addition, EU firms can offset their pollution by buying credits awarded to low-emission projects outside the EU, resulting in a massive transfer of funds from within Europe to developing countries with no overall reduction in emissions.

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It’s doubtful the Chinese will be quite so stupid and the market will almost certainly be localized to achieve genuine reductions, but while still in its pilot stage, you can’t help thinking it will encourage investment in areas not covered by the scheme – at the very least it will distort investment decisions between those cities within the scheme and those without.

Nevertheless, with an estimated 1 million people in China dying prematurely each year from air pollution and with warming temperatures potentially putting parts of China’s wealthiest coastal regions at risk, Beijing’s moves can be seen as a genuine effort to get to grips with a major problem.

For the sake of all those folks in Japan, Hawaii and the North American West Coast who receive the acid rain and airborne pollutants from China, we have to hope it works.

By. Stuart Burns