Climate Change and Emission Trading Systems (ETS)

China’s Perspective and International Experiences

Qin Tianbao

KAS-Schriftenreihe CHINA No. 102 (en) Shanghai 2012

Publisher Shanghai Project Office of the Konrad-Adenauer-Stiftung in the PRC

Room 1806, Overseas Chinese Mansion No.129, Yan'an Xi Road, Shanghai 200040 Tel.: 0086 21 6249 8511 Fax: 0086 21 6249 4549 E-mail: [email protected] Webpage: www.kas.de/china Person responsible: Dr. Peter Hefele, Director KAS Shanghai

The content of this publication does not necessarily reflect the opinion or position of the Konrad-Adenauer-Stiftung.

Cover photo by Mr. Hayata (Creative Commons: http://www.flickr.com/photos/mrhayata/358289272/in/set- 72157601528358955)

发行: 德国阿登纳基金会上海办公室地址: 上海市延安西路 129 号华侨大厦 1806 室邮编: 200040 电话: 0086 21 6249 8511 传真: 0086 21 6249 4549 E-Mail: [email protected] 主页: www.kas.de/china 主编: 何彼得博士，德国阿登纳基金会上海办公室主任

文章内容仅代表笔者之观点，与阿登纳基金会立场无关。

KAS-Schriftenreihe China 德国阿登纳基金会系列丛书

Climate Change and Emission Trading Systems (ETS)

China’s perspective and International Experiences

Qin Tianbao

No. 102 Shanghai 2012

Foreword

Provision of sufficient and affordable energy is a precondition for economic development and prosperity in every society. The fact that present-day industrialised countries are so prosperous is largely due to the exploitation of finite energy supplies such as oil, coal, natural gas and uranium. But the downside of these energy sources is a changing global climate that endangers our environment. For the Konrad-Ade- nauer-Stiftung global environmental and climate protection is not only a question of social and economic order. It is foremost an ethical obligation to protect the creation.

Green house gas (GHG) emissions from fossil energy sources are the main cause of global climate change. For this reason and since the conference of Kyoto 1997 emission trading systems (ETS) have become an important – and in terms of a global order policy – an efficient economic tool to reduce green house gas emissions.

The study of Professor Qin Tianbao, Research Institute of En- vironmental Law at Wuhan University (RIEL) provides a con- cise overview over international ETS and discusses their ap- plicability to China in the framework of the overall environmental and climate policy of the People’s Republic of China. China can learn a lot from the experiences made in the Euro- pean Union, in Australia and in the United States and will hopefully introduce its own ETS in 2014. By doing this, China – as the largest emitter of GHG – would contribute to the goal of an effective reduction of GHG.

The study is funded by the German Ministry of Economic Co- operation (BMZ) and is part of KAS’ global project on climate change. The content of this publication does not necessarily reflect the opinion or position of the Konrad-Adenauer-Stiftung.

Dr. Peter Hefele

Director KAS Shanghai

Content

1. Introduction of CO2 ETS 6

2. International Experiences and Implications for China 13 2.2 US 20 2.3 Other Countries 27

3. Necessity of CO2 ETS in China 30 3.1 Internal Pressures: Unsustainable Development 30 3.2 External Pressures: Post-Kyoto Protocol Negotiation 44

4. Feasibility of CO2 ETS in China 54 4.1 Policy Support 54 4.2 Case Studies on ET of SO2 57 4.3 CDM Experiences 72 4.4 Case Studies on ET of CO2 76

5. Key Issues of CO2 ETS 77 5.1 Purposes and Principle 77 5.2 Mode of Emission Trading: “Cap and Trade” or “Baseline and Credit”? 78 5.3 Targeted Industries 79 5.4 Allocation of Emission Credits 79

1. Introduction of CO2 ETS

CO2 Emissions Trading Scheme decades scientists have understood (ETS) is an economic tool devel- the processes by which emissions oped for the purpose of reducing of CO2 and other gases might greenhouse gas (GHG) emissions warm the planet through the so- cost-effectively, which was initiated called "greenhouse effect". The by and developed based on the fundamental conclusion of the In- three "market-based" mechanisms tergovernmental Panel on Climate defined in the Kyoto Protocol 1 to Change (IPCC) reports is that cli- the United Nations Framework Con- mate change is happening and CO2 vention on Climate Change (UN- emissions can increase the future FCCC)2 as part of the response to- risk of climate change. So far the wards mitigation of global warming. most of climate change is driven by human actions. As a result there is a growing international consensus Global warming has been described that global action is required to re- as one of the greatest challenges duce human-induced GHG emis- for the twenty-first century. 3 For sions and prevent further damage to climatic systems. Nevertheless it 1 Kyoto Protocol, opened for signature was not until the 1980s that the in- 11 December 1997 (entered into force ternational concern about anthro- 16 February 2005). Text of the Kyoto pogenic impacts on the atmosphere Protocol is available at http://unfccc.int/ through such emissions gained pro- resource/docs/convkp/kpeng.pdf at 20 minence, and it was only in the last December 2011. 2 two decades of the twentieth cen- United Nations Framework Convention tury that the UN took the first steps on Climate Change, opened for signature 12 June 1992 (entered into force 21 towards recognizing and addressing March 1994). Text of the Convention is the issue. These first steps led to available at the conclusion of the 1992 UNFCCC, http://unfccc.int/resource/docs/convkp/ followed by its innovative 1997 conveng.pdf at 20 December 2011. Kyoto Protocol. 3 A consensus has been reached from a scientific, political, economic or legal perspective. See, eg, Kevin Watkins et al, With an ultimate objective of stabi- Human Development Report of 2007/08: lizing GHG concentrations at a level Fighting climate change: Human solidar- that would prevent dangerous an- ity in a divided world, United Nations thropogenic interference with the Development Programme (UNDP) Report climate system, the Convention (2007) http://hdr.undp.org/en/reports/global/h sets an overall international legal dr2007-2008/ at 9 August 2011, and framework for intergovernmental Carolyn Fry, The Impact of Climate efforts to tackle the challenge Change: The World's Greatest Challenge posed by climate change. However, in the Twenty-first Century (2008).

governments knew that its com- jectives (QELROs) for industrial mitments would not be sufficient countries’ anthropogenic emission enough to seriously tackle climate by source, and removal by sinks5, change. The Kyoto Protocol was of GHGs. However, the most inno- therefore adopted in 1997, which vative aspect of the Protocol may in shares the Convention’s objective, fact not be these strict commit- principles and institutions, and sig- ments but the introduction of the nificantly strengthens the Conven- three market-based mechanisms. tion by committing industrialized In order to fasten the massive re- countries (Annex I Parties) to indi- ductions of GHG emissions neces- vidual, legally-binding targets to sary to stop the processes of cli- limit or reduce their GHG emissions mate change, three “financial me- within a specific time frame. The chanisms” – Joint Implementation individual targets for Annex I Par- (JI), the Clean Development Me- ties are listed in the Kyoto Proto- chanism (CDM) and Emissions col’s Annex B, which add up to a Trading (ET) – have been devised total cut in collective emissions of under the Protocol. six GHGs 4 by 5.2 per cent from 1990 levels in the commitment pe- Joint Implementation (JI) is defined riod 2008-2012. Developing coun- in Article 6 of the Kyoto Protocol. tries (non-Annex I Parties) whose Under JI, an Annex I Party may paramount task at present stage is implement an emission reduction the economic development and project or a project that enhances eradication of poverty are free of removals by sinks in the territory of emission obligations during this pe- another Annex I Party and count riod. To date, the US is the only in- the resulting Emission Reduction dustrialized country that has not Units (ERUs) towards meeting its ratified the Kyoto Protocol. Fur- own Kyoto target. The sponsoring thermore, Canada has formally governments receive credits that withdrawn from the Kyoto accord in may be applied to their emissions December 2011 due to its eco- targets; the recipient nations gain nomic downturn. foreign investment and advanced technology. Usually, it is cheaper to The Kyoto Protocol, for the first carry out energy efficiency work in time, sets binding Quantified Emis- transition countries, and to realize sions Limitation and Reduction Ob- greater cuts in emissions by doing so. 4 The six gases include carbon dioxide, methane, nitrous oxide, sulfur hexaflouride, hydrofluorocarbons and perfluorocarbons and are to be combined in 5 Removal by sinks means removing a ‘basket’, with reductions in individual carbon dioxide from the atmosphere, gases translated in to ‘CO2 equivalents’ which could include the sequestering of that are then added up to produce a sin- carbon by land use, land-use change or gle figure. forestry (LULUCF).

A JI project must provide an addi- their assigned emissions commit- tional reduction in emissions by ments in a given budget period sources, or an enhancement of re- (2001-2020) were penalized movals by sinks, in order to be car- through a requirement to contrib- ries out. Projects have to be ap- ute to the CDF. The penalty was to proved by the Host Party and par- be contributed to a "non-Annex I ticipants have to be authorized to clean development fund" for use in participate by a Party involved in funding climate change projects in the project. Projects starting as developing countries in order to from the year 2000 may be eligible foster sustainable development. as JI projects if they meet the rele- The negotiation in Kyoto could be vant requirements, but ERUs may characterized as a struggle that only be issued for a crediting period merged the US-backed proposals starting after the beginning of 2008. for project-based JI, and the proposals for CDF, which stress that "each party included in Annex I to The CDM, which is defined in Article the Convention shall meet its QEL- 12 of the Kyoto Protocol, is the only ROs through domestic actions." 7 mechanism open to Contracting Eventually, the CDM evolved into a Parties classified as industrialized mechanism for Annex I countries to and developing countries. Deemed gain emissions offsets to achieve as “Kyoto Surprise”6, the proposal their QELROs. Developing countries, of the CDM emerged late in the however, highlight the CDM’s func- Conference of the parties. Three tion to assist them in promoting negotiations and consensus on the sustainable development, and see final text developed with unprece- it as a new channel for financial as- dented speed. The CDM is very sistance, investments, technology much a creation of combination of transfer, and promotion of equity. Brazilian proposals concerning the Clean Development Fund (CDF) and various proposals concerning JI. Besides the ultimate objective – The CDF was a compliance mecha- stabilization of GHG concentrations nism proposed by Brazil in a meet- in the atmosphere at a level that ing of the Ad hoc Group on Berlin would prevent dangerous anthropo- Mandate. Under the CDF proposal, genic interference with the climate parties who failed to comply with system – of the Convention, the

6 Raúl Estrada-Oyuela, ‘Remarks on 7 See the negotiating text by the Chair- From Kyoto to Buenos Aires: Technology man (NTC) (FCCC/AGBM/1997/3/Add.1 Transfer and Emissions Trading’ (Speech and Corr.1), dated 21 April 1997, pre- delivered at a conference held at Colum- pared by the Chairman, with assistance bia University, New York, 24 April 1998). from the Secretariat, is a comprehensive See also Jacob Werkman, ‘Unwrapping document reflecting all submissions the Kyoto Surprise’ (1998) 7(2) Review made by Parties to date and structured of European Community and Interna- in the form of a protocol, and without at- tional Environmental Law 147, 151. tribution to the Parties. Para.121.4.

CDM has two basic aims. The pur- free transfer of advanced technol- poses of the CDM shall be to assist ogy and from foreign investment Parties not included in Annex I in which are essential to sustainable achieving sustainable development development through implementing and to assist Parties included in An- eligible CDM projects in their coun- nex I in achieving compliance with tries. their quantified emission limitation and reduction commitments under A CDM project must provide emis- Article 3.8 In brief, it works in the sion reductions that are additional following way: it allows a country to what would have occurred oth- with an emission-reduction or emis- erwise. The projects must qualify sion-limitation commitment under through a rigorous public registra- the Kyoto Protocol (Annex B Party) tion and issuance process. Approval to implement an emission-reduction is given by the Designated National project in developing countries. Authorities (DNA). Public funding Such projects can earn saleable for CDM project activities must not Certified Emissions Reduction (CER) result in the diversion of official de- credits, each equivalent to one ton velopment assistance. The mecha- of CO2, which can be counted to- nism is overseen by the CDM Ex- wards meeting Kyoto targets. ecutive Board (EB), answerable ul- timately to the countries that have The mechanism is the first global, ratified the Kyoto Protocol. Since environmental investment and cre- the operational initiation of the CDM, dit scheme of its kind, providing a more than 3,000 projects have standardized emissions offset in- been registered worldwide and it is strument, CER. It stimulates sus- estimated to produce CERs amount- tainable development and emission ing to more than 2.7 billion tonnes reductions, while giving industrial- of CO2 equivalent in the first com- ized countries some flexibility in the mitment period of the Kyoto Proto- ways they meet their emission re- col.9 In recent years, China with its duction or limitation targets. Indus- large carbon emission potential and trialized countries pay for projects favorable investment and legal en- that cut or avoid emissions in de- vironments has become the global veloping countries and are awarded CDM projects centre. Already today, credits that can be used to meet CDM projects launched in China their own emissions targets; the have been responsible for approxi- developing countries benefit from mately 60 per cent of the total CERs 10 produced under the scheme. 8 United Nations Framework Convention on Climate Change, opened for signature 12 June 1992 (entered into force 21 March 1994). Text of the Convention is 9 See CDM in Numbers, UNFCCC website available at http://cdm.unfccc.int/Statistics/index.ht http://unfccc.int/resource/docs/convkp/ ml at 9 August 2011. conveng.pdf at 9 August 2011. 10 See CDM Statistics: CERs Issued by

ET, as set out in Article 17 of the sions obligations to be reached by Kyoto Protocol, establishes a sys- the participating entities. The Euro- tem of emission rights trading pean Union ETS is the largest whereby one Annex I country might scheme in operation. European Un- directly purchase from another An- ion Allowances (EUAs) is materiali- nex I country some of its rights to zation of the EU ETS quotas, and emit GHGs. More than actual emis- the tradable unit under the EU ETS. sions units can be traded and sold One EUA represents the right to under the Kyoto Protocol’s emis- emit 1 ton of CO2. sions trading scheme. The basic emissions unit is based on reduction Thus, a new commodity was cre- commitments. Parties with com- ated in the form of emission reduc- mitments under the Kyoto Protocol tions or removals. Since carbon di- (Annex B Parties) have accepted oxide is the principal greenhouse targets for limiting or reducing gas, people speak simply of trading emissions. These targets are ex- in carbon. Carbon is now tracked pressed as levels of allowed emis- and traded like any other commod- sions, or "assigned amounts", over ity. This is known as the “carbon the 2008-2012 commitment period. market” and it has grown as a re- The allowed emissions are divided sponse to the Kyoto Protocol. Car- into “assigned amount units” bon trading, sometimes called (AAUs). The other units which may emissions trading, is a market- be transferred under the scheme, based tool to limit GHG. It is de- each equal to one tonne of CO2, fined as: may be in various forms: a removal unit (RMU), which is on the basis of land use, land-use change and for- … purchase contracts whereby one estry (LULUCF) activities such as party pays another party in return reforestation, an emission reduction for GHG emissions reductions or for unit (ERU) generated by a JI project the right to release a given amount or a certified emission reduction of GHG emissions that the buyer (CER) generated from a CDM pro- can use to meet its compliance – or ject activity. corporate citizenship – objectives vis-à-vis climate change mitigation.11 Emissions trading schemes (ETS) may be established as climate policy instruments at the national level and the regional level. Under such schemes, governments set emis- 11 Karan Capoor and Philippe Ambrosi, ‘State and Trends of the Carbon Market 2007’ (The World Bank 2007) 8 Host Party, UNFCCC http://web.worldbank.org/WBSITE/EXTE http://cdm.unfccc.int/Statistics/Issuance RNAL/NEWS/0,,contentMDK:21319781~ /CERsIssuedByHostPartyPieChart.html at pagePK:64257043~piPK:437376~theSit 9 October 2011. ePK:4607,00.html at 9 August 2011.

Based on whether the involvement compliance as well as mandatory or of an emission abatement project, voluntary markets. Most carbon carbon trading can be categorized markets are mandatory because into allowance-based transactions buyers largely participate in carbon (or cap-and-trade schemes) and trading due to carbon constraints at project-based transactions (or international, national or sub- credit schemes). In the allowance- national levels. On the other hand, based transactions, the governing some voluntary carbon markets, body begins by setting a total cap namely the Chicago Climate Ex- on emission allowances. Subse- change (CCX) in the USA13 and the quently those allowances are allo- New South Wales Greenhouse Gas cated or auctioned off to individual Abatement Scheme in Australia regions, countries, or even firms. were set up to help facilitate carbon Members that do not have enough offset transactions. allowances to their emission must either make reductions or buy an- The carbon markets are central to other member’s spare allowances. the global effort to reduce GHG Members with extra allowances can emissions. It is estimated that im- sell them or bank them for future plementing all the carbon market use. AAUs under the Kyoto Protocol proposals that are currently con- or EUAs under the EU ETS are ex- templated would result in global amples of such schemes. These emission reductions of 7 Gt CO2 by transactions may facilitate man- 2020. 14 At today’s secondary CER dated participants to meet compli- price, the market in 2020 would be ance requirements at the lowest worth €670bn. 15 A carbon price of possible cost. A project-based transaction may allow the buyer to purchase emission credits from a 13 project that can verifiably demon- It should be noted that the CCX was closed at the end of 2010. For more de- strate GHG emission reductions tails, see below page 15. compared with the emissions that 14. Brinkman, Marcel and Fankhauser, would have incurred anyways by Samuel and Irons, Ben and Weyers, funding pre-approved emissions re- Stephan (2009) The carbon market in duction projects in other coun- 2020: volumes, prices and gains from tries. 12 The CDM and the JI trade. Centre for Climate Change Eco- mechanisms of the Kyoto Protocol, nomics and Policy and Grantham Re- search Institute on Climate Change and generating CERs and ERUs respec- the Environment, 11. Centre for Climate tively are the most notable exam- Change Economics and Policy and Gran- ples. tham Research Institute on Climate Change and the Environment, London, UK. Also, the carbon markets can be 15 Endre Tvinnereim, The Global Carbon categorized into compliance or non Market in 2020 (Point Carbon) http://www.worldcommercereview.com/ publications/article_pdf/109 at 9 De- 12 Ibid. cember 2011.

$50 per ton would yield a market value of almost $2 trillion in 2020.16 The EU ETS remains the engine of the carbon market and China is the larges CDM seller.

