Cap-and-trade in China?

I’m a bit slow on the uptake here, but this is potentially a very big deal, so better late than never:

• Li Jing, Carbon trading in pipeline, China Daily, July 22, 2010.

The country is set to begin domestic carbon trading programs during its 12th Five-Year Plan period (2011-2015) to help it meet its 2020 carbon intensity target.

The decision was made at a closed-door meeting chaired by Xie Zhenhua, deputy director of the National Development and Reform Commission (NDRC), and attended by officials from related ministries, enterprises, environmental exchanges and think tanks, a participant told China Daily on Wednesday on condition of anonymity.

“The consensus that a domestic carbon-trading scheme is essential was reached, but a debate is still ongoing among experts and industries regarding what approach should be adopted,” the source said.

The meeting concluded that such efforts are self-imposed and should be strictly separated from ongoing international negotiations for a successor to the Kyoto Protocol to fight global warming, the source said.

As a developing country, China does not shoulder legally binding responsibilities to reduce carbon emissions, according to the basic principle set by the United Nations Framework Convention on Climate Change.

Putting a price on carbon is a crucial step for the country to employ the market to reduce its carbon emissions and genuinely shift to a low-carbon economy, industry analysts said.

China has mostly relied on administrative tools to realize its 20 percent energy intensity reduction target between 2006 to 2010. To that effect, the country’s top 1,000 energy consumers have signed contracts with the central government to improve their energy efficiency.

But with rising domestic energy demand, administrative measures are too expensive for the country to meet its future energy conservation targets — something that was also agreed at the meeting, said Tang Renhu from the low-carbon center at China Datang Corporation who also joined the discussion.

Although China has refuted the International Energy Agency’s label of being the world’s top energy consumer, its energy consumption for 2009 stood at 2.132 billion tons of oil equivalent, according to the National Bureau of Statistics.

“The market-based carbon-trading schemes will be a cost-effective supplement to administrative means,” said Yu Jie, an independent policy observer who previously worked for several international climate-related institutes.

Tang [Tang Renhu from the low-carbon center at the China Datang Corporation] also said the differences are centered on whether the pilot carbon trade projects should start from a selected industry, or a certain area.

Possible sectors for piloting carbon trade projects include carbon-intensive industries such as coal-fired power generation, Tang said.

One of the proposals include setting an absolute cap on carbon dioxide emissions in a certain area or industry. Others argue that the country’s carbon intensity target can be converted to some carbon-related allowances for trading schemes.

China has pledged to cut its carbon emissions per unit of economic growth by 40 to 45 percent by 2020 from 2005 levels.

Yu said it would be very complicated to work out a trading scheme that allocates the carbon-related emission permits among the enterprises in an open and fair manner.

“My suggestion is that the number of participating enterprises should be limited, as the goal of pilot trading is to try out the rules and establish a mechanism especially suitable for China,” Yu said.

As always, the devil is in the details.

12 Responses to Cap-and-trade in China?

  1. Uncle Al says:

    As a developing country, China does not shoulder legally binding responsibilities to reduce carbon emissions…

    China is the second largest economy on the planet.

    Does the bullbleep ever end?

    • John Baez says:

      Al: I’ve deleted your link about ‘cooling oceans’ because I don’t want every blog entry to have comments about every conceivable topic. I’m trying something sort of new here: I’m trying to use a blog for serious technical discussions and information-gathering. I’ve already written a blog entry about how coral reefs in Indonesia are dying from high water temperatures. If you want to claim that ocean temperatures are in fact decreasing, that would be an excellent place to do it.

      As for China: it’s tricky. The main problem is that the Kyoto accord was only able to pass by putting in an exemption for ‘developing countries’, and China, while huge, is still ‘developing’ in the sense that their per capita GDP is just 8% of the USA’s per capita GDP: about $3700 per capita, as compared with about $46,000.

      But hey: the USA didn’t ratify the Kyoto accord, so it’s not clear how much of this matters.

      What matters more is what China actually does. In 2007, China emitted 6.5 gigatons of carbon dioxide, while the US emitted only 5.8. They are the largest CO2 emitter in the world, so a lot is riding on what they do.

