China’s Carbon Reduction Debate Leans Toward Expansion of Trading Platforms

Owen Haacke and Daniel Markus

China’s recent push to address its environmental concerns—in particular its rampant air pollution—has brought to the forefront an internal debate on how the country’s leaders will cut carbon emissions. Recent reports have indicated the likely expansion of carbon trading program in the near future, while a proposal for a carbon tax appears to have been temporarily shelved. As the Chinese government begins preparatory work for its 13th Five Year Plan (FYP), it remains unclear to what extent government will push forward carbon emissions reduction schemes.

Currently, strict carbon emissions controls are absent from China’s guiding energy policy, the 12th FYP (2011-15) for Energy Development. That plan sets a 2015 target to reduce overall carbon intensity—calculated by metric tons of carbon per 10,000 RMB—by 17 percent from 2010 levels. This is the part of China’s long-term plan to reduce carbon intensity by 40-45 percent by 2020. Such targets have prompted policymakers to develop plans that diversify China’s energy mix and restrict coal development, presenting foreign companies with many opportunities for selling innovative emissions reduction technologies in China. A nationwide carbon trading platform or tax could further expand that market, while also helping China meet its carbon emissions reduction targets.

Carbon reduction schemes present opportunities and challenges for government and foreign firms

Incremental implementation of carbon trading platforms or a carbon tax present opportunities and challenges for both local governments and foreign and domestic firms operating in China. Both schemes, if implemented nationwide, would result in additional costs for polluters and more opportunities for green technology firms, while also speeding up the transformation to more energy efficient and clean industries.

  • Carbon trading platforms  China currently has carbon trading platforms in Beijing, Tianjin, Shanghai, Shenzhen, Guangdong, and Hubei, with the newest—approved in 2011—launched in Chongqing on June 19. The platforms have served as testing grounds for a potential nationwide system, which could come online near the end of the decade. But a lack of transparency and a shortage of carbon permits has made it difficult to set prices according to actual supply and demand. Enforcement has also been an issue, as more than a quarter of companies participating in Beijing’s carbon market program failed to submit their 2013 emissions data by the mid-June deadline.
  • Carbon tax  A carbon tax has garnered less public attention than carbon markets, last receiving official press coverage in late 2013. A plan initially proposed by the National Development and Reform Commission (NDRC) and the Ministry of Finance in 2010 discussed a potential carbon tax as part of China’s transition from an emissions fee system to a broad-based environmental tax. Recent reports have indicated that the carbon tax has been removed from the draft version of China’s environmental tax law, which was recently submitted to the State Council for review. A nationwide carbon tax—if resurrected—would provide additional revenue for debt-laden local governments, but the impact on businesses and investment would require companies to adopt measures to become more efficient.

To help reduce its carbon emissions, China has made ambitious plans for developing wind, solar, hydro, and nuclear power, leading the world in renewable energy investments at $56.3 billion in 2013. For instance, China’s 2013 National Clean Air Action Plan calls for renewable sources to account for 13 percent of total energy consumption by 2017. A nationwide carbon market or tax could help China reach its goal of capping coal emissions at 65 percent of energy consumption by compelling companies to seek new sources of energy and increase energy efficiency. Cleaner sources of energy such as natural gas, which accounts for only 6 percent of China’s energy consumption, may be poised to play a larger role if carbon emissions become more costly. Foreign companies are already taking advantage of China’s desire to make natural gas a greater part of its energy mix. For example, on June 18 BP signed a $20 billion liquid national gas supply deal with China National Offshore Oil Corporation.

Implementation slow, trajectory uncertain

While implementation of both a nationwide carbon trading platform and a carbon tax has been promoted by the NDRC and the Ministry of Environmental Protection, progress has been relatively slow, and in the interim local governments have been utilizing a combination of other methods to address emissions. Some of these methods include making air quality information more accessible to the public. Additionally, policies like the State Council’s 2014-2015 Action Plan on Energy Conservation, Emission Reduction, and Low-carbon Development call for the central government to reduce overall coal consumption—a major contributor to China’s air pollution.

The Vice Chairman of China’s National Experts Panel on Climate Change , a non-governmental advisory group, has indicated that the Chinese government will take even more dramatic measures. Speaking in advance of United Nations climate change talks in Germany, He Jiankun—an advisor to the Chinese government on climate change issues—told western media that China will set a defined cap on total carbon emissions. The statement followed another by the United States’ that would place emissions caps on coal-fired power plants.  

A US-China Business Council source that has close interaction with the Ministry of Environmental Protection indicated that developing a nationwide emission trading regime may be more likely than a carbon tax, noting the emphasis on shifting toward more market-driven policies during the third plenum last November. Official statements also lean toward carbon trading: In early June, China Daily reported that Sun Cuihua, deputy director of NDRC’s climate change department, said China plans to set up a nationwide carbon emissions trading market within three years. Other top officials, such as NDRC Vice Chair Xie Zhenhua have also indicated that the government will try to set up a nationwide carbon trading platform by the end of the decade. 

Looking forward, executives should pay close attention to the direction China will take in its upcoming 13th FYP, as the expansion of China’s carbon market or moves to push forward with a carbon tax or an absolute cap on emissions—all possibilities—could increase tax and regulatory compliance costs, but also attract investment in clean energy and energy efficient technologies.