16 Ibid.

2. International Experiences and Implications for China

2.1 EU

The EU Emissions Trading System pating companies to trade emission (EU ETS) is a cornerstone of the allowances means that emission European Union's policy to combat reductions can be achieved at low- climate change and its key tool for est cost. reducing industrial GHG emissions cost-effectively. It has allocated a Being the first and biggest interna- market price to carbon emissions tional scheme for the trading of and proven the possibility of trade GHG allowances, the ETS now op- in GHG emissions. This flexibility erates in 30 European countries ensures that emissions reduction (the 27 EU Member States plus Ice- occurs in a cost efficient way. land, Liechtenstein and Norway) and currently covers over 11,000 The aim of the EU ETS is to help EU installations in the energy and in- Member States to achieve their dustrial sectors which are collec- commitments to limit or reduce tively responsible for close to half

GHG emissions in a cost-effective of the EU's emissions of CO2 and 40 way. It is based on the "cap and per cent of its total GHG emis- 17 trade" principle. This means there sions. It covers CO2 emissions is a "cap", or limit, on the total from installations such as power amount of certain GHG that can be stations, combustion plants, oil re- emitted by the factories, power fineries and iron and steel works, plants and other installations in the as well as factories making cement, system. Within this cap, companies glass, lime, bricks, ceramics, pulp, receive emission allowances which paper and board. In addition, ni- they can sell to or buy from one trous oxide emissions from certain another as required. The limit on processes are covered. As of 2012, the total number of allowances aviation will also be included in the available ensures that they have a EU ETS. value. At the end of each year each company must surrender enough There have been three phases un- allowances to cover all its emis- der the EU ETS so far. The EU ETS sions, otherwise heavy fines are was launched on 1 January 2005. imposed. If a company reduces its The first trading period has been emissions, it can keep the remaining allowances to cover its future needs or else sell them to another 17 For more details, see website Emis- company that do not possess suffi- sions Trading Scheme (EU ETS) cient allowances. Allowing partici- http://ec.europa.eu/clima/policies/ets/in dex_en.htm at December 2011.

running for three years to the end sure that the EU as a whole, and of 2007 and was a “learning by do- each Member State, delivers on ing” phase to prepare for the cru- their Kyoto commitments. By 31 cial second trading period. The first December 2010 in the second trading period successfully estab- phase, the Commission has lished the free trading of emission adopted EU-wide rules, which were allowances across the EU, putting developed under a committee pro- in place the necessary infrastruc- cedure. These rules fully harmo- ture and developing a dynamic car- nises allocations and thus ensure bon market. The environmental that all firms across the EU with the benefit of the first phase may be same or similar activities will be limited due to excessive allocation subject to the same rules. The of allowances in some Member rules would ensure that the alloca- States and sectors. This miss- tion promotes carbon-efficient allocation results from dependency technologies as far as possible. The on projections rather than data, as adopted rules provide that to the verified emissions data only be- extent feasible, allocations are to came available under the EU ETS. be based on benchmarks, e.g. a When the publication of verified number of allowances per quantity emissions data for 2005 highlighted of historical output. Such rules re- this “over-allocation”, the market ward operators that have taken reacted as expected by lowering early action to reduce GHGs, better the market price of allowances. The reflecting the polluter pays principle availability of verified emissions and giving stronger incentives e data has allowed the Commission emissions reduction, as allocations to ensure that the cap on national would no longer depend on histori- allocations under the second phase cal emissions. All allocations are to is set at a level that will result in be determined before the start of real emission reductions. the third trading period and no ex- post adjustments will be allowed. The second trading period has begun on 1 January 2008 and runs In the first and second trading pe- for five years until the end of 2012. riod under the scheme, Member The importance of the second trad- States had to draw up national allo- ing period stems from the fact that cation plans (NAPs) which deter- it coincides with the first commit- mine their total level of ETS emis- ment period of the Kyoto Protocol, sions as well as the quantity of during which the EU and other in- emission allowances for each instal- dustrialized countries must meet lation in their countries . At the end their targets to limit or reduce GHG of each year installations must sur- emissions. For the second trading render allowances equivalent to period EU ETS emissions have been their emissions. Companies that do capped at around 6.5 per cent be- not require all allocated allowances low 2005 levels in order to help en- can sell their excess allowances.

Those facing difficulties in keeping will therefore not be needed any their emissions in line with their al- more. At the same time a series of lowances have a choice between ei- important changes to the way the ther taking measures to reduce EU ETS works will take effect in or- their own emissions – such as in- der to strengthen the system. Auc- vesting in more efficient technology tioning of allowances will become or using less carbon-intensive en- the basic principle for allocation. It ergy sources – or buying the extra is estimated that at least half of the allowances they need on the market. available allowances as of 2013 will A combination of the two methods be auctioned. Member States will be is possible. Such choices are likely responsible for ensuring that the al- to be determined by relative costs. lowances given to them are auc- In this way, emissions are reduced tioned. Each Member State has to wherever it is most cost-effective to decide whether it wants to develop do so. its own auctioning infrastructure and platform or whether it wants to cooperate with other Member The first two trading periods have States to develop regional or EU- also shown that widely differing na- wide solutions. The distribution of tional methods for allocating allow- the auctioning rights to Member ances to installations threaten fair States is largely based on emissions competition in the internal market. in phase one of the EU ETS, but a Furthermore, greater harmoniza- part of the rights will be redistrib- tion, clarification and refinement uted from richer Member States to are needed with respect to the poorer ones in order to take ac- scope of the system, the access to count of the lower GDP per head credits from emission-reduction and higher prospects for growth projects outside the EU, the condi- and emissions among the latter. In tions for linking the EU ETS to principle, any allowances remaining emissions trading systems else- in the reserve shall be distributed to where and the monitoring, verifica- Member States for auctioning. The tion and reporting requirements. distribution key shall take into ac- While the great majority of allow- count the level to which installations ances has been allocated free of in Member States have benefited charge to installations in the first from this reserve. and second trading periods, the Commission proposed that going forward, auctioning of allowances In addition, as from 2013, the should become the basic principle scope of the ETS will be extended for allocation. to other sectors and GHG. CO2 emissions from petrochemicals, ammonia and aluminium will be in- As from the third trading period, cluded, as will N O emissions from there will be a single EU-wide cap 2 the production of nitric, adipic and and allowances will be allocated on glyocalic acid production and per- the basis of harmonised rules. NAPs

fluorocarbons from the aluminium sion shall then adopt a legislative sector. The capture, transport and proposal amending the present Di- geological storage of all GHG emis- rective as appropriate. Moreover, sions will also be covered. the national laws, regulations and administrative provisions have to be ready. The Commission adopted This concerns the collection of duly a new Regulation governing the substantiated and verified emis- monitoring and reporting of emissions data from installations that sions from the activities listed in will only be covered by the EU ETS Annex I of the Directive. A separate as from 2013, and the national lists Regulation on the verification of of installations and the allocation to emission reports and the accredita- each one. Registries are standard- tion of verifiers should specify con- ised electronic databases ensuring ditions for accreditation, mutual the accurate accounting of the is- recognition and cancellation of ac- suance, holding, transfer and can- creditation for verifiers, and for su- cellation of emission allowances. As pervision and peer review as ap- a signatory to the Kyoto Protocol in propriate. its own right, the Community is also obliged to maintain a registry. This is the Community Registry, It is predicted that in 2020 emis- which is distinct from the registries sions will be 21 per cent lower than of Member States. Allowances is- in 2005 under the EU ETS. 18 The sued from 1 January 2013 onwards success of the EU ETS has inspired will be held in the Community reg- other countries and regions to istry instead of national registries. launch cap and trade schemes of their own. Furthermore, the Com- mission sees the EU ETS as an im- The EU also passed legislation to portant building block for the de- establish a scheme for GHG allow- velopment of a global network of ance trading within the Community. emission trading systems. The EU Member States have to bring into hopes to link up the ETS with com- force the legal instruments neces- patible systems around the world to sary to comply with the legislation. form the backbone of a global car- The relevant regulations in the leg- bon market. Linking other national islation have been revised multiple or regional cap-and-trade emis- times. When an international agre- sions trading systems to the EU ement is reached, the Commission ETS can create a bigger market, shall submit a report to the Euro- potentially lowering the aggregate pean Parliament and the Council cost of reducing GHG emissions. assessing the nature of the meas- The EU is keen to work with the ures agreed upon in the interna- new US Administration to build a tional agreement and their implica- transatlantic and indeed global car- tions, in particular with respect to the risk of carbon leakage. On the basis of this report, the Commis- 18 Ibid.

bon market to act as the motor of a the EU ETS has been criticized as concerted international push to having caused a disruptive spike in combat climate change. The in- energy prices. 21 They say that it creased liquidity and reduced price does not correlate with the price of volatility would improve the func- permits, and in fact the largest tioning of markets for emission al- price increase occurred at a time lowances. This might lead to a (Mar-Dec 2007) when the cost of global network of trading systems permits was negligible.22 in which participants, including legal entities, are able to buy emis- Third, there was an oversupply of sion allowances in order to fulfil emissions allowances for EU ETS their respective reduction commit- Phase I. This drove the carbon price ments. down to zero in 2007.23 This oversupply reflects the difficulty in pre- In spite of this achievement, there dicting future emissions but which is are some people and organizations, necessary in setting a cap. Given which have responded differently to the poor data about emissions the EU ETS. First, the EU ETS baselines, inherent uncertainty of needed to be supported by other emissions forecasts, and the very policies for technology and renew- modest reduction goals of the Phase able energy. Technology policy is I cap (1-2 per cent across the EU), necessary to overcome market fail- it was entirely expected that the cap ures associated with delivering low- might be set too high.24 carbon technologies, e.g., by supporting research and development. Fourth, there are some concerns 19 that the EU ETS brings about crime. In 2009 Europol informed that 90 Second, the EU ETS has been criticized for several failings, including: u-ets-failing-third-attempt at 20 over-allocation, windfall profits, pri- December 2011. ce volatility, and in general for fail- 21 Steven Mufson, Europe’s Problems 20 ing to meet its goals. In addition, Color U.S. Plans to Curb Carbon Gases, The Washington Post, April,2007, http://www.washingtonpost.com/wp- 19 Building a low-carbon economy – The dyn/content/article/2007/04/08/AR2007 UK’s contribution to tackling climate 040800758_pf.html at 20 December change. The First Report of the Commit- 2011. tee on Climate Change. 155, 22 A. Denny Ellerman and Paul L. Joskow, http://www.theccc.org.uk/pdf/TSO- The European Union's Emissions Trading ClimateChange.pdf at 20 December System in Perspective, (Pew Centre on 2011. Global Climate Change 2008) 20 EU Emissions Trading System: Failing http://www.c2es.org/docUploads/EU- at the third attempt, Corporate Europe ETS-In-Perspective-Report.pdf at 20 Observatory/Carbon Trade Watch, April December 2011. 2011, 23 Above n 19, 140. http://www.corporateeurope.org/news/e 24 Ellerman and Joskow, above n 22.

per cent market volume of emis- Fifth, there are some shortcomings sions traded in some countries of the use of offset credits. The EU could be the result of tax fraud, ETS allows the use of offset credits more specifically missing trader from JI and CDM projects. The fraud, costing governments more main advantage of allowing free than €5 billion. 25 German prose- trading of credits is that it allows cutors confirmed in March 2011 that mitigation to be done at least-cost. value-added-tax fraud in the trade In terms of the UK's climate change of carbon-dioxide emissions has de- policy 28 , noted three arguments prived the German state of about against too great a reliance on €850 million ($1.19 billion). In De- credits: cember 2011 a German court sentenced six men to jail terms of between three years and seven years • Rich countries need to demon- and 10 months in a trial involving strate that a low-carbon econ- evasion of taxes on carbon permits. omy is possible and compatible A French court sentenced five peo- with economic prosperity. This ple to one to five years in jail, and is in order to convince develop- to pay massive fines for evading tax ing countries to lower their through carbon trading. In the UK a emissions. Additionally, do- first trial over VAT fraud in the car- mestic action by rich countries bon market is put on track to start drives investment towards a in February 2012. Cyber fraudsters low-carbon economy. have also attacked the EU ETS with • An ambitious long-term target a "phishing" scam which cost one to reduce emissions, e.g., an company €1.5 million.26 In response 80 per cent cut in UK emis- to this, the EU has revised the ETS sions by 2050, requires signifi- rules to combat crime.27 cant domestic progress by 2020 and 2030 to reduce emissions. • CDM credits are inherently less robust than a cap and trade 25 Leigh Phillips, "EU emissions trading system, where reductions are an 'open door' for crime, Europol says" required in total emissions. (2009-12-10). EU Observer, http://euobserver.com/885/29132 at 20 December, 2011. Moreover, it has been argued that 26 Leigh Phillips, "Cyber-scam artists dis- the volume of CDM/JI credits, if car- rupt emissions trading across EU" ried over from phase II (2008–2012 (2010-02-03). EU Observer, to phase III 2013-2020) in the EU http://euobserver.com/885/29403 at 20 December 2011. ETS will undermine its environ- 27 “EU approves revised ETS rules to combat cyber crime” (2009-10-01), Euractive, rules-combat-cyber-crime-news-260461 http://www.euractiv.com/climate- at 20 December 2011. environment/eu-approves-revised-ets- 28 Above n 19.

mental effectiveness, despite the mits. The main lesson from the requirement of supplementary in European experience is that this the Kyoto Protocol.29 decision should be separate from either sectoral or state influence; the relative scarcity of emission The success and criticism of the EU permits in a cap and trade system ETS could have implications for the must be maintained if an emissions design of the Chinese ETS. There market is to meet its overall objec- are other lessons and experience to tives. This constitutes the primary be learnt from the EU ETS first principle and should also be a les- trading period, such as: son applied to any Chinese ETS. the EU’s adoption of the cap and trade approach to emissions control makes it the preferred approach for other countries wishing to eventually trade emission permits beyond their own borders;

• adequate preparation time is essential to implement a well designed emissions trading scheme; • a well informed trading market requires verifiable emissions data being available before emissions trading commences; • maintaining the relative scarcity of emission permits requires unlimited banking of unused permits together with no forfeiture of those permits should a particular emitting fa- cility close down; the initial allocation of emission permits is also vital to maintain the relative scarcity of emission per-

29 "The EU ETS, CDM and the Carbon Market", Mission of Thailand to the EC (2009), http://www.thaieurope.net/ftp/project09 /ETS_final.pdf at 20 December 2011.

2.2 US

The US has also used market-based The Regional Greenhouse Gas Ini- instruments to reduce emissions, tiative (RGGI) is a cooperative ef- which include, but is not limited to, fort by ten Northeast and Mid- Regional Greenhouse Gas Initiative Atlantic States of the US to reduce (RGGI), Global Warming Solutions CO2 emissions from electricity gen- Act of 2006 and the Chicago Cli- erating plants. In the US, RGGI, a mate Exchange (CCX). With the in- multi-state emissions cap and trade troduction of a GHG cap-and-trade program with a market-based scheme in the US, global carbon emissions trading system, is the markets could be worth almost EU2 first program of its kind. The cap trillion (USD $3.1 trillion), with to- and trade program is designed to tal transaction volume forecast at reduce CO2 while maintaining the 38 billion tonnes carbon dioxide affordability and reliability of elec- equivalent (Gt CO2e) per year by tricity. The program also directly 2020, according to Point Carbon. funds energy efficiency and cleaner According to the estimates, some energy programs that will lower 67 per cent of this EU2 trillion (USD GHG emissions. $3.1 trillion), equivalent to EU1.25 trillion (USD $2.3 trillion), would be In the absence of federal action on traded within a US ETS while the climate change, a group of North- second largest ETS, the EU scheme, eastern states began to fashion a would trade 9 Gt CO2e, equivalent collective regional response in 2003. to 23 per cent of the global mar- In August 2005, the RGGI staff ket.30 This is, Point Carbon believes, working group proposed an emis- a possible scenario given that the sions reduction program that would two main market segments by vol- start in 2009 and lead to a stabili- ume - the US and EU - have al- zation of emissions at current levels ready formulated quite specific (an average of 2002-2004 levels) proposals for how they will trade by 2015. This would be followed by carbon in twelve years' time. a 10 per cent reduction in emis- Therefore, the US ETS is expected sions between 2015 and 2020. The to play an indispensible role in the proposal would also allow partici- global carbon market and it is nec- pants to purchase offsets to meet essary to review its experience and 50 per cent of their emission reduc- practice. tions. This effort is known as the RGGI and represents an unprece- 30 The figures, released in Point Carbon's dented joint approach by a regional Carbon Market Analyst, entitled "Carbon coalition of states to combat global Market Transactions in 2020: Dominated warming. As of December 20, 2005, by Financials?," (2008)

seven Northeastern US states were A parallel effort to reduce emissions involved in the RGGI. The seven in the Northeast can be seen in the states involved (Delaware, New New England Governors/Eastern Jersey, New York, Connecticut, Canadian Premiers Climate Change Vermont, New Hampshire and Action Plan31, which calls for a re- Maine) signed a "Memorandum of duction in GHG emissions to 10 per Understanding" (MOU) committing cent below 1990 levels by 2020. For themselves to move forward with comparison: the EU aims to reduce the program. Massachusetts and emissions to 20 per cent below Rhode Island both joined RGGI in 1990 levels by 2020 and is deliber- early 2007, and Maryland joined in ating to increase this reduction aim April 2007. The MOU commits to 30 per cent. In addition, the states to invest 25 per cent of Northeast States for Coordinated Air revenue from carbon credits to en- Use Management is building a Re- ergy efficiency and strategic energy gional Greenhouse Gas Registry schemes. This revenue is generated (RGGR) to help track emissions in by auctioning credits from the state the region. This effort is similar to budget to compliance entities. that of the California Climate Action Since signing the MOU in 2005, all Registry. ten states have committed in their Model Rule to the sale of the vast In 2012, the RGGI will aim to build majority of the state's carbon upon the success of its first three- budget. year compliance period and make key improvements as it enters its RGGI’s goal is to reduce CO2 emis- second three-year compliance pe- sions from power plants in partici- riod. In an effort to strengthen the pating states through a mandatory existing initiative design and cap-and-trade program. Each RGGI achieve desired emission reductions, participant state must enact RGGI states are retiring allowances agreed-on rules, by way of state not sold in the first phase, increas- legislation or administrative regula- ing the reserve price of allowances, tions, in order to implement the conducting a comprehensive review, program. The program caps GHG and considering a reduction to the emissions in 10 states in the north- number of available allowances to east and allocates the right to emit ensure further emission cuts. through the auction of allowances. The program's first three-year On January 17, 2012, RGGI mem- compliance period begun on Janu- ber states announced several ac- ary 1, 2009 and ends on December tions to reduce the number of 31, 2011. Emission permit auction- available emission allowances. First, ing began in September 2008. Pro- ceeds are used to promote energy conservation and renewable energy. 31 The text of the plan is available at http://www.iclei.org/documents/USA/NE G-ECP_CCAP.PDF at 20 December 2011.

