creating subnational climate institutions in china HARVARD PROJECT ON CLIMATE AGREEMENTS With the support of the Harvard Global Institute In collaboration with Tsinghua University’s Institute of Energy, Environment, and Economy Michael Davidson School of Global Policy & Strategy University of California, San Diego December 2019 Creating Subnational Climate Institutions in China Harvard Project on Climate Agreements Michael Davidson School of Global Policy & Strategy University of California, San Diego December 2019 THE HARVARD PROJECT ON CLIMATE AGREEMENTS The goal of the Harvard Project on Climate Agreements, which was established in 2007, is to identify and advance scientifically sound, economically sensible, and politically pragmatic public policy options for addressing global climate change. Drawing upon leading thinkers from around the world, the Harvard Project conducts research on policy architecture, key design elements, and institutional dimensions of international and domestic climate-change policy. The Harvard Project is directed by Robert N. Stavins, Albert Pratt Professor of Business and Govern- ment, Harvard Kennedy School. For more information, see the Harvard Project’s website: www.hks.harvard.edu/hpca. acknowledgements The preparation of this paper was supported by a generous grant from the Harvard Global Insti- tute. The Harvard Project is collaborating with Tsinghua University’s Institute of Energy, Envi- ronment, and Economy on a larger project, of which this paper is a part, addressing subnational climate-change policy and carbon pricing. While writing this paper, Michael Davidson was a postdoctoral research fellow with the Envi- ronment and Natural Resources Program (ENRP), in Harvard Kennedy School’s Belfer Center for Science and International Affairs. The Harvard Project is grateful to ENRP and the Belfer Center for their support of Professor Davidson – and for broader support of the Harvard Project on Climate Agreements. The Harvard Project on Climate Agreements is grateful for additional support from the Harvard University Climate Change Solutions Fund; the Enel Foundation; and the Harvard University Center for the Environment. Previous sponsors of the Harvard Project on Climate Agreements include: The Ash Center for Democratic Governance and Innovation at Harvard Kennedy School; Christopher P. Kaneb; ClimateWorks Foundation; the Doris Duke Charitable Foun- dation; the International Emissions Trading Association (IETA); the James M. and Cathleen D. Stone Foundation; the Qatar National Food Security Programme; and Shell. The closely affiliated, University-wide Harvard Environmental Economics Program receives additional support from BP; Chevron Services Company; Enel Endowment for Environmental Econom- ics at Harvard University; and the Mossavar-Rahmani Center for Business and Government at Harvard Kennedy School. citation information Davidson, Michael. “Creating Subnational Climate Institutions in China.” Discussion Paper. Cambridge, Mass.: Harvard Project on Climate Agreements, December 2019. The views expressed in Harvard Project on Climate Agreements Discussion Paper Series are those of the author(s) and do not necessarily reflect those of the Harvard Kennedy School or of Harvard University. Discussion Papers have not undergone formal review and approval. Such papers are included in this series to elicit feedback and to encourage debate on important public policy challenges. Copyright belongs to the author(s). Papers may be downloaded for personal use only. table of contents Executive Summary....................................................................................................................1 1. Background on China’s Central–Local Governance.............................................................3 1.1 Unpacking the Chinese State.....................................................................................3 1.2 China’s Quasi-Federal System of Government...........................................................4 1.3 Decentralization in the Reform Era..........................................................................6 1.4 How Do China’s Institutions Evolve?........................................................................9 2. Subnational Governance of Greenhouse-Gas Emitting Activities.....................................11 2.1 China’s Economic Institutions.................................................................................11 2.2 Integrating Climate Change Considerations into Economic Institutions................14 2.3 Lessons from Conventional Environmental Policy...................................................20 3. Questions for a National Carbon Market and Beyond......................................................21 3.1 Overarching Institutional Framework.....................................................................21 3.2 Harmonizing Local Pilots.......................................................................................22 3.3 Dependencies on Electricity Market Reform...........................................................24 4. Conclusion...........................................................................................................................25 Acknowledgements..................................................................................................................26 References................................................................................................................................27 List of Figures and Tables Figure 1: Central–local organization of Party and state for the case of a provincial Development and Reform Commission. Adapted from Hart et al. (2017).........................................................5 Figure 2: Organizations, major policy levers, and factors affecting the implementation and durability of climate policy in China.........................................................................................17 Table 1: Institutions governing investment, production, and consumption of greenhouse-gas emitting activities at different levels of government....................................................................19 executive summary China’s party-state consists of multiple nested hierarchies of bureaucrats and officials accountable to a common leadership, yet it also gives substantial autonomy to lower levels of government in pursuing various objectives. By some fiscal measures, China is the most decentralized country in the world. As such, China’s particular flavor of “quasi-federal” control, as well as its integra- tion of party and state, will heavily influence and constrain options for controlling greenhouse gas (GHG) emissions in the economy. This paper describes the evolution of decentralization over the reform period that began in China in 1978, different theories of institutional change in China, and how the empirical and theoretical literatures help us understand the development of institutions for governing GHG-emitting activities. Climate policy merits this extended look at the subnational Chinese state for several reasons. First, large institutional transformations are required to align the incentives of government bureaucracies with the new goal of reducing GHGs across a wide range of established govern- ment functions. Second, the local political economy embedded in government institutions ensures that this task is significantly more complicated than prescribing a single set of ideal institutions (e.g., based on international best practices). There will likely be extended periods of geographic variation in policies and institutions. Third, effective policy prescriptions will thus require creative use of centralization where local interests diverge substantially from national objectives, but must also align with and exploit local government authorities to advance rapid reforms in other areas. In terms of institutional functions, China’s central agencies have a great deal of power over economic planning, tax policy, some pricing, and standard-setting. Meanwhile, local govern- ments control much permitting, other aspects of pricing, portions of production, and land policy. Since 2007, these functions have increasingly reflected climate change concerns, though the priority given to reducing GHG emissions is by no means uniform across central and local government institutions. Additionally, there remain crucial gaps in the overall institutional framework that would elevate the importance of climate change. Central enforcement of policy implementation generally increases when policies align with other, arguably more salient, policy goals, such as reducing air pollution. Personnel decisions crucially determine many aspects of implementation: local officials are directed and constrained by superiors via cadre-leadership selection and promotion, admin- istrative mandates, and budgets. Strong relationships—and consonance of interests—between provincial and central authorities and institutions may facilitate policy implementation by prov- inces. However, such strong ties may also reduce local officials’ flexibility in adapting policies to local conditions—and hence reduce policy effectiveness. On the other hand, if the implementa- tion process primarily reflects local interests, state objectives may not be achieved. These findings have implications for the design and implementation of the national carbon market set to start around 2020. The newly-created Ministry of Ecology and Environment HARVARD PROJECT ON CLIMATE AGREEMENTS » 1 is the