      From 1990 to 2006 China’s per capita CO2 emissions shot up from 2.2 tons to 4.6 tons. For the USA, it wiggled up and down, starting at 19 tons and ending at 19.1.

      Will China develop along a path that takes it to American or European levels of per capita CO2 emisssions, or will they try something different? Maybe they’re trying something different. Or maybe it’s just talk. Time will tell.

  2. andrewwiet says:

    Dear Professor Baez,

    I thought I’d let you know that I really appreciate the work you put into your blog, and your brilliant posts. I do enjoy the new slant of the blog – climate science is particularly prone to becoming excruciatingly dull, but not when you do it.

    However, I would ask, if you could, to keep up the theoretical quantum/condensed matter posts – though I’m only now catching up with the background to understand them properly, I found that they steered my interests into completely new areas; each one was an extremely valuable read.

    Finally, thanks again for all the effort that goes into this blog. I’m speaking for myself, and I’m sure many other people out there.

    Jedrzej Wieteska

  3. Bruce Bartlett says:

    Yu said it would be very complicated to work out a trading scheme that allocates the carbon-related emission permits among the enterprises in an open and fair manner.

    Of course! Cap-and-trade has been heavily discredited in scientific circles, hasn’t it? There is a simple way to do it: fee-and-dividend. Charge a fee for carbon at the source (port of entry) and then immediately distribute 100% of this fee to the country’s population via electronic bank transfer (those who do not have electronic bank accounts can pick up their monthly cheque at their local revenue office). This is absolutely open and fair, and all agree it will be incredibly effective. The only trouble is, the money doesn’t “filter” its way through governments, banks and stock markets. Hence they have an issue with it.

    • John Baez says:

      Why do you say that cap-and-trade has been heavily discredited in scientific circles? I am just learning about this stuff, but I hear divergent views.

      I’ve been reading The Climate War, which is a great book about the so-far-unsuccessful attempts to pass greenhouse gas legislation in the US. It’s clear that in a sclerotic democracy such as the US, the hard part is constructing any sort of bill that pleases enough powerful constituencies to pass. What surprised me, reading the book, is how close the recent attempts came to doing this. Cap-and-trade seemed to be the most politically palatable approach.

      In a command-and-control economy like China, things work a bit differently! But they are still, alas, not a dictatorship run by a philosopher-king (say, me). So there must still be a lot of bargaining going on, behind the scenes.

      • Bruce Bartlett says:

        Hey, you know loads more about this than me. But it was the impression I got from reading George Monbiot’s “Heat” and James Hansen’s “Storms of my grandchildren”. Both of them had passages implying that “most” scientists supported a fee-and-dividend scheme and didn’t think a cap-and-trade scheme would work. Monbiot’s scheme was a bit different (every citizen is given a certain fixed amount of carbon credits, called “icebergs”. Just like food vouchers in the war. So humanity has done this before.) but he was still a fan of fee-and-dividend.

        The main objections against cap-and-trade, as I recall, are: (a) it sets a _lower bound_ on emissions (if we all start emitting a lot less, than stock prices of licenses to emit carbon will crash, which is undesirable to the brokers), (b) the system involves a huge amount of stock brokers, banks and governments which heavily opens it up to (c) corruption and special interests and (d) it follows that the public gets much less bang for their buck, since quite a large percentage of their money actually goes into paying these carbon traders’ salaries.

        The crucial thought experiment underlining the difference between cap-and-trade and fee-and-dividend is, as I understand it, as follows:

        Say you are a concerned citizen and decide to use much less electricity, drive a ecofriendly car and fly very little. This just means that your neighbour next door can pollute _more_ (because there is a fixed amount of emissions that “have to be emitted”). In fee-and-dividend, this is not the case, there is a huge incentive for each individual to emit less, there is no lower bound to emissions.

        • John Baez says:

          Bruce wrote:

          Hey, you know loads more about this than me.

          Not really! I need to learn a lot more about these various schemes. I’ve been spending too much time thinking about the weather. When it comes to the politics of what to do about it, I’ve mainly just read The Climate War, which focused on the realities of US politics more than what scientists might prefer.