auctions in 2012 will only offer al- billion in economic value for its lowances for 2012 and none from member states between 2009 and the next compliance period (2015 2011. The proceeds from sales of to 2017). Second, at least five RGGI allowances have funded en- states (Connecticut, Delaware, ergy efficiency improvement pro- Massachusetts, New York, Rhode grams, community-based renew- Island, and Vermont) agreed to re- able energy projects, assistance to tire unsold allowances from the first low-income customers, education compliance period, which could and job training programs, and otherwise have been used in later general budget funds of the states. compliance periods. With fewer total allowances available for auction, The State of California not only cumulative emissions will decline. leads the nation in energy effi- Many states have faced an over- ciency standards and plays a lead supply of allowances as emissions role in environmental protection, from power plants are approxi- but is also one of the large emitters mately 30 per cent less than the of carbon worldwide. In 2006, Cali- cap, due in part to the economic fornia became the first state in the recession and investment in natural US to create a legally binding pro- gas and renewable electricity gen- gram to limit GHG emissions. The eration. Global Warming Solutions Act of 2006, or Assembly Bill (AB) 32, re- Beyond withholding future compli- sembles an exceptional legislative ance period allowances and retiring example of addressing climate unsold allowances, RGGI may also change and carbon emissions. It is consider additional measures to in- a California State Law that fights crease the market pressure on elec- climate change by establishing a tricity generators to reduce carbon comprehensive program to reduce emissions. Tightening annual emis- GHG emissions to 1990 levels by sion caps may be an additional op- 2020 by considering all sources tion identified by RGGI’s first man- throughout the state. dated program review, which will be completed in summer 2012. GHG emissions are defined in the bill to include all of the following: The economic benefits from RGGI’s carbon dioxide, methane, nitrous first compliance period were signifi- oxide, sulfur hexaflouride, hydro- cant. An Analysis Group report32 re- fluorocarbons and perfluorocarbons. leased in November 2011 esti- These are the same GHGs listed in mated that RGGI produced $1.6 Annex A of the Kyoto Protocol. The Act left substantial discretion to the California Air Resources Board 32 The text of the plan is available at (CARB), the California Energy Com- http://www.iclei.org/documents/USA/NE mission (CEC), the Public Utilities G-ECP_CCAP.PDF at 20 December 2011. Commission (CEC) as well as other

state agencies. It requires the Cali- California is also key to the West- fornia Air Resources Board to de- ern Climate Initiative, the west’s velop regulations and market answer to RGGI, which aims “to mechanisms to reduce California's design a regional cap-and-trade GHG emissions to 1990 levels by program that can deliver GHG 2020, representing a 25per cent re- emission reductions within the reduction statewide, with mandatory gion at costs lower than could be caps beginning in 2012 for signifi- realized through a California-only cant emissions sources. The bill en- program.” In the meantime, Cali- ables the Governor to suspend the fornia will become the country’s emissions caps for up to one year in testing ground for cap-and-trade the case of an emergency or signifi- policy. cant economic harm. The now defunct Chicago Climate On December 17, 2010 AB 32 Exchange (CCX) was North Amer- adopted a cap-and-trade program ica’s only voluntary, legally binding to place an upper limit on statewide GHG reduction and trading system GHG emissions. This is the first for emission sources and offset program of its kind in the US and projects in North America and Bra- will take effect in the beginning of zil. Although participation is volun- 2012. It will include an emission tary, compliance with emission re- limit which will be reduced by two duction objectives is legally binding percent each year through 2015 once a member joins. Members and three percent each year from who cannot achieve the reduction 2015 to 2020. First the rules will target through reducing their emis- apply to utilities and large industrial sions internally can meet their plants, and in 2015 will begin to be compliance commitment by pur- applied to fuel distributors as well, chasing emission allowances (called eventually totalling 360 businesses Carbon Financial Instruments; CFI) at 600 locations throughout the through CCX’s electronic trading State of California. Free credits will platform from other CCX Members be distributed to businesses that that reduce their emissions beyond account for about 90 percent of the reduction target. Offsets from overall emissions in their sector. projects implemented through the Additional emissions have to be ac- CCX offset program can also be counted for through either the pur- used to meet reduction targets. To- chase of allowances or credits. Off- tal use of offsets for compliance is sets - actions, such as the planting limited to no more that one half of of trees, that absorb greenhouse the required reductions. gases, can also be drawn upon in order to account for up to 8 percent CCX started trading in October of emissions. 2003, prior to the commencement of trading in the EU through the ETS system. Until July 2010, CCX

was operated by the public com- its 450 members achieved reduc- pany Climate Exchange PLC. The tions of 700 million tons of GHG exchange trades in emissions of six emissions over the seven-year life gases: carbon dioxide, methane, of the cap-and-trade program. 88 nitrous oxide, sulfur hexafluoride, percent of the reductions were perfluorocarbons and hydrofluoro- achieved through direct industrial carbons. emission cuts and 12 per cent through offsetting.34 The Trading System had the following three parts. The Administrative Bodies of CCX include: 1. The Trading Platform was a market place for executing trades am- CCX Committee on Offsets is re- ong Registry Account Holders. sponsible for reviewing and approv- ing proposed offset projects. 2. The Clearing and Settlement Platform processed all transaction External Advisory Board provides information. external strategic input to the CCX team and includes experts from the environmental, business, academic 3. The Registry was the official da- and policy-making communities. tabase for Carbon Financial Instru- ments owned by Registry Account Holders. Technical Advisory Committees are established by request of each CCX standing committee or on an ad- The exchange had more than 400 hoc basis. These technical commit- members ranging from corporations tees are usually comprised of out- like Ford, DuPont, and Motorola, to side experts. state and municipalities such as Oakland and Chicago, to educa- tional institutions such as University The CCX Committee on Forestry is of California, San Diego, Tufts Uni- responsible, among other things, versity, Michigan State University and University of Minnesota, to farmers and their organizations, such as the National Farmers Union and http://chicagoclimatex.com/content.jsf?i the Iowa Farm Bureau.33 CCX says d=64 34 Nathanial Gronewold, Chicago Climate Exchange closes nation's 33 See Participants of Chicago Climate first cap-and-trade system but Exchange, keeps eye to the future (2011-1-3), http://en.wikipedia.org/wiki/Chicago_Cli E&E Publishing mate_Exchange#cite_note- http://www.eenews.net/public/cli 10#cite_note-10, at 20 December 2011. matewire/2011/01/03/2 at 20 See also CCX Membership List December 2011.

for reviewing proposed forestry off- tem. It was the first such system set projects. established in North America and it has given companies the opportunity to learn and gain experience The CCX Regulatory Services Pro- with emissions reduction commit- vider is the Financial Industry ments and carbon trading. Despite Regulatory Authority (FINRA), the these very positive aspects of CCX, largest nongovernmental regulator there have been several points of for all securities firms doing busi- criticism of CCX in general and of ness in the United States. It pro- CCX’s offset program in specific.35 vides external verification of the baseline, annual emissions report of each member, monitors CCX First, CCX neither requires a local trading activity and reviews verifi- stakeholder consultation process ers’ reports for offset projects. and nor does it focus on enhancing cobenefits. CCX would not be a sufficient standard for buyers who Third-party Offset Project Auditors place value on these co-benefits. are called ‘verifiers’ and are approved by CCX for each project type to verify an offset project’s Second, there has been significant annual GHG sequestration or de- criticism of the lack of additionality struction. There are currently 29 of some CCX offsets. It undermines approved auditors (12/07). the environmental integrity of offsets: if non-additional credits enter a cap-and-trade system, emissions Financing of the Standard Organi- are actually increasing because the sation. Financials of Climate Ex- buyer of the non-additional offsets change, including CCX, are avail- will continue to emit whilst no fur- able to the public. The operations ther emissions reductions are and management of the exchange achieved through the offset pro- is financed primarily through trad- jects. ing and offset registration fees as well as through enrolment and annual fees generated from its mem- Third, it is true that additionality bers. raises an equity issue: individuals who have acted as pioneers and have already been engaged in non- Due to a lack of legislative interest, traditional low-carbon practices will CCX, a pilot program for the trading not be able to sell their carbon of GHGs in the US, shut down. credits because their actions are by Emissions trading, also known as cap and trade, effectively ended in the US when climate legislation died 35 WWF Germany, March 2008, Making in the Senate. But it's still going Sense of the Voluntary Carbon Market: A strong overseas. CCX was a pioneer Comparison of Carbon Offset Standards, in establishing a cap-and-trade sys- Anja Kollmuss (SEI-US), Helge Zink (Tri- corona), Clifford Polycarp (SEI-US).

definition non-additional (they hap- pressure above and beyond the pened for other reasons than the companies’ expected emission lev- carbon offset market). In order to els. If the cap in a cap-and-trade preserve the environmental integ- system is low and there is over- rity of the broader offsets market, compliance, the cap may not be the fairness concern would need to leading to any reductions beyond be addressed via measures other business as-usual. There is a risk than handing out non-additional that carbon offsets from unspeci- carbon credits (e.g. early action fied CFIs do not actually lead to provisions, tax/subsidy treatment, emissions reductions beyond busi- discounting of credits, etc). ness-as-usual.

Fourth, several groups have in the Although the nation's first experi- past criticized CCX for its general ment in carbon emissions cap and lack of transparency.36 CCX has re- trade ended, its impact on the cli- sponded to this criticism by making mate change industry will be felt for its rule book and many of the some time to come. Meanwhile, methodologies available on its web- CCX's sister institutions, the Euro- site. This increase in transparency pean Climate Exchange and the will enable a more independent Chicago Climate Futures Exchange, evaluation of project methodologies. will continue if there is corporate and state government interest in fighting climate change, even with Finally, companies who voluntarily the failure of cap and trade in the signed on to CCX are a self- US Congress. In addition, Califor- selecting subset of corporations nia's recent move toward manda- who are likely to be confident that tory emissions trading is reviving they can comply or even over- the market. RGGI officials are also comply with the commitments. It is in talks to reform their system. And therefore difficult to assess the CCX officials state that although achievements of the CCX per se. they've closed their contractually The very low prices of CFIs indicate binding trading platform, they aim that many of the member compa- to leverage their relationship with nies of CCX have over-complied some of the nation's largest compa- with their commitments and, con- nies to revitalize the voluntary car- versely, that the CCX targets are bon market, while maintaining their not stringent enough to exert any dominant position as the largest host of trading in a variety of environmental commodities. 36 Dale S. Bryk. (2006). ‘States and Cit- ies Should Not Join the Chicago Climate Exchange.’ Natural Resources Defense Council, http://www.hawaiienergypolicy.hawaii.e du/PDF/2007/Appendix_I.pdf at 20 De- cember 2011.

2.3 Other Countries

The success of the EU ETS has in- CPRS was to meet Australia’s emis- spired other countries and regions sions reduction targets in the most to launch cap and trade schemes of flexible and cost-effective way; to their own. Australia also endeav- support an effective global response ours to take market-based initia- to climate change; and to provide tives in response to the challenge of for transitional assistance for the climate change. However, in Aus- most affected households and firms. tralia the introduction of such initia- The main concern for the Australian tives is confronted with obstacles. Government was seen in the correct design of such a scheme, so that it would have complemented the inte- The Australian ETS was set to come grated economic policy framework, into effect in 2010, but that intro- and would have been consistent duction time has been delayed by with the Government’s commercial years. The main reason can be strategy. seen in the excepted increase of electricity, transport and fuel costs due to the introduction of carbon The final version of the now defunct pricing. The Carbon Pollution Re- Australian CPRS was, in effect a duction Scheme (CPRS) was a pro- hybrid scheme, whose main struc- posed cap-and-trade system of ture was cap-and-trade, but with emissions trading for anthropogenic set limits on the price of an emis- GHGs, due to be introduced in Aus- sions permit in its initial years and tralia in 2010 by the Rudd govern- unlimited acceptance of certain ment, as part of its climate change types of Kyoto Protocol emissions policy. It marked a major change in credits. However, the legislation for the energy policy of Australia. the CPRS failed to gain adequate support and was rejected twice. Af- ter a while, the CPRS idea was The basis of a CPRS was a cap and dubbed "a great big new tax". The trade system, and presented a way Rudd government did not call an of limiting GHGs emissions, as well election and the CPRS lost public as giving individuals and businesses support. In April 2010, Labor then incentives to reduce their emissions. deferred the CPRS. A carbon tax is The Australian Government would a tax on energy sources which emit have set a cap on carbon emissions, CO2. It is a pollution tax, which consistent with longer term goals of some economists favour because reducing Australia’s emissions by they tax a “bad” rather than a 60per cent compared with 2000 “good” (such as income). Carbon levels by 2050.The objective of the

taxes address a negative external- • the Clean Energy Regulator Bill ity. Externalities arise when an in- 2011 dividual production or consumption • the Climate Change Authority activity imposes costs or benefits Bill 2011 on a 3rd party. In market transactions, these costs and benefits are • the Clean Energy (Consequen- not normally reflected in the prices tial Amendments) Bill 2011. involved in the transaction, or taken into account in the transac- Following the recent passage of the tion decision. Clean Energy Legislative Package, Australia has become example for By placing a cost on these negative many of the key players in the externalities the underlying pur- global carbon market, particularly pose of a carbon tax is to reduce those in Europe and the UK whose emissions of CO2 and thereby slow own carbon market continues to global warming. It can be imple- suffer from apparent over supply. mented by taxing the burning of Furthermore, it works towards link- fossil fuels—coal, petroleum prod- ing Australia's carbon market with ucts such as petrol and aviation the EU scheme. fuel, and natural gas—in proportion to their carbon content. The carbon price is a central policy of Prime Minister Julia Gillard, who is struggling in the polls and who There is some political support for a has staked her government's future carbon tax in Australia as a means on a plan to price carbon emissions of implementing a carbon price. from Australia's top 500 polluting Some groups favour this approach companies. The carbon price is the as an interim step on the way to an key measure to help Australia, Australian emissions trading sche- which accounts for 1.5 percent of me. The Garnaut Climate Change global emissions, reach its target to Review, rejected carbon taxes in fa- curb emissions by five percent by vour of an emissions trading 2020, based on year 2000 levels. scheme. The Australian ETS would have forced up the price of emissions in- Australia's parliament passed its tensive products like coal-fired landmark laws to allocate a market power, gas and possibly petrol and price on carbon emissions, ensuring beef thus encouraging people to the start of a carbon tax on July 1, use less. But actually, it wouldn't 2012, ahead of a full emissions have discouraged consumption but trade scheme from mid-2015.The rather forced consumers to pay Clean Energy Legislative Package higher prices. includes four main bills: Essentially, the ETS is embodied by the government selling permits that • the Clean Energy Bill 2011 give the owners of the permits the

right to emit a tonne of carbon. For ited number of permits. The permits the first 3-5 years, there will be an are sold to the highest bidders, who unlimited amount of carbon permits can then use them to emit carbon sold at a fixed price (price yet to be or on-sell them to other parties. released). This effectively acts as a The price of carbon will vary de- tax. After 3-5 years, the govern- pending on demand for emissions ment will move from unlimited re- and the amount of permits auc- lease of permits to auctioning a lim- tioned of each year by government.

3. Necessity of CO2 ETS in China

3.1 Internal Pressures: Unsustainable Development

Climate change has a different im- while in the North, grasslands pact on different countries dues to dominate the landscape. China’s their different national circumstan- grassland area for 2005 was 400 ces.37 China has the following basic million hectares, most of which are national circumstances: high-cold prairie and desert steppe, while the temperate grasslands in northern China are on the verge of (1) Physical features and adminis- degradation and desertification, be- trative divisions of China cause of drought and environmental deterioration. 39 Southern China is China, located in eastern Asia on dominated by hill countries and low the western shores of the Pacific mountain ranges. The central East Ocean, is the third largest country possesses the deltas of China's two in the world by area after Russia major rivers, the Yellow River and and Canada, with 9.6 million Yangtze River (Chang Jiang). The square kilometres in total. China’s western part of China mostly con- coasts are on the East China Sea, sists of mountains, notably the Korea Bay, Yellow Sea, and South Himalayas, high plateaus and de- China Sea. The country has a con- serts. For 2005, China’s total area tinental coastline extending over of desertification was 2.63 million 18,000 kilometres and an adjacent square kilometres, accounting for sea area of 4.73 million square 27.4 per cent of the country’s terri- kilometres.38 tory; 40 arable land in China, however, only accounts for 14.86 per 41 The terrain of China contains a cent. In addition, the national for- large variety of landscapes. In the est area for 2005 was 175 million East, there are extensive and hectares, and the coverage rate 42 densely populated alluvial plains, was just 18.21 per cent.

37 This part is adapted from Xiaoyi Jiang, Legal Issues for Implementing the Clean Development Mechanism in China, 39 Ibid. (Springer: Berlin), 2012. 40 Ibid. 38 National Development and Reform 41 See The World Factbook (2008) Cen- Commission, People's Republic of China, tral Intelligence Agency, China's National Climate Change Pro- https://www.cia.gov/library/publications gramme (2007) 15 /the-world-factbook/geos/ch.html at 10 www.ccchina.gov.cn/WebSite/CCChina/U August 2011. pFile/File188.pdf at 9 August 2011. 42 Above n 38, 15.

China has administrative control with 750 million people living in ru- over twenty-three provinces, in- ral areas, and urban population ac- cluding Taiwan Province. There are counting for 43 per cent of the na- also five autonomous regions, tional population being lower than which have traditionally been re- the world average.45 ferred to as Outer China, because they are located beyond the Great Consequently, huge population and Wall of China. Four municipalities, urbanization movements bring including Beijing (Capital of China), about huge employment pressure Shanghai, Chongqing and Tianjin; for China, with annually more than and two Special Administrative Re- 10 million new workers in urban gions enjoy considerable autonomy. areas and about 10 million new ru- The twenty-two provinces, five ral workers moving to urban ar- autonomous regions and four mu- eas.46 nicipalities can be collectively referred to as mainland China, a term which usually excludes Taiwan, (3) Economic development in China Hong Kong and Macau. China's economy has been develop- (2) Population in China ing rapidly since the Reform and Opening up Policy47, which was proposed by Xiaoping Deng in 1978. As China has the largest population in a consequence, living standards in the world. In 2005, the population China has been improved dramati- of China’s mainland was 1.31 billion, cally. Although great economic accounting for 20.4 per cent of the changes have taken place, China is world population. 43 In spite of the currently at a relatively low level of large population, excessive popula- economic development. In 2005, tion growth trend has been under the per capita Gross Domestic effective control since the One Product (GDP) of China was about Child Policy was introduced by the US$ 1,714 (based on exchange rate Chinese government in 1982 as a of the same year, the same below), basic national policy.

Along with industrialization, an ur- 45 The data was issued in 2001. See Chi- banization movement is taking nese Cities and Provinces Information place in China: the urban popula- and Links, A China Information Base tion accounted for only 26.4 per http://www.chinatoday.com/city/a.htm cent in 1990, and increased to 43 at 10 August 2011. 46 per cent in 2005.44 However, China Above n 38, 15. 47 The economy has changed from a is still at a low level of urbanization, centrally planned system that is under a rigid political control to a more market- oriented economy that has a rapidly 43 Ibid. growing private sector and is a major 44 Ibid. player in the global economy.

only about one-fourth of the world The climate of China is extremely average.48 diverse, with tropical areas in the South, to subarctic areas in the North, adding to China's extensive Remarkable disparity in economic territory and complex topography. development exists among different The northern zone (containing Bei- regions of China. In 2005, the per jing) has summer daytime tempera- capita GDP of the eastern areas of tures of more than 30 degrees Cel- China was US$ 2,877, while that of sius and winters of arctic severity, the western areas was US$ 1,136, with the lowest temperature of mi- only 39.5 per cent of the former. nus 30 degrees Celsius in north- Especially, Shanghai in the eastern ernmost Heilongjiang province. The areas is experiencing fast economic central zone (containing Shanghai) development. According to interna- has a temperate continental climate, tional standards on statistics, the with very hot summer and cold win- per capita GDP in Shanghai in 2006 ter. There are also the famous was over US$7,000.49 Three Ovens cities along the Yang- tze River in summer: Chongqing, The income disparity between rural Wuhan, and Nanjing. The summer and urban residents is also signifi- temperature in these cities may cant. In 2005, the per capita dis- reach up to 40 degrees Celsius. The posable income of the urban resi- southern zone (containing Guang- dents was US$ 1,281, while that of zhou) has a subtropical climate, the rural residents was only US$ with very hot summer and mild 397, equivalent to 31.0 per cent of winter. the former.50 Furthermore, poverty eradication is still a huge challenge Moreover, most parts of China have for China. By the end of 2005, the a continental monsoon climate, poverty-stricken people in China’s with more drastic seasonal tem- rural areas numbered 23.65 million, perature variations. As a result, the with the per capita annual pure in- temperature in China in the winter come less than 683 Chinese is 5 to 18 degrees Celsius lower Yuan(less than US$ 100).51 compared to other areas on the same latitude, such as North Amer- (4) Climatic conditions in China ica and West Europe.52

Precipitation in China varies region- 48 Above n 38, 16. ally even more than temperature. 49 This is according to the news conference held by the Information Office of Shanghai Municipal Government on Feb- 52 See General Information of the Peo- ruary 7 2007. ple’s Republic of China (PRC), A China 50 Above n 38, 16. Information Base 16 Ibid. http://www.chinatoday.com/general/a.ht m at 10 August 2011.

