This past June, in the southern city of Shenzhen, China took a significant step forward in the effort to combat climate change by launching its first mandatory emissions exchange. Instead of setting a strict cap for emissions, the exchange requires that companies reduce their energy intensity, or the amount of energy needed to produce $1 of GDP, by 32% between 2010 and 2015. Six other cities and provinces are scheduled to unveil their own emissions trading programs within the year.
After failing to meet pollution control and air quality targets set by its 10th Five-Year Plan (2001-2005), China set its first binding environmental targets in the 11th Five-Year Plan. Responsibility for meeting these targets, previously held by low level officials on the front lines, was assigned to the leaders of county, city, and provincial governments. The environmental ministry was promoted to a department, with regional departments established for local enforcement.
After China’s 12th Five-Year Plan (2011-2015) set the goal of reducing emissions intensity 40-50% by 2020, an October 2011 government circular authorized the cities of Beijing, Tianjin, Shanghai, Chongqing, and Shenzhen and the provinces of Hubei and Guangdong to establish their own municipal carbon exchanges. Shenzhen is the first of these cities to commence trading, with the other cities scheduled to follow within a year.
Shenzhen represents a substantial improvement over previous emissions exchanges in cities such as Shanghai, Beijing, and Tianjin, whose extremely small scale and voluntary participation limited their effectiveness.
When asked what measures his company had taken to reduce emissions following its entry into the Beijing voluntary emissions exchange, a researcher at a national oil company explained that the exchange had little effect on his company’s total emissions. “We do have a department that covers emissions reduction, but its focus is reducing energy intensity and emissions intensity.”
China has strong incentives to cut emissions intensity, which is different from outright emissions. Y. Chen, an emissions exchange researcher at a major state-owned oil firm, explains that “for the past 30 years, the energy consumption and waste of China’s economy has been extremely high. As China continues to develop, its emissions and energy use will increase. Reducing emissions intensity is therefore required to sustain economic growth.” In addition to economic growth, making economic growth more environmentally efficient also strengthens the other pillar of party legitimacy: social stability. The public health effects of air and water pollution have led to widespread unrest. A 2012 study by MIT estimated the total cost of economic cost of air pollution in China at $112 billion, including lost labor and health care costs.
Even if the central government has the political will to set emissions intensity targets, local governments must be willing to enforce them for the exchanges to succeed. Local party officials’ incentives to drive economic growth have traditionally outweighed environmental concerns. A 2013 study by the National University of Singapore found that between 2000 and 2009, spending on environmental investments reduced city-level cadres’ chances of promotion, while spending on transportation infrastructure increased them.
The central government will likely continue to increase the importance of environmental standards for promotion, at least in more developed areas. For poorer areas, economic growth remains the first priority. Polluters forced out of prosperous coastal cities by environmentally conscious governments continue to be welcomed by officials in inland cities willing to sacrifice air and water quality for growth. The National Development and Reform Commission has opposed the establishment of exchanges in areas with GDP per capita of less than $10,000. Environmental evaluation for cadres has focused on methods compatible with economic growth: expanding clean energy investment, shifting from heavy industry to higher margin industries, closing down inefficient factories and power stations, and limiting heavy metal pollution and air pollution.
There are reasons to be optimistic about Shenzhen’s exchange. It will probably meet its emissions reduction target, which at 32% is actually relatively modest. Shenzhen was already on track to meet much of this target by 2015, due to implementation of new technology. It has taken steps to counter corruption by using electronic tracking systems to monitor allowances. The city governments establishing pilots will use similar technology, but each will have the flexibility to decide what authority monitors its own emissions trading system. Some cities will set up third party independent governing bodies, while others may form committees within the municipal government to watch over operations.
Watching and learning
The central government is watching Shenzhen and the other pilots for lessons for an eventual national system. The 12th Five- Year Plan includes provisions for the launch of a national carbon trading system in 2015. Officials have since released statements pushing the deadline back to 2020 or later. Even if Shenzhen and other upcoming pilots succeed, numerous obstacles to a national system remain.
The first and most obvious issue is corruption. Reports abound of local industries shutting down pollution control technology and officials resorting to temporary blackouts to reach emissions targets. As deadlines approached to achieve the 11th Five Year Plan’s energy reduction targets, local officials in several regions imposed power cuts on industries, hospitals, and schools to temporarily reduce energy measurements. There is a risk that emissions permits will be allocated according to the financial interests of local officials rather than the public’s economic and environmental interests.
Other problems stem from opaque data collection procedures. Inconsistencies in emissions numbers between government agencies demonstrate the tendency to falsify data when both local officials reporting emissions data and the environmental regulators assessing them have strong incentives to hit emissions targets.
Another issue is the weakness of environmental courts, which like most Chinese courts are not fully independent from local governments. Tseming Yang, former Deputy General Counsel of the US Environmental Protection Agency and director of the US-China Partnership for Environmental Law, notes that “officials who at one point see the creation of these environmental courts as serving their interests may not be as enthusiastic when potential cases come up that threaten business interests.”
Even if these barriers are overcome and a national system is implemented, China will continue to prioritize growth over total emissions reduction. China’s recent environmental policies demonstrate that it is willing to pursue emissions efficiency in the interests of sustainable growth and social stability, but a strict cap on national emissions remains unlikely, particularly as China continues to urbanize and move towards a consumption economy.
Lastly, there is a risk that officials may confuse profitability of the emissions exchanges with their effectiveness. “One thing driving carbon exchanges is interest in trading as an opportunity to make money. There is less concern about the integrity of the exchange in terms of making sure that credits bought and sold line up with emissions reduction,” says Yang.
“I do think there’s some value in these carbon exchanges, but I’d be quite skeptical that in the short term they’re contributing much environmental benefit.”
This article appears in the November 2013 issue of China Hands.