          The Environmental Defense Fund, or EDF, was a major player in passing cap-and-trade legislation for sulfur dioxide in 1990 — the so-called Acid Rain Program. Other big environmentalist groups, I believe including the Sierra Club, were opposed to cap-and-trade. People continue to argue whether this program was a good idea: the European Union took a different approach which reduced sulfur dioxide emissions by a greater amount. This division of opinion between environmental groups is playing out again with carbon dioxide — with the big difference being that there’s a lot more industry resistance to taking any action at all.

          I believe what you’re calling “fee-and-dividend” is generally called a “carbon tax” in the United States. For many Americans, it is an axiom that all taxes are bad. Ergo, a carbon tax is bad. End of discussion.

          Now some demagogues are starting to call the cap-and-trade system “tax-and-trade”, so they can prove that that is bad too.

          The main objections against cap-and-trade, as I recall, are: (a) it sets a _lower bound_ on emissions (if we all start emitting a lot less, than stock prices of licenses to emit carbon will crash, which is undesirable to the brokers),

          Technically cap-and-trade sets an upper bound: a “cap”. But you’re arguing that there’s no motivation to go below this upper bound, so that it’s also effectively a lower bound.

          I need to learn more, much more…

        • Bruce Bartlett says:

          Perhaps there is a chart somewhere (if it doesn’t yet exist maybe it can go on the wiki you are creating…) which summarizes the various cap-and-trade, fee-and-dividend, voucher schemes etc. proposed by various people and groups.

          For instance, apparently Al Gore supports fee-and-dividend, except his proposal is to reduce payroll taxes rather than to give dividends directly to the public.

          James Hansen links to an analysis by economist Charles Komanoff “showing” that fee-and-dividend is much more effective than cap-and-trade. Komanoff seems to have a Carbon Tax Center website on this issue.

          Hansen is quite dismissive of the purported success of cap-and-trade in the acid rain problem. Pg 216:

          But, you may ask, was it not proven with the acid rain problem that cap-and-trade did a wonderful job of reducing emissions at low cost? No, sorry, that is a myth – and worse. In fact, examination of the story about acid rain and power plant emissions shows the danger in both horse-trading with polluters and the cap-and-trade floor.

          Here is essentially how the acid rain “solution” worked. Acid rain was caused mainly by sulfur in coal burned at power plants. A cap was placed on sulfur emissions, and power plants had to buy permits to emit sulfur. Initially the permit price was high, so many utilities decided to stop burning high-sulfur coal and to replace it with low-sulfur coal from Wyoming. From 1990 to today, sulfur emissions have been cut in half. A smaller part of the reduction was from the addition of sulfur scrubbers to some power plants that could install them for less than the price of the sulfur permits, but the main solution was use of low-sulfur coal. Now what the dickens does that prove?

          It proves that in a case where there are a finite number of point sources, and there are simple ways to reduce the emissions, and you are satisfied to just reduce the emissions by some specified fraction, then emission permits make sense. …

      • Nathan Urban says:

        I’m not sure what it means to say that cap and trade has been discredited in “scientific circles”, since scientists generally aren’t policy experts. Most climate scientists probably don’t even have an opinion.

        Certainly Hansen doesn’t like cap and trade, but Hansen is pretty extreme on, well, most everything. There are still plenty of economists who like it. Still, I think economists do somewhat prefer a carbon tax over cap and trade.

        Martin Weitzman has a famous paper “Prices vs. quantities” which provoked a lot of the modern economic discussion on pros and cons of these approaches.

        One advantage of cap and trade is the cap: assuming it works as intended — and that’s a very big “if”! — then a quantity control assures emissions won’t go above a certain level. Sure, they won’t go below it either, but with a price control (a tax), there isn’t any quantity guarantee at all.

        There are also interactions with uncertainty and nonlinearity which are interesting and can favor one approach or another. You can read some more tradeoffs in Nordhaus’s book in the section “Comparison of price and quantity approaches”:

        http://nordhaus.econ.yale.edu/Balance_2nd_proofs.pdf

        But it’s really more of a plug for carbon taxes (Nordhaus is pretty strongly pro-tax). I don’t know of a similar polemic against taxes, but I’m sure those economists who favor cap-and-trade must have them.