Annual precipitation gradually de- III, accounting for 9.1 per cent of clines from the southeastern the total monitored cities.55 coastal areas, with as high as 1,500 millimeters to the northwest- Air pollution leads to acid rain. 56 ern inland areas, with less than 50 China is one of the countries in the millimeters. 53 Fro a seasonal point world suffering from severe acid of view, most of the precipitation rain contamination, which brings occurs in summer, mainly from May many hazards to the environment, to September. Hence, the unevenly affects the standard of living, and is seasonal and spatial distribution of even harmful to human health. precipitation in China may cause Central, South, Southwest and East floods in South China and droughts China are the regions with serious in North China. Besides, China ex- acid rain impacts. periences frequent meteorological disasters, such as typhoons, mon- soons, tsunamis, etc., which are In conclusion, it can be clearly seen unusual worldwide in terms of the that, first, China is vulnerable to gravity of disaster, the scope of af- the impacts of sea level rise, be- fected areas, and the mass of af- cause China has a long continental fected population. coastline, and most of the relatively developed cities in China, including Shanghai, are along the continental (5) Air quality in China coastline. Second, despite the huge territory, China still has a vulner- Air quality in China is poor. Al- able ecosystem due to the lack of though the trend of worsening air arable land and forest as well as quality in the cities in China has the expansion of deserts. Third, slowed, the overall pollution level China is facing the challenge of re- remains high. 54 According to the ducing employment pressure cau- 2006 China Environmental Quality sed by a large population and in- Communique, 62.4 per cent of the creasing urbanization. Fourth, the monitored cities have met the na- priority for China at this stage is tional air quality standard of Grade reducing poverty and developing its II, and 37.6 per cent are worse economy. Both goals require more than Grade II. Fifty-one cities fea- energy and will inevitably lead to tured air quality worse than Grade increased carbon emissions. Fifth, China has relatively harsh climatic

53 Ibid. 54 This is according to China Environ- 55 China Environmental Quality Commu- mental Quality Communiques 1996- niques – Air Quality 2006 2008 released by Ministry of Environ- http://jcs.mep.gov.cn/hjzl/zkgb/06hjzkg mental Protection of the People’s Repub- b/200706/t20070619_105423.htm at 8 lic of China August 2011. http://jcs.mep.gov.cn/hjzl/zkgb/ at 8 56 Acid rain is caused mainly by SO2 and August 2011. NOx from burning coal and oil.

conditions, and thus, inhabitants predicted that the high growth use more energy in order to main- momentum will remain in the 21st tain a relatively comfortable room century.60 temperature. Finally, air pollution in China is serious, and more efforts While China astonishes the world are needed to improve air quality. with its rapid economic develop- Therefore, China is under consider- ment, energy problems emerge as able pressure to reduce emissions to how it will fuel its future eco- without undermining its economic nomic growth. China will certainly development. require more energy.

Demand and supply of energy are First, China needs more electricity affected by economic growth and to advance industry development, structural change of economic sec- and maintain its living standards. tors. China has had a very high Although the industrial structure economic growth rate since the has been improved through a se- Economic Reform and the Opening ries of policies, with an aim of ac- Up policy was proposed. 57 Its an- celerating the development of terti- nual GDP growth rate has remained ary industries and restructuring appropriately 10 per cent in the secondary industries, the ratio of consecutive eight years during the secondary industry is still too high period of 2003-2010.58 In particular, and tertiary industry remains seri- the amount of GDP in 2007 reached ously lower compared to developed 2.47 billion Yuan, with 11.4 per countries. The National Bureau of cent growth rate.59 Moreover, it is Statistics of China indicates the breakdown of GDP across the primary, secondary and tertiary in- 57 It refers to the program of economic dustry in 2007 was 11.7 to 49.2 to reforms called ‘Socialism with Chinese 39.1, while in developed countries characteristics’ in the People's Republic of China (PRC) that were started in De- it is less than 5 to less than 30 to 61 cember 1978 by pragmatists within the more than 65. In this scenario, on Communist Party of China (CPC) led by the one hand, great efforts should Deng Xiaoping and are ongoing as of the be made to optimize the industry early 21st century. The goal of Chinese structure; on the other hand, more economic reform was to generate suffi- electricity and raw materials are cient surplus value to finance the needed as secondary industries still modernization of the mainland Chinese economy. dominate. Furthermore, as the http://en.wikipedia.org/wiki/Economic_r people’s living conditions increas- eform_in_the_People's_Republic_of_Chi ingly improve and urbanization na at 10 August 2011. 58 See Chinabilty http://www.chinability.com/GDP.htm at http://www.stats.gov.cn/english/ at 10 10 August 2011. August 2011. 59 See the primary accounting of China’s 60 Ibid. National Statistics Bureau 61 Ibid.

speeds up, more electricity is re- shares of oil, gas and hydro were quired to cater for people’s living 16.6 per cent, 2.1 per cent and 5.1 standards. per cent respectively. 63 Coal combustion in China produces 70 per cent of CO2, 90 per cent of SO2 In addition, China’s transportation emissions and 67 per cent of NOx sector is developing rapidly. In the emissions. 64 Hence, facing the early 1980s, it was very rare to problems of drastic air pollution own a private car in China. This from coal combustion and interna- situation has changed. With the tional concerns over carbon emis- development of China’s economy, sions caused by coal use, China re- the middle-class is emerging and alized that its long-term reliance on growing in China. Thus, rising in- this resource was simply unsus- comes make private cars more af- tainable. Hence, China began to re- fordable to the middle-class. Ac- duce coal’s dominance by increas- cording to the report of China Na- ing the share of high grade and tional Statistics Bureau, by 2001, clean energy: oil, nuclear power, China had 7.71 million private cars, hydro, natural gas, and renewable a number which may increase energy. As a result, the share of strongly to 140 million by 2020.62 coal in total primary energy supply Under this scenario, transportation in 2005 decreased to 63.4 per cent, fuel consumption would incur a with 13.0 per cent share of renew- massive increase in demand for able and waste energy (See chart energy and energy-related carbon 3.1 below). With regard to the elec- emissions. tricity generation by fuel in 2005, coal-fired power accounted for 79.0 Facing this situation, China’s en- per cent, while and 15.9 per cent ergy structure is examined in order were power generated by hydro to identify the sources for energy to and 2.1 per cent by nuclear (See meet the demand of such a phe- chart 3.2 below). nomenal economic growth.

China is endowed with rich resources of coal, and uses it as its main energy source. Historically, coal had supplied more than 70 per cent of China’s energy. It was reported that the share of coal in 63 China’s primary energy mix was Above n 38, 9. 64 76.2 per cent in 1990, whereas the Jonathan E. Sinton et al. ‘Evaluation of China's Energy Strategy Options’ (The China's Sustainable Energy Program, 2005) 19 62 See ‘China to Have 140 Million Cars by http://www.people.fas.harvard.edu/~res 2020’, China Daily (Beijing), 5 Septem- tern/ documents/LBNL_2005.pdf at 10 ber 2004. August 2011.

Chart 3.1 Share of Total Primary per cent. 65 However, until 2002, Energy Supply in 2005 China’s percentage increase in energy consumption was lower in relative terms than its economic growth rate, which increasing efficiency. Still, the energy efficiency is relatively low by an international comparison of energy consumption per unit of GDP. The ratio in 2005 was 0.91, which is 2.4 times higher than the global average, 4.9 times higher than in EU countries, and 8.7 times higher than in Japan.66

China’s energy demands will continue to grow with advancing economic development. According to Chart 3.2 China – Electricity Gen- World Energy Outlook 2007, eration by Fuel 2005 China’s energy demand is expected to more than double by 2030, with coal expected to fuel about one- half of the increase (see the chart 3.3 below). Per capita energy use, however, is low compared to international standards. It is equivalent to about one-half of the world average and only 10 per cent of the per capita energy use in the United States.67

Source: IEA Energy Statistics http://www.iea.org/textbase/stats/pdf_g 65 William Chandler et al. ‘Climate raphs/CNTPESPI.pdf at 10 August 2008. change mitigation in developing countries: Brazil, China, India, Mexico, South Africa, and Turkey’ (Prepared for Pew Furthermore, low energy efficiency Centre on Global Climate Change, 2002) and high energy intensity in China, 13 which are measured by the ratio of http://www.pewclimate.org/docUploads/ energy consumption to GDP, may dev_mitigation.pdf at 10 August 2011. 66 even compound the energy prob- Jing Fu, ‘Energy Law Aims at Power lems. During 1977–97 China’s en- Conservation’, China Daily (Beijing), 2 July 2006, 2. ergy intensity declined about 60 67 ‘China Human Development Report 2002’ (Stockholm Environment Institute and United Nations Development Pro-

Chart 3.3 China’s Primary Energy of the People’s Republic of China,68 Demand China’s GHG emissions in 1994 were 4,060 million tCO2e (tons of CO2 equivalent), of which 3,070 million tons of CO2. Furthermore, China’s GHG emissions in 2004 were about 6,100 million tCO2e, of which 5,050 million tons of CO2.69 From 1994 to 2004, the annual average growth rate of GHG emissions was around 4 per cent, while the share of CO2 in total GHG emissions increased from 76 per cent to 83 per cent.70 Moreover, there are re-

ports indicating that China has already overtaken the United States Source: IEA Energy Statistics as the world’s largest GHG emit- http://www.iea.org/textbase/speech/20 71 07/Tanaka/weo_beijing.pdf pp8 at 10 ter. In addition, China’s energy- August 2011. related CO2 emissions are expected to double by 2030 (See chart 3.4 below). Accordingly, China has endeavoured to optimize its energy mix by developing low carbon and renewable energy. However, the dominance of coal as the primary energy supply could not be com- pletely changed in a short-term due to China’s lack of clean technologies and the large amount of coal 68 Initial National Communication on reserves. Climate Change of the People’s Republic of China 2007 (the People’s Republic of China) Based on the above analysis, large www.ccchina.gov.cn/file/en_source/da/d demands for energy, which is domi- a2004110901.pdf at 10 August 2011. 69 nated by coal, would thus lead to Above n 38, 6. 70 Fu, above n 66, 6. increased carbon emissions in China. 71 See, eg, ‘Chinese CO2 Emissions in Perspective’ (Netherlands Envi- According to the Initial National ronmental Assessment Agency Communication on Climate Change 2007), ‘the surging power demand from China’s rapidly expanding economy caused CO2 emissions to rise by 9per cent in 2006…that increase, coupled with a slight United gramme, 2002) 55 States decline meant that China’s http://www.undp.org.cn/downloads/nhd emissions for the year surpassed r/nhdr2002.pdf at 10 August 2011.. those of the US by 8 per cent.’

Chart 3.4 China’s Energy-Related 61.7 tons over the same period, CO2 Emissions ranking the 92nd in the world.72

Chart 3.5 CO2 Emissions in China

China’s Energy-Related CO2 Emis- sions © OECD/IEA – 2007 Emis- sions soar from 5 Gt in 2005 to 11 Gt in 2030, though they remain be- Even when compared to earlier low current OECD levels in per- data, Chinas cumulative emissions capita terms remain relatively low. During 1850– 2002, China contributed only 7.6 per cent while the United States Most emissions come from electric- contributed 29.3 per cent and the ity and heat generation, followed EU-25 26.5 per cent of emissions.73 by industry consumption (See chart In addition, statistics from the In- 3.5 below).Although in the last few ternational Energy Agency indicate years’, transportation in China was that per capita CO2 emissions from responsible for only 9 per cent of fossil fuel combustion were 3.65 China’s energy related carbon tons in 2004 in China, which were emissions, it should not be ignored below the world average and that it is likely to grow dramatically equivalent to one third of the level in Organization for Economic Coop- Despite China’s increasing emissions, its historical and per capita GHG emissions are very low. In accordance with the study carried out 72 Baumert, T. Herzog and J. Pershing, by the World Resource Institute, ‘Navigating the Numbers: Greenhouse cumulative emissions in China ac- Gas Data and International Climate Pol- counted for 9.33 per cent of the icy’ (World Resources Institute, Wash- ington DC 2005) 13 . world total emissions during the http://www.worldresourcesforum.org/fil period 1950-2002, and the cumula- es/navigating_numbersper cent20-per tive CO2 emissions per capita were cent20baumertper cent202005_0.pdf at 10 August 2011. 73 Ibid 14.

eration and Development (OECD) ment is working on the 11th Five- countries.74 Year Programme for National Eco- nomic and Social Development (2006–10)76, where GHG emissions The effectiveness of a governance is further stressed that energy con- system in general may influence sumption (per unit of GDP) will be the effective global warming miti- reduced by 20 per cent over five gation. An effective governance years, that the amount of pollutant system requires instruments for will be reduced by 10 per cent, and policy coordination, rule of law ， that forest coverage will be raised and the realization of established to 20 per cent of the national terri- goals. Based on the above, the fol- tory.77 In order to increase the un- lowing section explores how the derstand of climate change in China, Chinese government has responded at the close of 2006, the warmest to the threat arising from global year in China since 1951, China warming and carbon emissions. released the country’s first-ever National Assessment Report on The Chinese government has Climate Change 78 , clearly showing adopted a series of policies and the fact that global warming poses programs designed to alleviate the a threat to China’s development. As side effects of global warming. it is mandated under the UNFCCC that all parties are required to First, climate change has been em- launch national strategies for cli- bodied in the overall national de- mate change mitigation and adap- velopment guidelines and plans. In tation to expected impacts, the 1994, China’s sustainable develop- Chinese government formulated its ment strategy, China’s Agenda 2175, first national policy specific on climate change: China’s National Cli- which described concrete steps to- 79 wards sustainable development and mate Change Program , in 2007, mounted a response to climate change in the 21st century, with 76 sustainable energy development as China’s Eleventh-Five Year Plan one of the major components, was (2006-2010) http://en.ndrc.gov.cn/hot/t20060529_71 released. Currently, the govern- 334.htm 3 March 2010. 77 See China’s Eleventh Five-Year Plan (2006-2010), Ch 6 74 See Statistics and Balance, Interna- http://en.ndrc.gov.cn/hot/t20060529_7 tional Energy Agency 1334.htm at 3 August 2011. http://www.iea.org/stats/index.asp 78 China's National Assessment Report Organization for Economic and Coopera- on Climate Change (I) & (II) tion Development (OECD) countries con- http://www.climatechange.cn/EN/abstra sists of most of the developing countries. ct/abstract8379.shtml# at 3 August 75 China’s Agenda 21 1994 (the People’s 2011. Republic of China) 79 National Development and Reform http://www.acca21.org.cn/english/index Commission, People's Republic of China, .html at 3 March 2011. China's National Climate Change Pro-

setting out broad goals for arrest- private cars in China, new passen- ing global warming and cutting ger vehicle fuel-efficiency standards GHG emissions. took effect in July 2005 that call for more stringent standards than those in the US and Japan.82 What’s Second, besides the overall guide- more, in June 2007, the State lines, China has carried out con- Council decreed that public build- crete programs to reducing GHG ings could not set their air- emissions. Many new standards on conditionings below 26 degrees energy have been issued to im- Celsius during the summer and prove energy efficiency and reduce above 20 degrees Celsius in the energy consumption. The China Na- winter, and even intended to intro- tional Institute of Standardization duce this regulation into legisla- issued a series of new appliance ef- tion.83 China just recently released ficiency standards for consumer Emission Standard of Coalbed appliances, such as refrigerators, Methane/Coal Mine Gas（on trial） electromagnetic ovens, washing 84 machines and lamp, with the pur- in order to enhance the man- pose of assisting to realize the ob- agement of emissions and mitigate jective of improving energy effi- global warming. ciency by 20 per cent in 2010 stipulated in the 11th Five-Year Plan. Finally, at a macroeconomic level, Also, there are several develop- China has introduced many eco- ments in the area of energy con- nomic mechanisms to help to fight servation, with new national con- against pollution and inefficiency. servation standards for public and Government bodies are expected to residential buildings seeking to re- make the tax rate more preferential duce energy consumption by 65 per for energy efficiency and renewable cent in Beijing, Chongqing, Shang- sectors. For example, according to hai, and Tianjin and by 50 per cent China’s new Corporate Income Tax 80 in small cities. By 2020, China plans to renovate 25 per cent of 82 public and residential buildings in See Hongyan H. Olive et al, ‘China’s Fuel Economy Standards for Passenger large cities, 15 per cent in medium- Vehicles’ (Discussion Paper 2009-03, sized cities, and 10 per cent in Harvard Kennedy School, 2009) 15 and 81 small cities. With the increase of 18 . http://belfercenter.ksg.harvard.edu/files /2009_Oliveretal_Impacts_of_Chinese_F gramme (2007) uel_Economy_Standards.pdf en.ndrc.gov.cn/newsrelease/P02007060 at 11 August 2011. 4561191006823.pdf at 3 August 2011. 83 Kim and Jones, above n 80. 80 See Margret Kim and Robert E. Jones, 84 Emission Standard of Coalbed Meth- 'China: Climate Change superpower and ane/Coal Mine Gas（on trial）2008 (the the Clean Technology Revolution' (2008) People’s Republic of China) 22(3) Natural Resources & Environment www.ep.net.cn/cgi- 9 11. bin/dbbz/doc.cgi?id=1067 at 11 August 81 Ibid. 2011.

Law85, a three-year tax exemption the corporation of environmental followed by a three-year half de- policies, plans, and other significant duction is available for energy- and environment problems, the Ministry water-saving projects. In addition, of Environmental Protection of the tariffs on environmental goods and People's Republic of China (MEP) services are lowered in order to at- has been set up to replace the tract cleaner technologies. China State Environmental Protection has recently imposed new restric- Administration of China (SEPA). tions on heavy polluters trying to This replacement was in accor- list on domestic stock markets. 86 dance with the Government Re- According to the new rules, compa- shuffle Plan of the State Council in nies from sectors designated as March, 2008. Its administrative high-polluting and high-energy level was raised from administra- consuming, which include thermal tion to ministry, enabling improved power, steel, cement and electro- exertion of its environmental pro- lytic aluminium, will have to submit tection function. to an environmental inspection if they wish to launch an Initial Public A new promotion system has also Offerings (IPO) or apply for addi- been launched, under which local tional financing.87 officials’ careers will be judged by their performance in meeting envi- China has also enacted numerous ronmental protection and energy specialized laws, regulations, pro- efficiency targets. The reason for cedures, and initiatives on climate the proposal of this new system is change and GHG emissions reduc- that local and provincial officials tion, which will be discussed in de- were judged mainly on their per- tail in Chapter four. formance in promoting economic growth, and there was little incentive for them to improve environ- In addition, the Chinese governmental quality and energy effi- ment has restructured official de- ciency. Based on the green as- partments in order to further en- sessment of local officials, it is pos- hance their environmental protec- sible for local governments to put tion capacities. In order to enhance environmental issues on the agenda, thus enhancing the en- 85 Corporate Income Tax Law 2008 (the forcement of environmental polices People’s Republic of China) and laws. www.investteda.org/downloads/Tax.doc at at 11 August 2011. 86 Agencies, ‘Heavy Polluters to be Re- The Chinese government has also stricted from Listing’, China Daily (Bei- more actively utilized media to jing), 25 February 2008 highlight the significance of envi- http://www.chinadaily.com.cn/bizchina/ ronmental issues and promote pub- 2008-02/25/content_6482947.htm at 11 lic participation. As the Olympic August 2011. 87 Ibid. Games in 2008 were approaching,

China attached more importance to 2008, nearly 75 per cent of urban atmospheric quality and committed Chinese are aware of the impor- to new environmental standards. It tance of a sound ecological envi- wanted to show the world that the ronment. 88 As for the ideal living environmental problems had been environment in China, clean air is improved though its unremitting ef- on the top of list.89 Based on that, forts, and that it was ready to host it can be concluded that most ur- the Games. Recently, ‘environment ban people have realized the im- and climate change’ in China has portance of environmental protec- become an importance part of me- tion. However, it should be noted dia coverage. Climate change sto- that this result cannot represent ries appear almost daily in China the environmental awareness of all Daily, the Government’s official Chinese. There are large differ- English-language newspaper, let ences between urban areas and ru- alone the other local newspapers; ral areas in regards to economic, when a television is turned on, education or living conditions. Ur- there is probably a piece of news or ban people are better educated, a commonweal advertisement and thus, they may be better in- about climate change on China formed than people living in rural Central Television Channel (CCTV). areas. Moreover, the extensive access to internet and other media has placed urban people in a better The conclusion could be drawn that position to obtain environmental in- the Chinese government has been formation and express their views. making arduous efforts to reduce On the contrary, in rural areas, GHG emissions and to minimize an which are more vulnerable to the adverse impact of climate change adverse impact of environmental domestically. problems and account for large part of China, people are not concerned In terms of China’s huge population, about the environmental protection public attitudes and daily behaviors due to the relatively low knowledge towards environmental protection levels and living conditions. By this will largely influence the progress reckoning, environmental aware- of global warming mitigation. ness in China is relatively low. In

Economic development and im- 88 The research was conducted by the proved education laid the basis for Chinese Ecological Education Promotion an increased sensibility towards Association and the Ecological Culture environmental issues. This is espe- Research Center under the Peking Uni- cially true for those Chinese born versity. It was carried out in the five cities in different regions of China and after the 1970s, who had the op- lasted more than three month. Accord- portunities to receive higher educa- ingly, this survey could be considered to tion. According to the report of a authentically reflect the public environ- nationwide survey released in April mental awareness in urban areas. 89 Ibid.

other words, most Chinese neglect GHG emissions and will continue to the importance of environment. do so in the foreseeable future. De- spite enormous efforts to improve the capacity for cutting emissions In spite of the relatively low level, and improving environmental qual- environmental awareness in Chi- ity, it is difficult to shift to a low nese society and consciousness of carbon consumption society in the the tense energy situation have short-term due to the lack of clean been enhanced. In addition, people technologies and funding in China. would pay more attention to cli- Under this scenario, international mate change as China launched its assistance and cooperation could first national environmental health be of great significance for China to action plan to enable the research reduce GHG emissions. on health impacts of climate change in China.90 The World Bank data demonstrates that almost one billion Chinese people live in air that does not meet the WHO (World Health Organization) standard.91 However, China has focused too much on its market-driven economic growth and environment- related health consequences have been neglected. As a result, there is little information available about the impact of the deteriorating environment on the health of the population, and people do not know how seriously it affects their health. It is believed that the outcome of this research would alarm people to raise their awareness of the environment.

