China Introduces Emissions Trading System

As the EPA moves to replace the Clean Power Plan, China launches nationwide carbon trading.

On Tuesday, the Chinese government released plans for the largest carbon credit market in the world. The nationwide program will cap the total carbon allowance of the power generation sector and, over the coming years, is expected to eventually extend to eight of China’s most carbon intensive industries, including cement and steel manufacturing. The timeframe for full implementation may be as soon as 2020. Once fully implemented, this program will create a marketplace in which companies can pay to emit more than their government-capped quantity of GHG’s. Similarly, companies that adopt sustainable practices will be able to profit by selling their extra carbon credits to more heavily polluting industries. If effectively implemented, this nationwide market could significant help China reach its Paris Climate Agreement goal of reversing growing emissions trends by 2030. Just taking the first step and creating a carbon trading scheme for the power generation sector, will alone regulate over 3 billion tons of CO2 equivalent emissions per year; approximately half of China’s total emissions from fossil fuels.

Just one day earlier, the EPA issued an advanced notice of proposed rulemaking (ANPRM) requesting comments on the repeal of the Clean Power Plan, the Obama Administration’s controversial landmark environmental policy. EPA administrator, Scott Pruitt, announced the agency’s plan to replace the CPP in October, and the 60-day comment period is designed to receive public input on, “the roles, responsibilities, and limitations of the federal government, state governments, and regulated entities in developing and implementing such a rule, and…the appropriate scope of such a rule.”

This week’s announcements reflect the increasingly apparent difference in attitude towards climate regulation between the world’s two largest carbon emitters. As China works to implement the world’s most ambitious emissions trading scheme to date, the Trump administration continues efforts to dismantle existing climate regulation, and distance the United States from its former commitment to the UN Climate Accord.

China’s program, which is being hailed as a game-changing accomplishment by environmentalists, is most similar in design and scope to the European Union’s Emissions Trading System (EU ETS). The EU ETS was first implemented in 2005, and over its decade long existence has received mixed feedback. While there is some indication that the EU ETS and other cap and trade programs like California’s CARB program have significantly reduced emissions, while supporting a growing economy, these programs have also received criticism for being too opaque and expensive, and for disincentivizing sustainable investment.

Never-the-less, there is hope that China’s new cap and trade market will successfully navigate these common pitfalls by taking a slow and measured approach to the programs implementation. Plans for a nationwide emission trading scheme have been in development since 2015 and are being informed by a number of provincial trading markets that have been set up throughout the country. By slowly phasing in new sectors of the economy, there is hope that China will successfully limit the availability of credits, leading to a stable and effective carbon trading market.

Although cap and trade programs have some inherent limitations over, say, an economy-wide carbon tax; it is evident that economies around the world continue to rely on this system as a way to incentivize more sustainable growth. Congress failed to implement a nationwide cap and trade system in 2010, and now the Obama Era Clean Power Plan, which created state specific emissions goals and trading, is being threatened. As the EPA prepares to reevaluate the US strategy for tackling greenhouse gas emissions, it would be advisable for decision makers, environmentalists, and industry advocates to reflect on why emissions trading strategies seem to succeed elsewhere, yet consistently falter in the United States. 

Oscar Serpell

Associate Director of Academic Programming
Oscar Serpell oversees student engagement activities, new student programming, and alumni connections. He also participates in several key research projects at the center and also writes blog posts and policy digests on timely energy policy topics.