China's short march to carbon pricing

China’s expert community expects that the country will have a national emissions trading scheme and possibly a carbon tax by the end of the decade, and that the pilot schemes will all go ahead in the near future.

Environment Minister Greg Hunt recently said “… the Chinese and the Americans who are the central part of any agreement both have a very strong view. The most heartening development in the past two years has been China's growing commitment to action from its paramount leadership.”

He is right. And the difference is that while the United States rely on direct regulatory intervention in gas markets and power generation, China is poised to introduce carbon pricing.

In the past months we ran the inaugural China Carbon Pricing Survey. We surveyed China-based carbon market experts from the service sector, academia and government think-tanks. While by nature such a survey cannot lay claim to be representative, we think it is a good reflection of expert views on carbon pricing for the world’s largest emitter.

We found high confidence that China will have national carbon pricing mechanisms in place by 2020. More than 80 per cent believe a national emissions trading scheme will exist by 2020, and over half expect China to also have a carbon tax in place by that time. The co-existence of emissions trading and carbon tax is indeed on the policy radar: a carbon tax is being investigated along with other pollution taxes, separately from the plans for national emissions trading.

The large majority also expects that China’s seven pilot emissions trading schemes – home to over 250 million people and responsible for around a fifth of China’s energy use – will all be running by 2015. The Shenzhen scheme has already been launched. Our survey suggests that Shanghai, Beijing and Guangdong are not too far away from starting.

Expected prices

The experts’ average price expectation for the pilot schemes rises from 30 yuan ($5) per tonne of carbon dioxide in 2014 to 50 yuan ($8.50) in 2018.

The average expected price for a national ETS rises from about 30 yuan in 2018 to about 50 yuan in 2020 and 70 yuan ($12) in 2025. The average expected level for a carbon tax is much lower, about 20 yuan ($3.50) at 2020. (These national level averages include 'zero' values for respondents who expect no scheme to be in place). Unsurprisingly, there is great variance in the responses, indicating uncertainty.

The combined expected future carbon price, as an investor might take it into account, is around 70 yuan – $12 – at 2020.

Carbon pricing is, of course, only a part of the broader policy portfolio. China already has an array of policies in place, from mandated energy efficiency standards to support for renewable energy industries. These are unlikely to be ditched anytime soon. And so the combined policy effort is greater than the expected carbon prices. The same is true for the European Union and California: the prices in the carbon trading schemes are only partially an indication of their mitigation effort.

China in the overtaking lane

But putting a price tag on emissions is the best choice for long-term effective and efficient policy to cut emissions. The IMF and OECD last week issued forceful reminders of this. The OECD reckons that without an explicit price on emissions, governments are just “pushing at a piece of string” on climate policy. The IMF emphasised that carbon taxes and emissions trading schemes can raise much-needed revenue for governments.

It is ironic that China looks set to introduce comprehensive carbon pricing when the US, the home of market mechanism for pollution control, is getting nowhere with federal emissions trading – the Obama administration instead relying on emissions standards for power stations and cars and regulatory approaches to keep gas cheap. Australia, meanwhile, is poised to abolish its carbon pricing scheme.

For China this is part of a broader push for market reform. It could even help accelerate market reform in the energy sector, which is still dominated by regulation and planning.

One imagines that if China succeeds, there will be some satisfaction in Beijing at overtaking the West in an area that not so long ago was perceived as the exclusive domain of developed countries. Look back four years to pre-Copenhagen: there was hardly anyone who thought that carbon pricing was in the making in China.

Not a walk in the park

China’s policymakers have a big job on their hands, designing and implementing emissions trading. The pilots are behind their original, ambitious schedule. Data collection, scheme design and presumably stakeholder negotiations have taken longer than thought at the outset.

Designing and implementing a national scheme will not be easy. The Chinese government regards the pilots as experiments from which to learn for a national scheme. The development work for a national scheme is starting, with the visible components including an eight million dollar program to support China’s emissions trading design, under the Partnership for Readiness program.

The technical complexities are enormous, and competing stakeholder interests will need to be balanced – ideally without compromising the scheme’s effectiveness. If it works out then China will be sending a powerful signal to the world.  

The authors jointly conducted the China Carbon Pricing Survey 2013.

Frank Jotzo is director of the Centre for Climate Change Economics & Policy at the Australian National University. Dimitri de Boer is vice chairman of China Carbon Forum, a Beijing-based non-profit organisation.