In conclusion, viewed domestically, the rapid development of China’s economy has brought with massive

90 Taige Li, China Moves to Tackle Pollu- tion Effects on Health, (26 November 2007) http://www.scidev.net/en/news/china- moves-to-tackle-pollution-effects-on- health.html at 11 August 2011. 91 Ibid.

3.2 External Pressures: Post-Kyoto Protocol Negotiation

China is not subject to binding to enter a range of domestic com- emission cut target in the first mitments provided that real action Kyoto period before 2012.92 How- is taken from the developed coun- ever, according to its national cir- tries. China announced in the Co- cumstances, both the economy and penhagen Conference that it would emissions growths in China have reduce its carbon intensity by 40 been increasing rapidly. Due to per cent to 45 per cent by 2020, such a significant role in reducing based on 2005 levels. This essen- emissions, China has been actively tially means that China will con- participating in the UN post-2012 tinue to grow, but will do so more negotiations as well as other arenas efficiently and in ways that will fea- in which key countries can meet to ture reduced emissions. discuss global warming mitigation. These include, but are not limited to, Based on their national circum- the United Nations Climate Change stances, different countries have Conferences, the G8+5 Summit, the their different positions on the APEC Economic Leaders' Meeting post-2012 regime. Due to different and the Asia-Pacific Partnership on interests, the three stances are Clean Development and Climate. held by three groups: the European Union (EU), the so-called Umbrella Through these climate change ne- Group, a group of developed coun- gotiations, China’s position on the tries excluding the EU and develop- post-2012 regime is clearly ex- ing countries pressed. First, China highlights the major role of the UNFCCC for inter- (1) The EU’s position national community to structure a post-2012 regime and insists on ‘common but differentiated respon- The EU sees itself as a champion in sibilities principle’. Second, China the fight against climate change, advocates reducing emissions with leading the world in legislation, ac- technical and financial support by tion and technology regarding en- developed countries rather than ac- ergy saving and emission reduction. cepting mandatory emission cuts in As the strong advocate of the Kyoto any post-2012 regime. Third, China Protocol, the EU as a whole prom- recognizes the urgent need to ad- ises an 8 per cent cut of emission dress climate change and is willing between 2008 and 2012. 93 Its

93 Stefania Bianchi, ‘Environment-EU: 92 This part is adapted from Xiaoyi Jiang, Carbon Trading Scheme Challenged’, In- Legal Issues for Implementing the Clean ter Press Service News Agency (Brus- Development Mechanism in China, sels), 15 May 2006 (Springer: Berlin), 2012. http://ipsnews.net/news.asp?idnews=33

emissions are now very close to 203097), and global CO2 emissions this target through a series of (from 14 per cent in 2000 to 8 per newly introduced policies. In addi- cent in 205098) will decrease, while tion, EU’s active participation pro- the shares of developing countries motes the development of global will increase. In this case, countries carbon market. As mentioned pre- such as China, the US, India, Japan, viously, Europe and China are the Russia and Brazil will be the leading leading players in the fast-growing economies of the future and should business of the CDM. The EU is be part of new commitments to ad- buying more than 80 per cent of all dress global warming.99 The EU has emission credits globally.94 urged them to set emissions reduction targets. Moreover, the Euro- The EU has committed to reducing pean Commission has proposed its greenhouse gas emissions by 20 freezing new demand for CDM proper cent by 2020 compared with jects in 2012 unless the major pol- the levels of 1990. 95 Furthermore, luters, like the US, China and India, it was considering raising its carbon set emissions reductions targets.100 cutting target to a 30 per cent cut if a legally binding treaty for post- (2) The Umbrella Group members’ 2012 era was concluded. 96 Al- positions though the EU has committed to battling global warming with the binding target beyond 2012, it is The Umbrella Group is a loose asso- watching the move of the US and ciation of developed countries. the major developing countries. It Without a formal list, the group in- believes that the shift in economic weight for developing countries as 97 well as the US could impact on the See ‘World Energy Outlook 2004’ (In- future approaches to global warm- ternational Energy Agency, 2004) 59-80 www.iea.org/weo/docs/weo2004/WEO20 ing. The economic growth of devel- 04.pdf at 8 August 2011. oping countries in combination with 98 See ‘Winning the battle against global relatively low economic growth climate change’ (European Commission, rates in the EU implies that the lat- 2005) 35. ter’s relative share in global GDP, 99 Wilbur Perlot, ‘Post-Kyoto and the Po- global energy demand (from 16.6 sition of the European Union’ (Briefing per cent in 2001 to 12.5 per cent in papers, Clingendael International Energy Programme, 2005) 4 http://www.clingendael.nl/publications/2 005/20050823_ciep_briefing_perlot_pos 233 at 8 August 2011. kyoto.pdf at 9 September 2011. 94 Capoor and Ambrosi, above n 56, 33. 100 See ‘State and Trends of the Carbon 95 ‘Information Note on the UNFCCC’ Market 2008’ (2008) The World Bank (Council of the European Union), http://web.worldbank.org/WBSITE/EXTE 15838/09, 11 November 2009, 2 RNAL/TOPICS/EXTENERGY2/0,,contentM www.consilium.europa.eu/uedocs/cmsUp DK:21759158~menuPK:4137780~pageP load/ST15838_09.pdf at 8 August 2011. K:64020865~piPK:149114~theSitePK:4 96 Ibid 6. 114200,00.html at 8 August 2011.

cludes the United States, Australia President Bush announced in and Japan. These countries have 2007’s G8 summit that the US the similar positions regarding their would work with other nations to reduction obligations in the post- establish a new international ap- 2010 regime. Their medium-term proach to energy security and cli- emission reduction targets for 2020 mate change. Moreover, the US has are low and conditional on the par- promised to lead the world to pro- ticipation of major developing coun- duce fewer GHG emissions, but do tries. it in a way that does not undermine economic growth or prevent nations from creating greater pros- (2) The United States perity for their people.103 With regards to the GHG emissions in the The US is not only the largest and post-2012 regime, Bush was re- technologically most powerful eco- ported to have said that the US nomy in the world but also pos- cannot be expected to agree to sesses the largest share of histori- emissions reductions unless China cal emissions. Moreover, the US and India undertake similar obliga- ranks the first in the world regard- tions.104 He also argued that doing ing per capita emission level. How- so would result in the US industries ever, the economic growth of the and jobs moving out to the coun- US is not as rapid as that of the tries that do not have emission re- major developing countries, like duction commitments and would China and India. The GDP growth rate in the US has been less than 3 per cent for the four consecutive years from 2006-09, 101 which means the increase rate of energy could greatly hurt the economy of the demand would be relatively low US, leading to economic losses of $400 compared to the other major devel- billion and costing 4.9 million jobs. 2) large developing countries, like China oping countries. and India, are exempted from the reduction obligations under the Kyoto Proto- In spite of the huge contribution to col.3) there are still some scientific un- certainties. the global carbon emissions, the US 103 President Bush Participates in Major has not ratified the Kyoto Proto- Economies Meeting on Energy Security 102 col. The United States former and Climate Change http://www.state.gov/g/oes/rls/rm/2007 /92938.htm at 8 August 2011. 101 United States GDP Growth Rate 104 Shyma Saran, Climate Change - From (2009) Global Economic Research Back Room to Board Room - What http://www.tradingeconomics.com/Econ Indian Business Needs to Know about omics/GDP-Growth.aspx?Symbol=USD India’s Approach to Multilateral at 8 August 2011. Negotiations on Climate Change (2008), 102 President Bush gave three reasons available at why the US refused to ratify the Kyoto http://meaindia.nic.in/mystart.php?id=5 Protocol: 1) the goals of this protocol 15713883 at 1 June 2011.

therefore in any case not lead to interim report issued by a Japan global warming mitigation.105 government advisory panel, Ja- pan's emissions are forecast to rise by 0.9 per cent in the fiscal year The US has become less negative ending in March 2011 and are likely in tackling climate change since to increase 0.9-2.1 per cent from President Barack Obama took office. 1990.107 In spite of the difficulties, The Obama government actively Japan still shows determination to promotes new energy policies and fulfil its pledges and is considering the American Clean Energy and Se- new measures to achieve the target. curity Act106 which is an energy bill establishing a version of a cap-and- trade plan for GHG and addressing With regard to the post-2012 re- climate change was approved in gime, the Japanese Prime Minister June 2009. Based on this act, the stated that Japan would assume United States is empowered to im- the responsibility for creating a pose carbon tariffs on imports from post-2012 framework and setting a the countries that do not have lim- fair emissions reduction target for ited emission reduction targets. In the world as a whole, including all spite of the active stance, this the major polluter nations. 108 The country still refuses to adopt the ‘sectoral approach’ to reducing Kyoto Protocol. However, it has carbon emissions was proposed.109 promised to commit to enhancing Also, Japan seeks to design an financial support for developing emissions trading program helping countries to address climate cha- fight climate change after the nge in the context of transparency of the mitigation actions of the ma- 107 See Elaine Lies, Japan Emissions to jor developing countries. Rise, Reaching Kyoto Goals Hard (2007) Reuters (3) Japan http://www.reuters.com/article/idUST28 5136 at 15 August 2011. 108 Yukio Hatoyama, ‘Statement by H.E. Japan, one of the world’s biggest DR. Yukio Hatoyama Prime Minister of emitters of GHGs, has a target un- Japan at the United Nations Summit on Climate Change’ (New York, 22 Septem- der the Kyoto Protocol to cut its ber 2009) 3 emissions by 6 per cent from 1990 www.montreal.ca.embjpan.go.jp/pdf/PM levels over the period from 2008- _statement_220909.pdf at 15 August 2012. However, meeting the Kyoto 2011. target may be difficult as Japan's 109 As mentioned earlier, This debatable GHGs emissions are set to rise over bottoms-up approach is to identify car- the next few years. According to an bon-intensive industries, such as power, steel, cement, transportation and building and construction and to set uniform global efficiency norms and lower carbon 105 Ibid. emission standards for each sector, 106 American Clean Energy and Security which added up would then form a na- Act of 2009, ACES (2009). tional target.

Kyoto Protocol expires in 2012. The Australian government moved Even though a target of reducing to ratify the Kyoto Protocol in De- GHG emissions by 25 per cent by cember 2007. The Australia gov- 2020 against 1990 levels was an- ernment had committed to reduc- nounced in Copenhagen, it would ing emissions by 60 percent on be contingent on a deal involving 2000 levels by 2050 and has stud- all major emitters.110 ied how to achieve or even over- achieve this target for Australia.114 The government has taken meas- (4) Australia ures, including the Renewable En- ergy Target Scheme, which is to Australia, with 0.32 per cent of the ensure that 20 per cent of Austra- global population, contributes 1.43 lia’s electricity supply comes from per cent of the world’s carbon renewable sources by 2020 and the emissions. 111 Hence, it is not sur- Emission Trading Scheme, to slow prising that Australia’s per capita the rise of carbon emissions. Re- emissions are higher in comparison garding the post-2012 regime, the with other developed countries. Its Prime Minister said that China and per capita emissions in 2004 were India as well as the US must be 4.5 times the global average, just prepared to make commitments in below the value for the US.112 De- the fight against global warming. spite the big emission on a per capita basis, Australia was granted a (5) Developing countries’ positions limitation of an 8 per cent increase Kyoto target.113 Based on different interests, Co- penhagen saw three demands from three groups: the Group of 77 (G 77) and China,115 Small Island De- 110 Hatoyama, above n 108, 1. 111 Mike Raupach, ‘CO2 Emissions In- creasing Faster than Expected’ (Working 114 See Hon Martin Ferguson, Australia's Paper No 07/89, CSIRO Marine and At- Energy Security and the Clean Energy mospheric Research and the Global Challenge (2008) Minister for Resources Carbon Project, 2007) 3. and Energy 112 Ibid. http://minister.ret.gov.au/TheHonMartin 113 The UNFCCC gives special consid- Ferg- erations to some countries. Article4, sonMP/Pages/Australia'sEnergySecuritya section 8(h) of the UNFCCC stipulates ndtheCleanEnergyChallenge.aspx.html that’ Countries whose economies are at 3 March 2011. highly dependent on income generated 115 The Group of 77 at the United Na- from the production, processing and tions is a loose coalition of developing export, and/or on consumption of fossil nations, designed to promote its fuels and associated energy-intensive members' collective economic interests products’. Australia belongs to that and create an enhanced joint negotiating kind of countries as it is the world's capacity in the United Nations. There largest coal exporter and is reliant on were 77 founding members of the fossil fuel for transportation and energy. organization on 1964, but the

veloping States (SIDS) and Tropical other so-called “major emitter” due Forest Group. to its huge population and rapid economic growth, and is also the focus of negotiations on mitigating − The G 77 and China global warming for the post-2012 era. However, India does not con- The G 77 includes most of the de- sider itself to be a major emitter as veloping countries and their posi- it argues that neither the total vol- tions are consistent with China’s. ume of its CO2 emissions nor its They agree on long-term coopera- per capita emissions today, would tive actions on climate change, qualify it in the category of “major mitigation of emissions, adaptation emitters”. 119 It insists on the per to the impact of climate change, as capita standard and emphasizes well as provision of financial and the distinction between ‘lifestyle technological support to developing emissions’ and ‘survival emissions’ countries. 116 In addition, they sta- to address global warming is- ted that developed nations should sues. 120 Accordingly, India claims honour their commitment to ac- that it is not prepared to accept complishing or establishing the any limitation on its carbon emis- medium-term emission reduction sions in the post-2012 period. targets. Moreover, concerns of the least developed countries, small is- Brazil, constituting another major land developing states and African developing country, made an ambi- countries should be considered.117 tious proposal to fight climate change at meetings in Copenhagen. In addition, after China announced It pledged to reduce the pace of to reduce its carbon intensity, In- the Amazon's deforestation by 80 dia followed with an announcement per cent and make its emission of 24 per cent reduction by levels reach to the levels of 2005 2020. 118 India is regarded as an- organization has since expanded to 134 http://www.undispatch.com/india-steps- member countries. China is not its and-pledges-emissions-targets at 12 member, but it supports the G 77’s December 2010. claims. 119 See Saran, above n 74. In spite of 116 ‘Backgrounder: Three major stances 1.15 billion population and 8.5per cent in Copenhagen climate change negotia- GDP growth rate in 2007, India’s total tions’ Xinhua (Beijing), 9 December emissions are 4per cent of the global 2009 figure and it emits about 1.1 tons of CO2 http://www.chinataiwan.org/english/spe per capita while the corresponding figure cialrports/sr/Climate/267/43/200912/t2 for the US is more than 20 tons. 0091209_1168909.htm at 3 March 2011. Furthermore, India accounted for only 2 117 Ibid. per cent of the cumulative CO2 118 Aaron Wiener, India steps up and emissions in the period between 1850 pledges emissions targets (2009) UN and 2000. Dispatch 120 Ibid 78.

by 2020. 121 Furthermore, it pro- − Tropical Forest Group mised to provide funding for the least developed countries to ad- The Topical Forest Group is com- dress climate change. posed of rainforest countries in Af- rica and South America. These − Small Island Developing States countries need the security of fi- (SIDS) nance to realize the objective for reducing deforestation by at least 50 per cent by 2020.124 They stress SIDS is another coalition of devel- developed countries’ responsibility oping countries, representing 43 is- to provide financial support. land developing countries with low coastlines. These countries are most vulnerable to sea level rises It can be concluded from the above caused by climate change. Facing that: first, all the countries have this situation, they not only put recognized the urgency of reducing forward Tuvalu's Proposals122 at the carbon emissions and are involved Copenhagen Conference to call for in the post-2012 negotiations. Al- a new legally binding agreement to though the post-2012 negotiations include commitments from the US have not been concluded, most but also other issues such as adap- countries have set their individual tation and finance. In addition, numerical target for addressing they also claimed that the global emission reduction beyond 2012. emissions should be reduced by 85 Moreover, they are taking or have per cent by 2050.123 promised to take measures in order to reduce their domestic emissions in different forms.

121 Raymond Colitt, ‘Brazil eyes capping Second, national interests are the emissions at 2005 levels’, Reuters (Bra- root cause of different positions on silia), 13 October 2009 the post-2012 regime. The divi- http://www.alertnet.org/thenews/newsd sions between developing and de- esk/N1315528.htm at 12 December veloped countries and between the 2010. EU and the US originate in different 122 Tuvalu was calling for a discussion on what form the final deal from Copenha- national interests and are according gen will take. The small island states put to different national circumstances. forward a proposal for a new protocol – in addition to the Kyoto Protocol – to include the commitments from the US and the other issues such as adaptation and finance. 124 The EU's negotiating position for 123 Ahead of Copenhagen talks, small island Copenhagen (2009) Federal Ministry for nations sound alarm at UN on climate the Environment, Nature Conservation change (2009) UN New Center and Nuclear Safety http://www.un.org/apps/news/story.asp http://www.un.org/apps/news/story.asp ?NewsID=32265 at 12 December 2010. ?NewsID=32265 at 12 December 2010.

Third, China’s and the United countries, however, are reluctant to State’s positions play a decisive commit to specific targets because role in designing a post-2012 of the restrictive effects that such framework. China functions as a targets may have on their industrial model for other developing coun- development. Consequently, al- tries. When China leads, other de- though the developed countries un- veloping countries will follow. In der the Kyoto Protocol are urging addition, the United State’s position the US and China to accept manda- influences the other countries’ tory emission cuts in a post-2012 stances with regard to their obliga- regime, neither of them are willing tions in the post-2012 regime. to move.