        Once you get into political practicalities rather than pure economics, the issue gets more complex. Cap-and-trade is more susceptible to cheating the system. And in terms of the business cycle, it’s easier to predict how much things will cost, and plan ahead, if there’s a fixed price on carbon.

        But as you’ve mentioned, it’s death to mention the word “tax” to the U.S. public, regardless of whether economists think it’s a good solution. So it seems we’ll probably get stuck with cap-and-trade, if anything. (I don’t know why they’re not labeling it the “green tax rebate” or something, since any tax will be associated with some way of returning revenues to the public.)

  4. romain brasselet says:

    Hi,
    there are two confusing things to me:

    First, in this cap-and-trade system, how can nuclear and, say, coal plants pollution be compared? These are two very different types of pollution. By focusing on CO2 emission only, nuclear plants (that produce nuclear wastes) is favored. Is that logical?

    Second, you quote: “China has pledged to cut its carbon emissions per unit of economic growth by 40 to 45 percent by 2020 from 2005 levels.” Is that really a commitment? I mean, aren’t there scale economies in the emissions of CO2? Isn’t that natural to reduce the emissions per capita when more people actually produce them? I don’t know but it would be interesting to check that.

    Sorry I only raise questions but am unable to answer any…

  5. John Baez says:

    Romain wrote:

    These are two very different types of pollution. By focusing on CO2 emission only, nuclear plants (that produce nuclear wastes) is favored. Is that logical?

    Yes. Nuclear power plants are already heavily regulated: they’re required to safely store their nuclear wastes. Meanwhile, coal plants freely spew their wastes into our air! The aim is to remedy this situation. If we don’t, we are in serious trouble.

    In his excellent new book Whole Earth Discipline, Stewart Brand wrote:

    Nuclear waste goes into dry cask storage, where it is kept in a small area, locally controlled and monitored. You always know exactly what it’s doing. A 1-gigawatt nuclear plant converts 20 tons of fuel a year into 20 tons of waste, which is so dense it fills just two dry-storage casks, each one a cylinder 18 feet high, 10 feet in diameter. [5.5 meters high, 3 meters in diameter.]

    By contrast, a 1-gigawatt coal plant burns 3 million tons of fuel a year and produces 7 million tons of CO2, all of which immediately goes into everyone’s atmosphere, where no one can control it, and nobody knows what it’s really up to. That’s not counting the fly ash and flue gases from coal — the world’s largest source of released radioactivity, full of heavy metals, including lead, arsenic, and most of the neurotoxic mercury that has so suffused the food chain that pregnant women are advised not to eat wild fish and shellfish. The air pollution from coal burning is estimated to cause 30,000 deaths a year from lung disease in the United States, and 350,000 a year in China.

    Romain wrote:

    Second, you quote: “China has pledged to cut its carbon emissions per unit of economic growth by 40 to 45 percent by 2020 from 2005 levels.” Is that really a commitment? I mean, aren’t there scale economies in the emissions of CO2? Isn’t that natural to reduce the emissions per capita when more people actually produce them? I don’t know but it would be interesting to check that.

    Indeed, it would be very interesting. It would also be interesting to see how much they plan to let the total carbon dioxide emissions rise — and how much it actually does rise.

    • romain brasselet says:

      John wrote: “Nuclear power plants are already heavily regulated: they’re required to safely store their nuclear wastes.”

      Hmm, that’s wishful thinking. AREVA, the largest nuclear energy company in the world, is involved in controversies concerning its sites of extraction of uranium in Niger, where high levels of radiation have been recorded. Also concerning its sites of storage in Siberia, where some nuclear wastes (that may nor be highly dangerous though) are virtually in the open air.

      http://www.rfi.fr/actuen/articles/118/article_5492.asp

      http://www.spiegel.de/international/europe/0,1518,654969,00.html

      However, my point is not so much to attack or defend any source of energy, but much more to try to stress the issues in comparing the pollution of different sources of energy. If you don’t take them into account, then you’re indirectly favoring some source.

You can use HTML in your comments. You can also use LaTeX, like this: $latex E = m c^2 $. The word 'latex' comes right after the first dollar sign, with a space after it.

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Follow

Get every new post delivered to your Inbox.

Join 2,847 other followers