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Chinese environmental exchanges: carbon trade preliminaries?

China must eventually curb its carbon emissions in absolute terms if aggregate GGEs are to be controlled. 

Growing them at half its GDP growth rate will not work. At 5% emissions growth China’s emissions in less than 30 years will be 4 times their current level or about what the world emits in total now.  The Chinese are hard-headed enough about cost issues to understand that these controls can be effected most efficiently by a cap-and-trade scheme.  My guess is that in Copenhagen this year the Chinese will begin such controls via loose – and increasing – voluntary carbon control quotas.   They should also be urged to set a date for initiating a future date at which they will begin to control their emissions absolutely.

Institutions are being created in China for trading pollution emission quotas. There is one in Beijing and one in the neighbouring city of Tiangin.  So far there has not been much in the way of the purchase of carbon emission rights by Chinese firms – a single $40,000US transaction in the Beijing exchange – but there are many sales of carbon emission quotas to developed countries. Indeed China is the world’s largest supplier of carbon credits. The country is due to generate 55% of all certified-emission reduction credits (CERs), which under the Kyoto protocol allow companies in developed nations to offset their emissions by buying credits from developing nations.   Recently Tianping Auto Insurance, a Shanghai-based company, bought credits equivalent to 8,026 tons of emissions on the China Beijing Environment Exchange.

While this offers hopeful signs it is mainly a demonstration of corporate social responsibility rather than evidence of the emergence of local restrictions on carbon emissions. As The Economist notes:

“If Tianping’s purchase signals that domestic demand for carbon credits is growing, that should in theory help the fight against climate change. Investment in low-carbon projects, which range from installing cleaner stoves in homes to building wind farms, is what generates credits. The greater the demand for credits, the more attractive such projects become. So is a new Chinese boom, this time in carbon, now on the horizon?

Not quite. What Tianping bagged were voluntary, or verified, emission reductions (VERs). Voluntary credits are an increasingly popular means for companies to burnish their green credentials (although the crisis has muted demand recently). Last year over-the-counter transactions of VERs globally hit a record $397m, according to data from New Energy Finance (NEF), a research firm. Tianping bought credits from last year’s Beijing Olympics, supposedly generated by commuters who opted for eco-friendly forms of transport.

Tianping’s voluntary purchase shows that the concept of corporate social responsibility is no longer entirely foreign in China. But the idea is still in its infancy. A study by Syntao, a consultancy in Beijing, found that from January to November 2008 just 121 Chinese companies published “sustainability reports”. Awareness of carbon offsets remains low. Tianping’s $40,000 purchase was small by Western standards. And the credits were first auctioned in December—hardly a sign of feverish demand. Worryingly, they also appear not to have been audited by specialists in line with the highest standards for voluntary credits, says John Romankiewicz at NEF: it is hard to be sure, for example, that people really rode their bikes to work during the Olympics rather than jumping in taxis.

For domestic demand to take off, Chinese firms will probably have to be pushed. Setting a limit on companies’ emissions beyond which they must buy offsets is not thought to be on the cards, but hopes are growing that China will commit to some kind of non-binding target, possibly at the Copenhagen climate-change summit at the end of this year. Chinese negotiators recently gave a timetable for a peak in the country’s emissions, albeit in far-off 2050. In June, China’s state council said it plans to set a “carbon intensity” target, which would determine a certain level of emissions per unit of GDP. But detailed policies may not take shape until the launch of the next five-year plan, beginning in 2011. Tianping’s move is still a rather solitary shoot of greenery.”

Reuters reports that the “2050 China Energy and CO2 Emissions Report” (I have not found a link yet – apparently only in Chinese) proposes that Chinese emissions growth could slow by 2020 with levels peaking around 2030. In this graphic China acknowledges it is the world’s largest greenhouse gas emitter.  

Beijing has resisted specifying when its emissions may peak, pointing out its emissions per person are much lower than the average in rich nations. By China seems to want an agreement before Copenhagen.

The report argues that China could push financial steps and price reforms to favour clean energy, a “carbon tax” and cautious steps toward a “cap-and-trade” system for buying and selling emissions rights. Beijing may seek to use such domestic initiatives to show other nations it is serious about fighting global warming.

The report warns about worsening droughts and floods, retreating glaciers, shrinking farm productivity and threats to water supplies for the country of 1.3 billion people.

From the Preface:

“By 2008 China had become the world’s biggest national emitter of greenhouse gases and faces unprecedented challenges…

“As soon as possible, study and draft relative and (then) absolute targets to cap the total volume of carbon dioxide emissions”.

“Establishing and acting on quantified targets and corresponding policies to address climate change in the medium to long-term is already a matter of great urgency.”

(If China can reach these goals by 2050 its carbon dioxide emissions from fossil fuel) “could fall to the same emissions levels as in 2005 or even lower,” the report says….

“The potential threat to China from climate change exists and it is massive…”

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