Finally, divisions between develop- Based on the above analysis, the ing countries and developed coun- US and China would play a decisive tries, especially between the United role in the post-2012 period. If States and China, are the critical China insists its position on climate factor impeding the post-2012 ne- change for the post-2012 regime gotiations. The division derives era, other developing countries from the following ques- would follow China and not possibly tions: Should countries share their accept any fixed reduction targets. reduction obligations on the basis In terms of the promises regarding of historical emissions or future emissions reductions that have emissions? Should countries share been made by some developed their reduction obligations based on countries, two scenarios would per capita emissions or nation wide probably occur. One scenario is emissions? The major developing that a new global agreement on countries, which have both rela- climate change would go forward tively low historical and per capita beyond 2012 without the US and emissions, are expected to produce China’s involvement; the other substantial emissions due to eco- scenario is that all the developed nomic growth in the coming dec- countries, including the US would ades. By contrast, the major devel- agree a new pact with fixed reduc- oped countries, which are the main tion targets beyond 2012. contributors to the current global warming, will decrease their shares The first scenario would be a new in global carbon emissions with agreement without inclusion of the their relatively low economic US and China beyond 2012. First, growth rates. In this scenario, most from a global perspective, it will be developed nations believe that for a formidable task of slashing over- the next global agreement to be all emissions by 50 per cent from meaningfully, it must contain GHG 1990 levels by 2050 without the in- reduction commitments from China, clusion of the US and China. A con- India and the other large develop- crete reduction target averting the ing economies. The developing irreversible consequence of global

warming has been concluded by countries would ratify a new IPCC. Nonetheless, it is impossible agreement to replace the Kyoto to achieve the 50 per cent reduc- Protocol beyond 2012, leaving Chi- tion target by 2050 without inclu- na and the other major developing sion of the US and the major de- countries without binding reduction veloping countries, which together targets. In this scenario, China account for more than half of the would on the one hand, not sacri- world emissions. Furthermore, the fice its economic development to fact that emission figures in the reduce carbon emissions but on the developing countries would con- other hand, would have to face tinue to increase at a speedy rate many challenges that may arise in a few years complicates the beyond 2012. problem. Although the US is seeking less demanding alternatives First, China and the whole world and China has endeavoured to im- may suffer the consequences of prove its energy efficiency, whether global warming. It is predicted that these measures will prove to be China and other developing coun- more or less effective than the new tries would account for more than agreement with the fixed targets in half of the planet’s emissions in a the post-2012 period is a question few decades. Therefore, unless the that will not be answered until it carbon emissions are effectively re- may be too late to plot a new ap- duced in these countries, global proach. warming would not be averted.

The US and China would face great Second, China would be under pressure of not accepting fixed tar- great pressure internationally. gets beyond 2012. The other de- When the US is included in the new veloped countries that have deter- agreement, China, which has al- mined to reduce emissions with the ready become the world’s biggest fixed targets under the new agree- GHG emitter, together with other ment in the post-2012 period may rapidly developing countries would constantly urge for the involvement undoubtedly be a focal point in the of the US and major developing climate regime. countries. Moreover, the competition among developing countries in the CDM market would be more in- Third, although China may benefit tensive beyond 2012 without the from massive carbon credits de- carbon credits demand from the US mands in the CDM market as a re- and the support from EU. sult of the inclusion of the US in the new agreement beyond 2012, there would be a negative impact on Another scenario would be a new China’s economic development in agreement without the inclusion of the long-term. In the context of China beyond 2012. In this sce- economic globalization, China has nario, all the major developed

become the world industry base In addition, China’s foreign trade with its cheap labour and relatively would be affected beyond 2012. En- favourable investment climate. As a tering into the new century, foreign world factory, China has not only investment in China has been obtained much needed capital and steadily growing. According to the technologies, but also promoted its statistics unveiled by the website of economic growth. However, the Ministry of Commence of China,127 expenses could not be neglected. the value of foreign trade in China Once the infrastructure and equip- has accounted for nearly 70 per ment of these factories, most of cent of GDP and the export value which are with high energy con- with nearly 40 per cent. The US is sumption and emissions, are put the no. one export pattern with into use, their average duration China. Against this backdrop, China would be at least between 15-50 and other countries, in particular years. During this period, the cor- the US, have become more interde- responding technologies and capital pendent in their economic develop- would be locked until the investment. However, as claimed by the ment is returned. 125 Hence, when US former President Bush, the goal China accepts reduction obligations of emissions reduction would incur in the future, these factories would economic losses in the US. In terms be an impediment to the develop- of the interdependence, the de- ment of a low carbon economy in crease of the US economic devel- China. Even if China transfers these opment would also weaken China’s factories, the economic develop- foreign trade. In this regard, ment and employment would be China’s economic development undermined. On top of that, the would be under attack beyond 2012. problem of carbon emission leakage 126 would derive from the fact In conclusion, with China jumping that realizing fixed reduction tar- past the US as the largest CO2 gets could accelerate the trend of emitter, it will face a great challenge developing carbon-intensive indus- of reducing its carbon emissions be- tries overseas by developed coun- yond 2012. Even if China is not allo- tries. Considering the above men- cated with binding reduction target tioned circumstance, the pressure under the new agreement, it would China will have to face in the future be subject to considerably adverse is of no surprise. consequences of global warming, not limited to environmental consequences. Facing this situation, it is urgent for China to find a way that 125 In the economic science this is called ‘Lock in Effect’. 126 Emission leakage is a concept refer- ring to the problem that emission 127 See the website of Ministry of Com- abatement achieved in one location may merce People’s Republic of China be offset by increased emissions in un- http://english.mofcom.gov.cn/statistic/st regulated locations. atistic.html.

leads to sustainable development and a low carbon economy.

4. Feasibility of CO2 ETS in China

4.1 Policy Support

Although China and other develop- ministrative measures. Having ing nations have not been bound by adopted market mechanisms throu- the protocol to reduce emissions of ghout its economy, China is now the gases blamed for global warm- embracing carbon trading and is ing and climate change, China has exploring provincial and/or city- been the largest emitter. For the based trading schemes. long-term interests, addressing climate change is regarded as one First, the ETS in China is supported of the important strategies of by the national economic and social China's economic and social devel- development plan. Faced with se- opment, and following goals have vere pollution, a predicted surge in set to control the emissions of urbanisation and a struggle to en- GHGs until 2020 before the Copen- sure adequate energy supplies to hagen Climate Summit as China’s fuel its rapid growth, China has out- contribution to the international ef- lined plans to reduce carbon emis- forts addressing climate change: sions in its latest five-year economic plan. The 12th Five Year Plan • lower CO2 emissions per unit was endorsed by the National Peo- of GDP by 40–45 per cent by ple’s Congress on 14 March 2011. 2020 compared to 2005; China’s Five Year Plan seeks to es- • increase the share of non-fossil tablish a “green, low-carbon devel- fuels in primary energy con- opment concept”. This is the first sumption to around 15 per Plan to include a commitment to gradually introduce market mecha- cent by 2020, and nisms to control carbon pollution. • increase forest coverage by 40 China announced several new car- million hectares and forest bon and energy targets from 2010 stock volume by 1.3 billion cu- levels, namely: bic meters by 2020 from 2005.

increase the proportion of non- China’s attempts to address emis- • fossil fuels in energy con- sions have predominantly focused sumption to 11.4 per cent by on legislation in areas such as en- 2015; ergy efficiency, the feed-in tariff under its renewables law, or ad-

• reduce energy consumption egy. First of all, it is required to es- per unit of gross domestic tablish project-based national vol- product (GDP) by 16 per cent untary emission trading schemes from 2010 levels by 2015; and and implementing mandatory cap and trade carbon emissions trading • reduce carbon dioxide emis- pilot schemes. In addition, the es- sions per unit of GDP by 17 per tablishment of the supporting sys- cent from 2010 levels by 2015. tem for carbon emissions trading should be enhanced. The Five Year Plan refers to establishing low-carbon product stan- With the support of the 12th Five dards, improving the statistical ac- Year Plan, NDRC of China has ap- counting systems for GHG emissions and the “step by step estab- proved a mandatory “Cap and lishment of carbon emission trading trade” emissions trading pilot markets”. The use of market mech- scheme in seven provincial regions by 2013 and will expand it nation- anisms to incentivise energy sav- ally in 2015 in an effort to encour- ings was included in the Plan. age carbon emission reductions. The municipalities and provinces The Five Year Plan also highlighted given the green-light include Bei- priority 'strategic emerging indus- jing, Tianjin, Shanghai, Chongqing, tries' for industrial innovation and Shenzhen, Hubei and Guangdong. development. These included: Schemes are intended to be launched in 2013 and the key issues, including the future design of • energy efficiency technologies, the pilot schemes, timetable for recycling, and waste manage- implementation, obstacles and ment； challenges remaining and perspec- • advanced nuclear energy, wind, tives for a nation-wide emissions solar, smart grids and bio- trading scheme are still under dis- mass；and cussion. If the schemes were intro- • hybrid and pure electric vehi- duced in 2013, China could con- cles. sider introducing a nation-wide emissions trading scheme in its next 5 year plan, covering the pe- Second, The Working Strategy on riod starting in 2016. Making cap- controlling GHG emissions under and-trade a reality in China will be the 12th Five Year Plan was release challenging. The future success or by the National Development and failure of the emissions trading Reform Commission (NDRC) subse- scheme in China will have major quently in 2011 with a commitment implications on the future of carbon to realizing the reduction goal un- trading globally. der the plan. Attempts to establish carbon emissions trading market are addressed in the working strat-

Besides the carbon trading, the of controlling the local emissions of NDRC also designated thirteen ar- GHGs. In addition, they will also eas to operate a variety of pilot establish the statistics and man- schemes as part of the country’s agement system of GHG emissions commitment to reduce its emis- and actively promote the low car- sions. In July of 2010, NDRC issued bon lifestyle and consumption pat- the policy paper “Notification on tern in order to reduce the carbon Advancing the Low Carbon Pilot emissions. The NDRC also required Projects on Province and City the experimental areas to explore a Level”. According to the paper, pilot mechanism to promote energy con- schemes will be deployed in five servation and emissions reduction provinces – Guangdong, Hubei, as well as the development of the Liaoning, Shaanxi and Yunnan – as low-carbon industry and implement well as eight cities – Tianjin, the target-related responsibility Chongqing, Hangzhou, Xiamen, system in controlling GHG emis- Shenzhen, Guiyang, Nanchang and sions. Baoding. Each city and province will be expected to develop its own Additionally, the experimental ar- plan to reduce emissions, and sub- eas are required to explore effec- mit a strategy for developing a tive government guidance and eco- lower carbon economy, some of nomic incentive policies, study and which are expected to include car- apply the market mechanism to bon trading schemes, for inclusion achieve the emissions goal as well in China’s 12th Five Year Plan as closely follow the latest techno- (2011-2015). logical advancements in the low Relevant government officials of carbon field. Furthermore, they are those provinces and cities have expected to actively promote the promised to research and develop a introduction, absorption and re- low-carbon development plan, to innovation of technologies or to accelerate the establishment of an conduct joint research and devel- industry structure featuring low opment on new technologies with carbon emissions and to actively overseas companies. It can be ob- promote low-carbon lifestyles and served that reducing carbon emis- consumption patterns in order to sions and establishing ETS in China help tackle global climate change. has been put on top of the agenda The governments of these experi- and that the Chinese Government mental provinces and cities will consequently has created a favor- clearly establish operational goals, able political environment for ETS major tasks and specific measures in China.

4.2 Case Studies on ET of SO2

Sulphur dioxide (SO2) is one of the but the pilot SO2 trading projects at pollutants responsible for acid rain, the city and provincial levels in which can damage forests and China have provided valuable les- acidify lakes and streams, render- sons for developing a carbon trading some of them incapable of sup- ing scheme. Additionally, it is reporting aquatic life. SO2 air pollu- ported that SO2 emissions were re- tion also causes respiratory and duced by 29 percent in 2010 com- other health problems for people. A pared with 2005 levels. 128 There- cap-and-trade system was firstly fore, it is necessary to conduct a imposed on SO2 emissions in the case study on SO2 ETS in China. A US in the context of acid rain re- program for controlling SO2 emis- duction under Title IV of the Clean sions in Taiyuan city, Shanxi Prov- Air Act amendments of 1990. ince is a good case to study on the initial stage of the implementation of emissions trading. 129 What The 11th Five-Year Plan (2006– makes the Taiyuan project distinct 2010) of China established a man- is that it not only tests the effec- datory SO2 emission reduction tar- tiveness of a cap-and-trade pro- get of 10 per cent. To encourage gram in a severely polluted city, sustainable reductions in SO emis- 2 but identifies the features that are sions, the Chinese Government crucial for any future national im- proposed a market-based SO trad- 2 plementation. ing system be utilized to comple- ment command-and-control instruments. The introduction of an Taiyuan was selected to run the

SO2 trading system provides a mar- experiment for good reasons. First ket-based mechanism to manage of all, the SO2 pollution in Taiyuan SO2 emissions at the least eco- is very severe and the local author- nomic cost. The Government sets a national emissions cap before establishing an emission trading plat- 128 China to pilot carbon emission form based on emission allowances rights trading scheme: economic allocated to SO2 emitters. Emission planner (2011-11-12), Xinhua New, sources with excess reductions can http://news.xinhuanet.com/english then trade their allowances. The 2010/china/2011- trading system operates to identify 11/22/c_131263322.htm at De- cember 2011. least-cost emission reductions. This 129 The case study of Taiyuan SO2 ETS cap-and-trade system comple- below is adapted from Bo Mian’s ments existing policy initiatives to PhD thesis entitled Designing a Na- reduce SO2 emissions. The national tional Emissions Trading System to SO2 ETS has not been set up so far, Control Multiple Airborne Pollutants in China (2007), 91-110.

ity was facing enormous pressure to improve the air quality from both inside and outside. Secondly, the city government had formulated an ambitious total emissions control goal of 50 per cent SO2 reduction off the 2000 level by 2005.130

After careful preparations, a tradable permit system targeting SO2 emissions was launched in 2002. The basic elements of the Taiyuan program are summarised in the following table:

130 The ambient SO2 concentrations were 0.2mg/m3 in 2000, three times higher than the Class II standards that are deemed to be the acceptable standards for me to live in urban cities. See Jintian Yang and Jeremy Schreifels, ‘Implementing SO2 Emissions in China’ (Paper presented at OECD Global Fo- rum on Sustainable Development: Emissions Trading, Concerted Action on Tradable Emissions Permits Country Forum, Paris, 17-18 March 2003) available at: www.oecd.org/dataoecd/11/23/29577 44.pdf (last visited on 3 June 2004).

Table 4.1: Summary of theTaiyuan Program

Legal basis Regulation on TEC in Taiyuan City and ARET Taiyuan. Cap and timing TEC limits for the national 10th Five-Year- Plan − 125,000 tons in 2005.

Scope: emissions and sec- Smokestack SO2 emissions from 26 key pol- tors covered luting enterprises accounting for 50per cent

of the city’s SO2 emissions, including power plants, iron and steel enterprises, district heating provider, and other heavy industrial sources. Allocation of allowances131 Grandfathering, small-portion auction is also allowed in the legislation.

Allocation method Data of firm’s actual reported SO2 emissions in 2000−01 forms the basis of their allocation share. Monitoring and measure- Continuous Emission Monitoring System ment (CEMS) are installed for a handful of large sources; less accurate methods like material balance are also applied; periodic on-site in- spections are carried out by local EPB. Tracking systems An emissions-tracking system and an allowance-tracking system are both established with US EPA’s help. Offsets Early reductions are not recognized. Banking and borrowing Banking of permits is allowed as long as prior approval is obtained from the EPB, but borrowing of future allowances is prohibited. Punitive mechanism A financial penalty is set for enterprises failing to submit sufficient allowances for their yearly emissions. However, the total penalties are set at a level far below the marginal abatement costs.

Source: RFF team, Richard D. Morgenstern et al, 2004.

131 One allowance is equal to one ton of SO2 emissions and may be used to authorize SO2 emissions during the year for which was allocated or for subsequent years.

The performance of the Taiyuan a legal regulation (ARET Taiyuan) program was disappointing. In a was promulgated by the local gov- phone interview conducted in No- ernment and forms the legal basis vember 2004, officers in the local for the SO2 allowances trading re- EPB revealed that there was only gime in the city. This piece of legis- one single trade since the program lation is unique because it is the was initiated. 132 The situation first regulation enacted by a city changed slightly in 2005. The latest government that provides legisla- news with respect to the Taiyuan tive support for a tradable permit program reports that twelve trades system in China. It serves as a took place among 12 firms before good model for putting forward fu- June 2005.133 From the available in- ture relevant legislations, as the formation, it can be observed that ARET Taiyuan incorporates many almost all the trades are of small crucial features of designing an volumes. For instance, the traded emissions trading regime and cre- amount of SO2 allowances in seven ates a relatively strong foundation trades that took place between the for the implementation, i. Xiaodian Heating Company and seven other enterprises ranged from Secondly, from the perspective of 1 ton to 67 tons, with most around technical support, with the help 10 tons, totalling 122.7 tons.134 from US, EPA, an emissions tracking system (ETS) as well as an al- There are surely other accomplish- lowances system (ATS) have been ments of Taiyuan project.135 Firstly, established for monitoring purposes. The ETS is important as it inte- grates technical monitoring infor- 132 Interview with an officer of the Tai- yuan EPB (Telephone 12 November mation collected by Taiyuan EPB 2004), interviewee remains anony- with additional data on coal pur- mous as indicated. The trade took chases, new SO2 control measures place in 2002 between Taiyuan Chemi- taken, enterprise-level output, and cal Industry Company (seller) and the other factors.136 The ATS holds the China Lanxing Company (buyer). The allowance account of individual buyer purchased 67 tons SO allow- 2 firms, tracks the transfer of allowances from the seller by the arrange- ment of local EPB. The price remained ance between trading accounts, confidential. and verifies trades. The two sys- 133 Kexing Zhang and Shi Baoyu, ‘Tai- tems, if properly operated, will be yuan City is Encouraging SO2 Emis- able to ensure, to a large extent, sions Trading’ (2005), available at: the credibility of the trading sys- http://www.tyshbj.com.cn/newweb/hb xx/dongtai1.asp?id=246 (last visited on 6 May 2007). 134 Ibid. Air Quality in an Industrial City in the 135 The RFF teams summarized the People’s Republic of China’ (Discussion achievements of Taiyuan program in Paper 04-16, Resource for the Future, its report. See Richard D. Morgenstern 2004). et al, ‘Emissions Trading to Improve 136 Ibid.

