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China continues to eye a domestic emissions trading system
posted by Rob on 16th Nov 2010

As the world's climate change spotlight shifts towards Cancun and the impending UNFCCC meeting, China continues to quietly assess its options in developing a domestic emissions trading scheme. What does this mean for the international climate negotiations? Put frankly, not much. China is clear in that its domestic emissions trading ambitions are exactly that; domestic, and not to be confused with what is happening on the international stage.

Since a seemingly well-placed article in the China daily in July of this year, it seems that domestic emissions trading in China has been firmly placed on the agenda. It is hotly anticipated that a domestic emissions trading scheme will be included in China's 12th Five-Year Plan (2011-2015). It is even rumoured that 'emissions trading' is already in place in some institutions key documents, making it almost inevitable that this will take place.

While there seems to be a common consensus that some form of domestic emissions trading will take place in China, the framework of such a system remains largely undecided with widespread speculation of what it might look like and whether it will be based on an overall cap or an energy intensity target. It seems likely that pilots in eight provinces will precede any national scheme, with some observers estimating kick-off as early as 2012. Also hotly debated are the sectors that might be included in such a system. It's widely known that China's energy consumption and demand is growing at a staggering rate . Starting with the power sector would almost certainly be the 'easiest' way of getting a domestic ETS underway, however, it's not just the power sector that's growing, it’s all sectors. Nowhere is this more obvious than in China's exploding cities. The pace of development is overwhelming and the construction industry is desperately trying to keep up with demand. The energy efficiency of this building boom is of growing concern resulting in extensive research into how the building sector might be included into a domestic ETS.

What is clear is that China sees a number of advantages in developing a domestic emissions trading system: from data collection and management, testing its fledgling environmental exchanges without being subject to international pressure, increasing energy efficiency, reducing dependency on imported fossil fuels and spurring low carbon innovation.

Emissions trading could indeed offer a number of benefits for China, yet the difficulty of the task at hand should not be underestimated. Developing an ETS is complex and requires extensive institutional capacity in place to make it work. Where there might be the political will in Beijing, the ability of the provinces to implement and manage an ETS will be the make or break of any scheme. Data collection and management remain a huge challenge for China and without reliable data emissions trading simply cannot happen. Not to mention the somewhat sensitive point of needing to develop and set a stringent cap.

As China continues to consider what a domestic ETS should look, policy makers are looking to the EU ETS for experience. The challenges facing Europe and China will at times be wildly different; nevertheless, Europe's steep learning curve offers invaluable insight for anyone debating how to structure their ETS.

China is not the only country looking to develop a domestic ETS: Japan and South Korea are also busy planning their own systems. This is on top of the already active New Zealand ETS and the US regional greenhouse gas initiative (RGGI).

An international agreement in Cancun is of course the most desirable outcome, but sadly expectations for a meaningful result at COP16 are low. Nevertheless the clock is still ticking. It is questionable how long the markets and the politically motivated are willing to wait for a comprehensive UN agreement. Fracturing the markets into a number of regional ETSs might not be the ideal scenario but the race is on and China and others are limbering up. A weak UN deal is not going to stand in the way of them pursuing domestic policy that assists in their resolve to increase energy efficiency and stay competitive in the global drive towards a low carbon economy.

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