Climate Policy with Chinese Characteristics

 As planned, China’s new emissions-trading scheme (ETS) is doing nothing to reduce its emissions.

Launched in July, the ETS encompasses 2,200 companies that operate coal- and natural-gas-fired power plants — facilities responsible for 40 percent of China’s total greenhouse-gas emissions. It builds upon pilot programs in seven delimited regions — including Beijing, Shanghai, and Chongqing — that began in 2013.

On the opening trading day, July 16, 2021, allowances to emit one ton of carbon dioxide swapped for between 50 and 53 yuan ($7.72 to $8.18), roughly equal to the cost of permits in the Regional Greenhouse Gas Initiative, in which eleven states along the U.S. Atlantic Coast participate. By August 20, prices had dropped to 49 yuan, or $7.57.At $7.57, the permit trading price is 84 percent lower than the International Monetary Fund (IMF) estimates would be necessary to effectively drive down China’s emissions.

The foremost problem with China’s ETS, however, is not the price at which permits are trading. Instead, the problem is that the plan revolves around “emissions intensity” — a term of art denoting the ratio of emissions to power generation — rather than around absolute volumes of emissions.

China’s scheme allocates tradable permits free of charge to existing power entities as a function of their operations’ emissions intensity and historical power output. The plan places no firm upper bound on the sector’s emissions, nor does it set a timetable for doing so. According to the International Carbon Action Partnership, an intergovernmental climate-policy monitoring group, the nominal cap will be adjusted ex post facto based on actual power-production levels.

While the ETS does introduce an incentive for companies to generate lower-emissions electricity, climate change is precipitated by absolute volumes, not by ratios. This structure guarantees that the power sector’s cumulative emissions will continue to increase.

“Unlike other ETSs,” writes Carbon Brief’s Hongqiao Liu, “the Chinese scheme does not currently put a fixed cap on emissions, nor promises a declining cap over time. Therefore, it is not guaranteed to cut carbon.”

Whereas programs such as the Regional Greenhouse Gas Initiative and the European Union ETS have firm emissions limits for the sectors they cover and offer fewer permits over time, China’s scheme takes the “cap” out of “cap-and trade.” In so doing, it grants its sanction to the Chinese power sector’s continued emissions increases.

“The current design, this intensity-based target that you allow emissions to increase, that is not very helpful,” says Yan Qin, economist and lead carbon analyst at Refinitiv.

However much the scheme may have been hailed, this emperor wears no clothes. Even if we account for an intensity-based system’s low expectations, China’s ETS will encounter another set of hurdles around compliance and enforcement.China differs from the countries and subnational regions that have implemented emissions trading in that its political system begets corruption. According to Transparency International’s 2020 Corruption Perceptions Index, China ranks below 77 other countries, including places such as Cuba and Belarus.

In this low-trust context, environmental compliance often proves elusive and enforcement proves difficult. In one notorious example, atmospheric-circulation analysis conducted in 2018 by four independent modeling groups revealed that chemical plants in China’s Shandong and Hebei provinces have been generating the compound trichlorofluoromethane — an ozone-layer-depleting chlorofluorocarbon (CFC) — in contravention of the 1987 Montreal Protocol, to which China is a party.

The journal Nature deemed the findings “the culmination of years of scientific sleuthing” as global levels of CFCs remained mysteriously high. But according to Nature’s David Cyranoski, “the Chinese environment ministry disputes that there is enough evidence to pin the recently discovered spike in emissions on China.”

In the emissions-trading arena, China’s existing regional pilot programs have been plagued by records falsification on the part of supposedly independent verification agencies, according to SinoCarbon Innovation & Investment Co.’s Qian Guoqiang. Reports have already emerged of companies attempting to game the new national ETS. Moreover, the scheme puts in place a maximum fine of just 30,000 yuan ($4,635) for noncompliance or falsifying information.

But none of this should suggest the ETS will not satisfy China’s purposes.

Like Xi Jinping’s 2060 carbon-neutrality pledge and the country’s forgiving Paris Agreement target of reaching peak emissions by 2030, China’s ETS provides political cover for further significant expansion of its coal, oil, and natural-gas consumption.

In the past ten years, China’s oil use has increased by 30 percent, and its natural-gas use has doubled. Its coal use has remained relatively steady, after more than doubling the decade prior, but it, too, set an all-time record high in 2020.

Despite the implementation of the ETS, China’s coal use will persist for decades to come. According to International Energy Agency data, more than half of the emissions from China’s coal-fired power plants in 2018 came from facilities under ten years old.

Today, China is responsible for 27 percent of global greenhouse-gas emissions, more than all of the world’s other advanced economies combined. The IMF expects that China’s portion will reach 32 percent by 2030.

And yet China praises itself — and finds itself praised — as a climate-policy leader.

Such praise often reaches the American public through popular media and is amplified by opportunistic politicians, but it tends to be initiated by American environmental activist groups that have stationed a significant portion of their activities in China. One such group is the Environmental Defense Fund (EDF).

Since at least 2017, EDF has conveyed Beijing’s message on the emissions-trading scheme to a U.S. audience. In December of that year, EDF wrote that China is “stepping into a leadership void” so that, “by taking advantage of best practices, China will have a leg up as it designs its own, unique market,” and that “China is showing positive action — and the rest of the world is watching.”

Four years hence, it appears EDF isn’t watching.

Despite all we now know about the shortcomings of China’s emissions scheme, EDF president Fred Krupp inexplicably described the launch of credit trading in July as “putting the last puzzle piece in place for the largest carbon market in the world.”

If the trading of limitless permits is indeed the last piece of the puzzle for China’s emissions plan, what incentive could there possibly be elsewhere — such as in the United States — to tighten self-imposed firm emissions caps or to impose punishing carbon taxes?

China’s emissions-trading scheme shows no indication it will curb the country’s growing appetite for coal, oil, or natural gas — but it was never meant to. Thanks in part to the environmental agitprop of American activists, China’s ETS will serve its purpose: shielding China from criticism as it increases its emissions with each successive year.