tem. 137 As a result of running the timely basis and thus form an ap- two systems, Taiyuan has become propriate basis for gauging the one of the few cities that have rela- emissions or granting related al- tively comprehensive information lowances in the case of proper op- about enterprises’ production and eration of the CEMS. 140 However, emissions. Thus, if a national emis- many experts have expressed con- sions trading was waged in the cerns as to the enterprises’ unwill- foreseeable future, Taiyuan would ingness to run the installed CEMS experience much less difficulty in due to the high operating fees. It is collecting the requisite data than suggested that it does not present most other cities. much difficulty for firms to turn off CEMS if no operation standards are available and local EPB only in- Thirdly, CEMS have been installed spects periodically. in a handful of large sources.138 The high expenditure in equipping stationary enterprises with CEMS, the Fourthly, the Taiyuan project tested most accurate method for measur- a couple of essential elements of a ing emissions, has long troubled lo- tradable permits system. Of par- cal environmental agencies. With ticular importance is the allocating the financial assistance from the method employed by the regulators. ADB, the Taiyuan EPB is able to in- The local EPB adopts “grandfather- stall the best monitoring equipment ing”141 and distributes the initial al- in some large emitters.139 It is as- sumed that the enterprises’ actual 140 emissions will be reported to the The actual number of enterprises equipped with CEMS is not publicly local environmental authority on a known. But according to some official documents regarding equipping qualified firms with CEMS from the Taiyuan 137 Ibid. EPB website, it could be inferred that 138 The RFF teams do not uncover the at least a handful of CEMS have been exact number of CEMS that have been installed. See Notice on Strengthening installed. However, it is reported that the Instalment and Network Connec- the Taiyuan government has been kept tion of CEMS, above n 138. requiring the emitting sources to in- 141 Grandfathering often refers to the al- stall CEMS since the program got location that is based upon historical started. See Notice on Strengthening data rather than contemporaneous or the instalment and Network Connec- future data. However, it should be tion of CEMS, available at: noted that this term has a meaning in http://www.tyshbj.com.cn/newweb/wu emissions trading that differs from its ranfangzhi/fangzhi1.asp?id=19 (last use in other contexts, such as when it visited on 5 April 2006); Notice on in- implies exemption form tax or regula- stalling CEMS at Enterprises at the tory provisions. See A. Denny Eller- Second Round, available at: man, Paul L. Joskow, and David Harri- http://news.xinhuanet.com/misc/2005 son, Jr., ‘Emissions Trading in the US: -10/07/content_3590248.htm (last Experience, Lessons and Considera- visited on 5 April 2006). tions for Greenhouse Gases’ (Policy 139 See Morgenstern et al., above n 135. paper prepared for the Pew Center on

lowances to participants without In the Taiyuan case, the local gov- charge. Rather than auctioning al- ernment set an ambitious SO2 lowances among potential partici- emissions reduction goal in 2001: it pants and selling them to the high- would decrease SO2 emissions by est bidder, this approach proves to 50per cent below the 2000 level in be a realistic way to solicit enter- 2005. 142 There were very strong prises’ agreement to participation. political considerations for the tar- A kind of precedent has been set get-setting: the local administration for later programs through the free intended to demonstrate their distribution. For instance, in the Ji- strong support for the Tenth-Five- angsu emissions trading program, Year Plan, in which the Central although the local enforcers adopt Government called for a nation- a different allocation method, they wide 20per cent reduction in SO2 still distribute the allowances to the emissions from 2000 levels by power entities without charge. 2005. 143 Taiyuan, as a city distin-

guished for its SO2 pollution, was surely expected to bear more than In brief, although the Taiyuan ex- the average responsibility for curb- periment does not yield the desired ing the local emissions. The overly outcome, there are certain accom- ambitious target was thus formu- plishments, as mentioned above, lated as an indication of the local that deserve consideration. How- administrative team’s political de- ever, in view of the huge financial, termination to fulfill the formidable personnel, and political resources task. invested in the demonstration program, it is somewhat disappointing to see the poor volume of trades As always, initially, the pollution and the less than encouraging per- levy system was supposed to be formance of the market. Compared to the limited accomplishments, lessons learned from the Taiyuan 142 Some researchers also discussed the project may bear more meaning to style of China’s government in setting observers. the goal for environmental protection. See for example, See Ruth Greenspan Bell, ‘Choosing Environmental Policy First, a tradable permit system has Instruments in the Real World’ (Paper to interact and coexist with other resented at Concerted Action on Trad- policies and measures. This might able Emissions Permits Country Forum, OECD Global Forum on Sustainable lead to a situation, in which the Development: Emissions Trading, Paris, permit system is made responsible 17-18 March, 2003). for the failure of achieving the 143 The Tenth Five-Year Plan was ap- overall target even though, the re- proved by the fourth meeting of the sponsibility for the failure lays with Ninth National Congress on 15 Mar other participating parties. 2001, available at: http://news.xinhuanet.com/misc/2005 -10/07/content_3590248.htm (last Global Climate Change, 2003). visited on 3 July 2005).

the major instrument to achieve Although much criticism was di- the goal. It worked well in 2001 rected to the PLS for its failure to and 2002 as the SO2 emissions in effectively collect fees from enter- Taiyuan decreased by more than prises and induce them to change 10per cent from the 2000 level.144 their behaviour, the ongoing emis- This was the period of time when sions trading system also received Taiyuan was selected as the place unfavourable comments. 147 As the to demonstrate a tradable permit program suggested, the 26 partici- system. The preparatory works pating firms’ allowances for 2005 were basically completed in 2001 were allocated in accordance with and an emissions trading regime their SO2 emissions quotas in started to operate in 2002. The 2000−01, but in that year almost program seemed to run smoothly all the participants emitted much and the first reported trade took more SO2 than the allowances they place in the same year. However, held for 2005.148 Considering this, it the situation changed dramatically is not surprising why no trade took in 2003 when the national energy place: no one had any surplus al- demand surged. The highest lowance to sell. The lack of real amount ever of consumed fuel coal, transactions still tarnishes the along with the sharply increasing reputation of the tradable permit costs of purchasing coal, made system, as people may wonder: abating SO2 emissions as it usually why bother establishing such a would have been. The national SO2 program in China if it achieves emissions continued to rise and nothing but simply adds another 145 reached a climax in 2005. Tai- layer of complexity to SO2 man- yuan was not immune to this agement and creates new rent- change. The local SO2 emissions seeking opportunities? echoed the national trend and the city failed to meet the goal of 50per However, it was not the tradable cent reduction in 2005.146 permit system’s fault that no trade occurred in that year. A similar case that took place in a NOx emissions trading program is the 2000 144 Interview with an officer of the Tai- yuan EPB (Telephone interview, 12 No- California electricity crisis, where vember 2004), interviewee remains anonymous as indicated. 145 See Shengxian Zhou, ‘Controlling 2006), interviewee remains anony- China’s Emissions Control Targets’ mous as indicated. (Speech delivered at the National Air 147 Interview with an officer of the Tai- Pollution Prevention and Control Con- yuan EPB (Telephone interview, 5 April ference, 30 May 2006), available at: 2006), interviewee remains anony- http://www.zhb.gov.cn/xcjy/zwhb/20 mous as indicated. 0605/t20060530_76957.htm (last 148 Interview with an officer of the Tai- visited on 7 June 2006) yuan EPB (Telephone interview, 5 April 146 Interview with an officer of the Tai- 2006), interviewee remains anony- yuan EPB (Telephone interview, 5 April mous as indicated.

energy demands increased dra- Second, a related lesson concerns matically and the enterprises need- the fact that the integrity of a traded more allowances to cover their able permit system will be severely actual emissions. In sharp contrast undermined if the goal is compro- to the non-trade situation in the mised by the regulated parties’ plea Taiyuan project, the emissions for lenient treatment. trading market in California was quite active and almost all enter- Realising the fact that they were prises bought the additional allow- unable to submit allowances equi- ances they needed, though at an valent to their actual emissions in unprecedented high price.149 2005, the participants of the Tai- yuan project cited the special mar- The comparison of the two cases is ket conditions of that year and ne- instructive because it highlights the gotiated with the local EPB for a li- fact that trading demands strong ability exemption.150 As will be dis- supporting environmental institu- cussed later, paying fines was not tions, such as reliable punitive the major issue that worried the mechanisms; and the emissions enterprises, because the fines set trading system by itself cannot fix for breaching the enterprises indi- the lack of requisite institutional vidual cap were virtually trivial factors in China. The government’s compared to their average abate- slowness or inefficiency, at both the ment costs. What concerned the national and local level, in rectify- participants more was the shame ing the deficiencies in the environ- they would bear should they be mental institutions has contributed claimed to be violators of the greatly to the embarrassing situa- law. 151 Not surprisingly, almost all tion that emissions trading is en- the participants were cleared of trapped in its application to China. their liabilities. One primary reason As happened in the Taiyuan case, why local EPB made such a lenient when unsatisfying results emerged, decision was that the environ- the tradable permit system may mental agency was required not to take unjustified blame if it is con- be too harsh on enterprises as they fused with an environmental target experienced “these unpredictable while actually being a policy tool.

149 The NOx credit prices increased from less than $2000 a ton in 1999 to over $70,000 a ton in 2000. See Ellerman, 150 Interview with an officer of the Tai- above n 141, 15 footnote 11; see also yuan EPB (Telephone interview, 5 April David Harrison. Jr., ‘Ex Post Evaluation 2006), interviewee remains anony- of the RECLAIM Emissions Trading mous as indicated. Programmes for the Los Angeles Air 151 Interview with an officer of the Tai- Basin’ in OECD (ed), Tradable Permits: yuan EPB (Telephone interview, 5 April Policy Evaluation, Design and Reform 2006), interviewee remains anony- 45 (OECD, Paris, 2004). mous as indicated.

and unavoidable market chan- ferent. Conceptually, the increasing ges”.152 demand for more allowances will turn into a continual rise in the allowance price, and if sharp enough, Pressures on the local envi- a price shock as happened in the ronmental regulators were coming California electricity crisis may oc- from many sources, and concerns cur. Although the California case is such as the firm’s bottom line, tax- far from perfect in many aspects ing revenue, and fund distribution and a number of factors need to be were very real. While it is hardly properly assessed for analysing possible to determine what was go- purposes, the integrity of the pro- ing on in the enterprises manage- gram is assured by sticking strictly ment’s mind when they realized to the emissions cap.153 Such strin- they would suffer a great economic gency is exactly what is lacking in loss if they stuck strictly to the al- China’s environmental regimes. lowances allocated to them. Sens- Without adequate confidence in the ing the possibility of easing the regulators’ determination to set a goal of the program, as always mandatory cap on the total emis- happens, must have given them sions and vigorously enforce it as the reassurance to continue emit- happened in the California case, ting SO instead of taking effective 2 the enterprises in China are bound abatement measures. The golden to be sceptical and some may wait rule of “law does not punish the until the last minute to undertake majority” (Fa Bu Ze Zhong) in their own responsibilities.154 China’s political culture is perfectly reflected in the concerted actions of the participants in the Taiyuan pro- Thus, if the Chinese Government is gram. They neither needed to scale interested in pursuing a realistic down the production to offset SO2 goal, rather than a figure selected emissions as would be environmen- by some inner councils working in tally effective, nor did they have to somewhat of a vacuum, it should face the request to purchase allow- build explicit consultation with the ance to cover their additional emis- potential participants and solicit as sions as would be encouraged in an many of their opinions as possible. efficient market. Enforcement is more likely to suc- ceed if firms know what their real However, had a tight cap and an efficient allowance market been in 153 See in general David Harrison. Jr., ‘Ex place, the case of “Taiyuan in Post Evaluation of the RECLAIM Emis- 2005” would have been totally dif- sions Trading Programmes for the Los Angeles Air Basin’ in OECD (ed), Trad- able Permits: Policy Evaluation, Design 152 Interview with an officer of the Tai- and Reform 45 (OECD, Paris, 2004). yuan EPB (Telephone interview, 5 April 154 Bell, ‘Choosing Environmental Policy 2006), interviewee remains anonymous Instruments in the Real World’, above n as indicated. 142.

and actual targets are.155 Setting a in a financial or a personnel sense. realistic target is the first, and If an order issued by the Taiyuan maybe the foremost step in pro- EPB comes into conflict with certain moting an environmental protection major economic or political inter- regime in China, where the policy- ests of the local parties, the envi- makers have long favoured grand ronmental concern always con- but often unachievable goals. Ex- cedes to the powerful economic or perience shows that an unreach- political clout. In 2005, when the able goal is worse than not having local environmental authority found a goal: it will not only undermine out that all the participants were in the integrity of the program, but violation of the regulation because ruin the reputation of the regula- of the inability to submit the tory instrument chosen to attain equivalent allowances for their SO2 the program’s target.156 emissions, instead of simply enforc- ing the regulation and independently imposing fines, the Taiyuan Third, another lesson drawn from EPB consulted the city government the Taiyuan project relates to the for instructions.157 It may have dis- urgent need for enhancing the local appointed advocates who held the environmental agency’s enforce- pilot program in high regard, since ment capability. the cap was not observed and the integrity of the program was un- As the government institution that dermined. takes the primary responsibility for the administration of the program, However, it would be unfair to criti- the Taiyuan EPB was expected to cize the local EPB for the failure in be equipped with the requisite ju- independently performing its duty risdiction for vigorous enforce- without taking into account the ment of its requirements. However, practical concerns of the environ- the functioning of the program did mental agency. Obtaining the local not confirm this assumption. There government’s strong support is es- are several factors explaining the sential. It would be much more less than adequate performance of shameful to the Taiyuan EPB if their the local environmental regulator. issued orders were constantly ignored by the enterprises rather Firstly, like any other local envi- than turning to the city government ronmental organ, the Taiyuan EPB in advance for advice. is not an independent body either

155 This statement proves to be reason- able in Western democracies. See, e.g., Bell, ‘Choosing Environmental Policy In- 157 Interview with an officer of the Tai- struments in the Real World’, above in yuan EPB (Telephone interview, 5 April 142. 2006), interviewee remains anony- 156 Ibid. mous as indicated.

Secondly, aside from the local pa- duty must be sent to firms in order tron’s frequent intervention, the to change their behaviour.159 Taiyuan EPB’s supervising power is also restricted in some areas by the The Taiyuan EPB is not immune to provincial EPB. For instance, al- the low credibility in collecting fees though the provincial EPB has or imposing fines that has plagued stated strong support for the im- almost all of China’s local environ- plementation of the demonstration mental authorities. Many factors in Taiyuan, it is still an intricate and other than environmental concerns critical issue for the Taiyuan envi- are evaluated by the local EPBs ronmental agency to deal with the when they decide the financial relationship with its supervisor. 158 treatments to emitting sources. Hard times usually lead to normal Hence, if the fees or fines are set in things becoming suddenly compli- accordance with the enterprises cated: When the power plants bargaining capacities, rather than failed to submit sufficient allow- their real emissions, the monetary ances to cover its emissions in instrument loses its credibility and 2005, the Taiyuan EPB had to go sends no signal to alter the firms’ through a much more difficult and behaviour. In effect, the PLS in Tai- time-consuming bureaucratic pro- yuan acts more like a fund-raising cedure to file an order, in which the measure than an incentive provider, provincial EPB’s opinion was highly because the fees or fines are never respected and clearly reflected. set at a level that either reflects the enterprises’ real abatement cost or Thirdly, the limited enforcement offers them sufficient economic in- tools are not properly utilized by centives to reduce pollution. the Taiyuan EPB to ensure compliance. Collecting fees and imposing These thoughts are also reflected in fines are the major instruments the case of installing CEMS in large that enable the local environmental stationary sources in Taiyuan. Al- agencies to exert influence on en- though CEMS provide the most ac- terprises. It is suggested that a curate measure to calculate enter- steady, reliable message that the prises’ actual emissions, they are environmental requirements are not always favoured by enterprises. serious and the administration in Even with factories that have in- charge would consistently fulfil its stalled CEMS in Taiyuan, they have insisted on not connecting their CEMS to the local EPB’s monitoring network so as not to expose the 158 Any senior staff shift in the provincial online emissions data to the local EPB would lead to certain change in environmental authority. their attitude towards the Taiyuan program, suggesting that the Taiyuan EPB has to make extra efforts to convince the new leader to support them. 159 Bell, above n 142.

As previously discussed, it is not Another enforcement tool that the hard for the Taiyuan EPB to find Taiyuan EPB is equipped with is the that, apart from the fact that firms right to recommend to the compe- want to retain their bargaining tent authority to shut down the abilities, the concern about high plants if its emissions are causing operating fees is the major reason imminent threat to communities. that firms are reluctant to operate Since powering off a plant, even CEMS on a regular basis. While the temporarily, always requires ap- enormous resistance from enter- proval from local government and prises contributes to the slow build- concerns other than environmental ing of the network connection be- protection often take priority, such tween the sources and the regula- a tool is seldom used in regulating tors, the local EPB’s ambiguous at- SO2 emissions. titude in whether to accelerate the connection also merits attention. Nonetheless, attributing the failure Instead of making such network in utilizing the available enforce- connection mandatory, the ARET ment tools to effectively reduce Taiyuan only requests the enterprises to periodically send data to the local EPB.160 terprises’ CEMS to the local EPBs, and perhaps the local enforcer’s strong self- interests in the slowness. In a national A bold assumption is that the local speech given on 30 May 2006, he re- enforcer also worries about using quested the local environmental agen- their discretion in setting fees once cies to take active action in building the the emissions data are fixed, which network connections. And if the real emissions data is made available to the would leave smaller bargaining local EPB, it will be very hard not to con- room for both parties and less rent- ceal the data from the public, as the lo- seeking opportunity for the envi- cal EPB will be unable to ignore the in- ronmental regulator to take advan- creasing calls for more transparency in tage of the data uncertainty. In ad- environmental issues from the public. dition, it may not be as convenient See Zhou, ‘Controlling China’s Emissions as it used to be for the local EPB to Control Targets’, above n 145. In addition, SEPA has recently issued the Meas- adjust the annual environmental ures of Environmental Information Dis- figures, whether requested by the closure (Trial), which will take effect local government or not, if the real from 1 May 2008 and stipulated the re- emissions data are made available sponsibilities of the environmental agen- not only to them but also to the cies and enterprises to disclose their public through such network con- emissions information. This newly pro- nections.161 moted regulation will enable the public to have more access to the pollution information and make it harder for the local EPBs to adjust the pollution data for their convenience. If properly imple- 160 See, Article 19, ARET Taiyuan. mented, it can be anticipated that the 161 The chief executive of SEPA has real- credibility of the enterprises emissions ized the slowness in connecting the en- data will be greatly enhanced.

SO2 emissions solely to the local The importance of putting adequate regulator’s incompetence is inap- penalties in place, in whatever form propriate; there are much more is appropriate, has been proved complicated institutional factors beyond dispute by the existing ex- leading to the local EPB’s poor per- perience with emissions trading in formance. Such failure points out the US. 165 In the Taiyuan project, that it is essential to reform China’s the regulator’s failure to do so did existing environmental institutions not send a proper price signal to in a way that the local regulators entities, which would have induced can operate in a constructively in- their compliance with the program. dependent sense. As demonstrated In 2005, when the participants by the Taiyuan program, enhancing faced the difficulty in whether to the local environmental authority’s abate their SO2 emissions to match enforcement capacity is vital to en- the allowances they held, the minor sure the compliance as well as the financial punishment was obviously integrity of a tradable permits sys- not the focus of their considera- tem. tions.166

Finally, one more lesson from the Nonetheless, there are very realis- pilot case can be seen in the fact tic reasons leading to the legisla- that the regulation passed by Tai- tor’s choice. The RMB30,000 is the yuan lacks effectiveness. 162 Al- maximum amount that a city gov- though the entities in violation will ernment can impose on a single be fined RMB3000 (roughly US$364, as of 4 March 2007) to RMB8000 generally requests the local EPB to act in (roughly US$968) per ton of excess accordance with other relevant laws emission, the regulation sets a should any other violation occurs, but yearly cap of RMB30,000 (roughly this vague language would not give en- US$3630) on the total penalties, forcers much instruction as to how to which undoubtedly falls far short of fulfil its duty when such unnamed viola- the violator’s cost of compliance.163 tion does take place. 165 Moreover, there are few articles It is suggested the success of the US Acid Rain Program, the RECLAIM pro- applying other civil and criminal gram, the Northeast NOx budget trading penalties to participants if they, for depends to great measures on the exis- instance, present fraudulent papers tence of an effective punitive mecha- or faked emissions data.164 nisms. See for example, Ellerman et al., ‘Emissions Trading in the US: Experience, Lessons and Considerations for Green- house Gases’, above n 141. 166 The RMB30,000 fine is trivial com- 162 Bell, ‘Choosing Environmental Policy pared to the actual costs of reducing SO2 Instruments in the Real World’, above n emissions by almost all the firms in 2005. 142; see also Morgenstern et al., above Even with the PLS in place, paying fines n 135. still became a more economic option for 163 See Article 23, ARET Taiyuan. entities failing to submit sufficient allow- 164 Article 25 of the ARET Taiyuan only ances to cover their emissions.

civil environmental violation as the basic institutional prerequisites stipulated by the Central Govern- and domestic motivation need fur- ment 167 As such, it is beyond the ther examination. 169 As a result, Taiyuan government’s capacity to the accomplishments achieved are fix the problem by itself. However, not as inspiring as the lessons although the fines set in the Tai- drawn from the demonstration. yuan regulation serve more than a nominal figure, they show the local Although the Taiyuan project does EPB’s determination to try every- not fully answer the question of thing within their power to equip whether emissions trading can sur- the emissions trading program with vive in China, a country where a financial incentives. It is highly strong enforcement and compliance unlikely for the State Council to system is lacking, monitoring ca- grant the city administration special pacity remains weak, and state en- powers to dramatically raise certain terprises are the biggest pol- fines for environmental concerns luters, the Taiyuan team’s efforts under China’s political scenario. are not invisible. They reflect the Therefore, it seems that a nation- incremental nature of developing wide program, where the Central national environmental policies in Government can set the uniform fi- China. It has been suggested that a nancial punishments at the central tradable permits system would not level and can delegate the en- be applied on a national scale until forcement rights to the local level, the Central Government deter- can better deal with the issue of in- mines that the local pilot programs adequate penalties. have accrued sufficient experience. The Taiyuan demonstration has In summary, it is not surprising to greatly enriched the needed ex- see that the Taiyuan program experience in that sense. perienced a problematic implementation and failed to yield the de- Indeed, the accomplishments and sired outcome expected of a mar- lessons gleaned from the enforce- ket-based instrument. As some ob- ment of this project are useful for servers contend, the local environ- the further application of emissions mental agency is still struggling trading to China, as the partici- with basic issues of how to ensure pants in the Taiyuan projects indi- compliance with environmental re- cate, “…they believe that this work quirements and how to achieve has succeeded in developing the regulatory independence; 168 and foundation for an effective and effi-

cient SO2 controls in Taiyuan and in 167 Although the local EPB can argue how advancing the emissions trading to define a “single violation”, it is very difficult for them to put that into practice in view of the strong negotiating power 169 See Bell, ‘Choosing Environmental of enterprises. Policy Instruments in the Real World’, 168 See Morgenstern, et al., above n 135. above n 142.

model to a point that other areas of Shanxi Province can adopt it.”170

170 See Morgenstern, et al., above n 135.

4.3 CDM Experiences

As mentioned earlier, 171 CDM is a nese enterprises knew about the voluntary project-based carbon CDM and that they were not con- emissions trading scheme open for cerned about its influence. The developing and developed countries. main reason for the lack of under- Since the first CDM project in China, standing of the CDM at that time Huitengxile Wind farm Project of was that they did not know what Inner Mongolia with credits pur- benefits the CDM could bring to chased by the Dutch Government, them. Subsequently, China’s poten- was successfully registered by the tial of implementing the CDM at- CDM Executive Board in June 2005, tracted developed countries to con- China has dominated the global duct CDM capacity building projects carbon market through participat- in China, which, to some extent, ing in CDM projects and become promote the development of the the largest beneficiary. Further im- CDM in China and enhance CDM- plications for China derive from the related training and education for implementation of CDM projects for Chinese governmental officials and several years. researchers. Nonetheless, the involvement and awareness of local private sectors, which are supposed First, participants’ enthusiasm, ei- to be the major players in the CDM, ther voluntary or mandatory, is of were neglected. At that time, there great significance. Initially, Chinese were few capacity building projects enterprises knew little about the at an enterprise level, and the co- CDM and its implications for them. operation and communication on Guanghua Management College of concrete CDM projects were rare. Peking University conducted a CDM Consequently, most of the enter- related questionnaire targeted at prises did not really understand the Chinese enterprises in 2000.172 The significance of the CDM, and thus result showed that only a few Chi- did not participate in it.

171 This part is adapted from Xiaoyi Jiang, Second, the Government should Legal Issues for Implementing the Clean pay attention to the scopes of pro- Development Mechanism in China, jects. The HFC-23 173 destruction (Springer: Berlin), 2012. 172 Chinese Enterprisers’ Understanding 173 about the CDM （Translation of 中国企业 HFC-23 (trifluoromethane) is generated as a waste gas in the manufactur- 对CDM的理解 , available on the Internet ing process of HCFC-22 which is a gas at cdm.ccchina.gov.cn/web/ News- used as refrigerant and as feedstock, a Info.asp? NewsId=41 (last accessed on raw material for other products. It has a 30 global warming potential 11, 700 times July 2010). greater than CO2. The UNFCCC and the

projects were very popular in China The majority of registered and is- because they have a short cycle sued credits in China after 2007 time and offer large volumes of began to be concentrated in the credits for a low capital investment energy sector. and mitigation cost and because the additional assessments are Third, the Measures for Emissions relatively straightforward. In addi- Trading play an important role in tion, China is estimated to account the carbon market. The Chinese for more than half of the global Government issued Measures for emissions of HFC-23. 174 Therefore, the Operation and Management of developing the HFC-23 CDM pro- CDM projects in China 25 (hereinaf- jects could bring industries more ter referred to as the Measures), economic benefits than innovating which is regarded as a basic regu- technology to reduce HFC-23 emis- lation guiding the implementation sions. Based on the above, most of of CDM projects in China. The the Chinese industries would rather Measures were issued in 2005 and apply for CDM projects with the were revised in 2011, adding a current HFC-23 emission level than chapter of “Liability” to safeguard reduce it. However, there is limited the smooth implementation of CDM potential for these projects as a projects. significant proportion is already in the CDM pipeline and thus cannot bring long-term benefits to China. Fourth, information disclosure is Facing this situation, China began another concern. At the initial stage to attach great importance to the of implementing the CDM in China, energy sector, primarily renewable there were participants claiming energy and energy efficiency. 175 that some of the information on the carbon market was not available, making them lose the opportunity Kyoto Protocol list the HFC-23 as a ma- to find buyers and have confidence jor potential GHG, and one of the first types of projects established under CDM to implement CDM projects. was theinvestment in the destruction of the compound HFC-23. 174 Jane Ellis, OECD and Sami Kamel, Overcoming Barriers to Clean Develop- ery and utilization.” In addition, the Chi- ment Mechanism Projects (Paris: Or- nese government imposes different ra- ganization for Economic Cooperation and tios of tax to encourage the energy sec- Development and International Energy tors. Article 24 of the Measures stipu- Agency, 2007), at 10. lates that “ (1) the Government of China 175 The Chinese government issued takes 65 per cent CER transfer benefit Measures for the Operation and Manage- from HFC and PFC projects; (2) the ment of CDM projects in China in 2005. Government of China takes 30 per cent Article 4 of the Measures stipulates that CER transfer benefit from N2O project; “The priority areas for CDM projects in (3) the Government of China takes 2 per China are energy efficiency improvement, cent CER transfer benefit from CDM pro- development and utilization of new and jects in priority areas and forestation renewable energy, and methane recov- projects. ”

Fifth, another concern is Desig- plying for DOEs, only 2 entities got nated Operational Entities’ (DOE) the approval by the EB among 48 unsatisfactory performance. The DOEs.176 One of the approved enti- emission reductions need to be cer- ties is the China Environmental tified by the DOE. The DOE plays United Certification Center Co., Ltd. an important role in developing (CEC) and the other is the China CDM projects as it directly decides Quality Certification Center (CQC). on the successful registration of a As the first indigenous DOE, CEC CDM project, on the successful is- spent nearly three years getting suance of emission reductions and the approval from the EB in March on the quantity of CERs that can be 2009. The current situation im- issued. However, the current situa- pedes the development of Chinese tion and problems of DOEs per se CDM projects. Most of the interna- cause barriers to CDM projects in tional DOEs validate and verify Chi- China. First, the current staffing of nese CDM projects through their of- the DOE is too small to meet the fices in China. Validation and verifi- need for the rapid processing of cation processes are likely to be CDM projects. With the increase of delayed due to the fact that the in- CDM projects, the problems of a ternational DOEs are not familiar situation of insufficient staffing and with China’s national circumstances asymmetrical information are com- and that their offices have limited pounded in the CDM EB. As a con- discretion. Furthermore, there is a sequence, the CDM system relies language barrier for CDM owners in on verifiers to verify the claim of China in communicating with the the project developers, and many international DOEs. If there were proposed CDM projects in China are more qualified indigenous DOEs, delayed, waiting for validation from these barriers would be overcome. the DOEs. Moreover, the performance of the DOE is highly volatile Sixth, the carbon trading related and there are questions about the service industry needs to be regu- qualification of its staff. lated. The major barriers to CDM projects in China are attributed to Finally, a lack of indigenous DOEs the lack of expertise and the non- makes it difficult to meet the de- standard CDM-related service in- mand for the rapid processing of dustry. As introduced previously, Chinese CDM projects. Against the the CDM operational rules are ex- background of China having be- tremely detailed and technical. The come the largest CDM credits sup- CDM project owners, on the con- plier, most of the DOEs are from trary, usually do not have the cor- Europe and Japan and there are only 2 indigenous DOEs. According to the information released by the 176 The list of DOEs is available at the UNFCCC official website, although UNFCCC website on the Internet at there are 7 entities from China ap- cdm.unfccc.int/Statistics/index.html (last accessed on 15 March 2011).

responding technical capacity and other behaviours that violate the practical experience to implement Measures. The CDM is developing CDM projects in China. Conse- rapidly in China, and it is an inevi- quently, they tend to resort to the table and long-term trend to reduce CDM related consulting service carbon emissions through carbon agencies. In this regard, the CDM- trading. In this scenario, it is neces- related service industry is deemed sary to enact a series of compre- an indispensible part in the imple- hensive and compulsory profes- mentation of CDM projects in China. sional standards for the CDM- However, there is no professional related service industry. The Decla- standardization of the CDM-related ration has limited binding effect in service industry in China. Under China (of low legal effect) and can this circumstance, the quality of its no longer meet the demand of the services and the qualification of its development of CDM projects in staff cannot be guaranteed, thus China. Therefore, it is urgent and bringing about many barriers to necessary to set up legitimate and CDM projects, e.g. a low CERs is- legally binding standards for the suance rate and a great inconsis- CDM service industry with a view to tency between monitoring plan and regulating and ensuring the service operation in practice. quality of the CDM service as well as a highly qualified staff. Facing this situation, the Important Declaration of Standardization of Consulting Service and Appraisal Work for CDM Projects in China was issued by the Office of the Commit- tee in February 2006 (hereinafter referred to as the Declaration). 177 The Declaration is mainly aimed at regulating the behavior of the CDM- related service agencies, concluding contracts with project developers for direct sharing of CERs or the proceeds of transferred CERs with the project implementation and

177 Important Declaration of Standardi- zation of Consulting Service and Ap- praisal Work for CDM Projects in China 2006 (issued by the Office of the Na- tional Coordination Committee on Cli- mate Change of the People’s Republic of China), is available on the Internet at cdm.ccchina.gov.cn/UpFile/File630.PDF (last accessed on 15 March 2011).

4.4 Case Studies on ET of CO2

Voluntary Emissions Trading Sche- can come to China and buy the mes of CO2 have already been carbon credit on the exchange. In trailed, providing much experience. the meantime, the public trading of China launched a carbon emission carbon emission credit on the ex- trading system led by the China change could help China gain its Beijing Environmental Exchange, pricing rights in the global carbon Shanghai Environment Energy Ex- emissions market. On the other change and Tianjin Climate Ex- hand, China is a big user of carbon change, which were all set up in resources, but it is currently at the 2009. 178 Among them, Tianjin Cli- lower end of the carbon trading mate Exchange is established as market, and its carbon finance China's first comprehensive plat- market is relatively backward. Until form for enabling the transfer of now, China has been a seller of credits for energy intensity, and carbon credits, allowing western aims to promote environmental companies and nations to offset protection and emission reduction their emissions by buying up the by means of market and financial credits generated by environmental measures. While the traded unit schemes in China. Now the world's was a carbon emission credit, it largest emitter of GHGs is likely to was created on the back of a local emerge as a big buyer of the cred- energy efficiency scheme. Further- its. The potential value for a do- more, the China Beijing Environ- mestic trading market in China is mental Exchange created China's about £125 billion a year, nearly first voluntary emission reduction twice that of the entire global car- standard, dubbed the "Panda Stan- bon trading market, according to dard". It will certify domestic envi- Standard & Poor's, the credit rating ronmental projects across a variety agency. This is because the coun- of industries, including forestry and try's rapid economic expansion im- agriculture. This is likely to lead to plies it will continue to produce the creation of a number of offset- large amounts of emissions. China ting projects and new projects is currently on track to account for leading to new investment oppor- a third of global emissions by 2030. tunities. But so far these exchanges have These exchanges build domestic only served as platforms for indi- platforms for carbon credit trade. vidual small scale deals.179 China’s From then on, overseas companies first voluntary carbon trade was

178 See, Shai Oster, ‘China Expand Mar- 179 Tianjin Climate Exchange Launch kets for Carbon Trading’, The Wall Street Carbon Contract (2009) China Tells Journal (The US), 11 November 2008, http://blog.chinatells.com/2009/09/197 A11. 6 at 12 December 2009.

agreed in 2009, when Shanghai- be changed as the Chinese Gov- based Tianping Auto Insurance ernment has given clear signs of its purchased credits generated in Bei- approval and is drafting the Meas- jing during the Olympics through ures for Implementing a Voluntary the deployment of a green com- emissions scheme in China. muting campaign where motorists could only drive on certain days. It is expected that the situation would

5. Key Issues of CO2 ETS

Based on the above analyses and program in different regions and domestic and international circum- the future of China’s ETS is still un- stances, it can be concluded that it certain, there are some key issues is of necessity and feasibility to im- needing to be clarified before con- plement CO2 ETS in China. Al- sidering the establishment of a na- though China is undertaking a pilot tionwide carbon market in China.

5.1 Purposes and Principle

China is under considerable pres- to establish regional carbon mar- sure to reduce carbon emissions kets targeted for key industries by without undermining its economy. 2015 and finally to set up a na- Also, according to the other coun- tional carbon market commencing tries’ experience and practice, the from 2015. Establishing China’s CO2 ETS have been proven to be a emissions trading market shall be cost-effective tool to reduce emis- based on the following principles: sions. Therefore, China attempts to establish a nationwide scheme for - The principle of openness, im- CO2 emissions trading in order to partiality, fairness and public promote the reduction of CO2 supervision; emissions in a cost-effective and - The principle of state guidance, economically efficient manner. The adopting measures to local objective of China’s CO2 ETS is to conditions and promoting output in place the necessary infra- standing features; structure and develop a dyna- - The principle of steady pro- mic domestic carbon market. In gress and gradual development; order to realize the objective, the - The principle of combining go- current plan is to establish regional vernment guidance and market CO2 ETS targeted for certain in- regulation. dustries by 2013 and subsequently,

5.2 Mode of Emission Trading: “Cap and Trade” or “Baseline and Credit”?

According to the experience of CO2 than their baseline emissions. ETS, there are two modes of emis- These credits may be banked or sion trading – “cap and trade” and sold to companies who exceed their “baseline and credit”. Under a cap baselines. The effect is to limit ag- and trade system, a government gregate emissions to an implicit cap authority first sets a cap, deciding equal to the sum of the individual how much emissions in total will be baselines. Typical baseline-and- allowed. Next, companies are allo- credit plans also differ from classic cated credits, essentially permits to cap-and-trade in a number of insti- emit, based on how large the com- tutional details. For example, cred- panies are, what industries they its are often computed on a pro- work in, and so forth. If a company ject-by-project basis rather than on emits below its cap, it has extra the basis of enterprise-wide emis- credits which it may trade with sions. They must be certified and other companies. For companies registered before they can be which emit below their caps, a cap traded and there are generally re- and trade system is great, because strictions that credits cannot be they can sell their extra credits, registered until the emission reduc- profiting while reducing their emis- tions have actually occurred. In this sions. For companies which cannot regard, the baseline-and-credit is get their emissions under control, a more complex than cap and trade cap and trade system penalizes in operation. them for their excess emissions while still bringing overall emissions Based on China’s national circum- rates down. In a sense, the need to stances and in accordance with the purchase credits acts as a fine, en- principles discussed above, it is ap- couraging companies to reduce propriate to adopt a hybrid plan of their emissions. combining “cap and trade’ and “baseline and credit”, that is, the In these baseline-and-credit plans targeted industries included into there is no explicit cap on aggre- ETS are divided into existing com- gate emissions. Instead, each firm panies and new companies through has the right to emit a certain setting a certain year. “Cap and baseline level of emissions. This trade’ mode is adopted for existing baseline may be derived from his- companies and “baseline and cre- torical emissions or from a per- dit” mode is adopted for new com- formance standard that specifies panies. The “baseline and credit” the permitted ratio of emissions to mode is to set a higher baseline le- output. Companies create emission vel of emissions. The new compa- reduction credits by emitting fewer nies create emission reduction

credits by emitting fewer than their baseline emissions and these credits may be banked or traded in the carbon market.

5.3 Targeted Industries

Three factors should be considered plants, oil refineries and iron and when discussing which industries steel works, as well as factories would be covered by the China’s making cement, glass, lime, bricks, ETS at current phase. They are ceramics, pulp, paper and board. China’s economic development lev- Nitrous oxide emissions from cer- el, China’s regional economic dis- tain processes are also covered. parity as well as regional differ- Thus, the target industries may in- ences and emissions levels of vari- clude power industry, chemical in- ous industries. dustry, non-metal mineral process- Based on the above mentioned facing industry, metallurgy industry, tors, the China’s ETS may covers transportation equipments manu- CO2 emissions from installations facture and etc. such as power stations, combustion

5.4 Allocation of Emission Credits

The existing methods of allocation certain sectors that have passed on in the international carbon market the notional cost of allowances to include free allocation, auction and their customers despite receiving mixed allocation. Each method has them for free. However, it also has disadvantages and advantages of shortcomings in that it increases their own. Free allocation method production cost of companies and is makes the large carbon emitters prone to be resisted by companies. obtain emission rights free of As the originator, for the three-year charge, reducing economic effi- period beginning 1 January 2005, ciency and undermining market EU Member States allocated at competition. The method of auction least 95 per cent of the allowances best ensures the efficiency, trans- free of charge and for the five-year parency and simplicity of the sys- period beginning 1 January 2008, tem and creates the greatest incen- EU Member State allocated at least tive for investments in a low- 90 per cent of the allowances free carbon economy. It best complies of charge. The EU gradually trans- with the “polluter pays principle” fers the method of free allocation and avoids giving windfall profits to to auction. From 2013 onwards, EU

Member States shall auction all al- China would allocate one part of lowances which are not allocate the allowances free of charge and free of charge. the ratios of allowances free of Therefore, the China’s ETS would charge would be gradually reduced take the EU’s example. Different until all allowances are auctioned. regions would allocate all allow- Auctioning of allowances will be- ances free of change by 2015. come the basic principle for alloca- When a national ETS is set up, tion.

About the author

Dr. QIN Tianbao is a Professor of Environmental Law and Interna- tional Law, and serves as the Assistant Dean for International Affiliations for both School of Law and the Research Institute of Environmental Law (RIEL), Wuhan University, China. Dr. Qin is the Secretary-General of China Association for Environ- ment and Resources Law (CAERL), and a member of the Committee on the Legal Princi- ples relating to Climate Change of the International Law Association. Currently, he is concentrating his study in the areas of laws and policies concerning climate change, energy security, bio-safety and biodiversity, trade and environment, corporate environmental responsibility, air and water pollution control, and trans- boundary environmental issues.