Development and the environment China wants to clear the air with a market-based approach to pollution
DOING something about global climate change seems to be one of the very few things that the Chinese and American governments can agree upon. Earlier this year they announced a series of environmental measures which would, in practice, bring their carbon emissions per head to roughly the same level by 2030. Now, at a time of arguments over cyber-security, the South China Sea and much else, they have done it again, with President Xi Jinping due to announce, during a summit meeting with Barack Obama in Washington, that China plans to set up a national carbon-emissions trading market in 2017. When up and running, it should be the largest in the world.
China already has seven pilot emissions-trading schemes in individual cities and provinces. The government always said that, assuming they worked, it would create a national market, too. The new announcement merely confirms that and provides a date. Such "cap-and-trade" schemes set a price on carbon. Governments or local regulators set an overall limit on carbon emissions (the cap). Within that cap, companies are given allowances to produce carbon, or they buy them. They then trade the allowances. If pollution is too high, companies must buy more allowances, pushing up the carbon price. In practice, the system depends heavily upon getting the details right: if the allowances are too generous, the market price of carbon becomes almost meaningless, as happened to the European Union’s emissions-trading scheme in early 2013.
It is too soon to draw conclusions about the results of China’s pilot trading schemes. The first began only in mid-2013, and the most recent only last year. There are signs that some of the pilot schemes suffered from excess allocations. Shanghai’s carbon market even dried up completely at one point. And as Thomson Reuters Point Carbon, a firm of analysts, has argued, without a proper tax and accounting framework (which is not yet in place), the people using the market have no way of reporting reliable earnings figures or compliance costs. So Mr. Xi’s willingness to go ahead with a national scheme probably owes as much to a wish to announce a deal at his summit with Mr. Obama as it does to an analysis of the pilot schemes’ track record.
But the carbon-trading scheme also chimes with China’s new desire to use market mechanisms in environmental policy. That wish was clearly on display in the country’s big new reform plan for environment policy, announced on September 21st by the government and Communist Party. The reform puts much greater stress on the role of markets to control pollution than China has done in the past, and more than most Western countries do. The new reform plan begins with a detailed description of who owns what natural resources, along with a promise that “clear lines will be gradually delineated” between different owners. This starting-from-first-principles approach is unusual. There are two good reasons for it.
First, the current unclear and overlapping system of ownership has encouraged local, provincial and central authorities to compete in exploiting natural resources before anyone else does, producing wasteful and polluting development. And because there is often no clear owner, of, say, lakes and rivers, no one has had an interest in their long-term condition either.
Second, the government has its eye on bringing market influences into its planning for the environment. But, for the purposes of controlling land, rivers and other natural assets, China is still a communist country: these assets are collectively owned. To square the circle, China’s green planners have decided to separate ownership from control (or use)—and make usage rights tradable whereas ownership will remain collective. But for all that to happen, ownership rights need to be clear.
A consequence of these two ideas would be the creation of a potentially powerful new body to regulate usage rights. At the moment, ownership and control are diffuse. The new plan says that “one body will be established to carry out the unified exercise of ownership rights for all types of natural resources.” In theory, such an institution could end up running half the country—and run into fierce opposition from vested interests. The new plan also talks about “eliminating overlapping and conflicting spatial plans” and having one development plan per city or county. Again, this is easier said than done in China.
The planners urge banks to sell green bonds (i.e., bonds which finance projects that have been certified as environmentally sound). They also say the government will improve guarantees for energy-efficient or low-carbon projects. Along with the new carbon market, such policies mark a sharp change from the command-and-control system that has mostly prevailed in Chinese environmental policy so far.
But not everything in the new reform plan is to be market-based. The plan says there will be a “redline below which the area of China’s permanent basic cropland must not fall”, i.e., it will impose limits on the allocation of fields for urban development. There will also be a new system of national parks, modelled on America’s, in which development is more or less banned (at the moment, different government departments may set up their own nature reserves).
The big question raised by these proposals is to what extent China will actually carry them out. The whole plan has a habit of saying the government will do this or that—without giving dates. But perhaps one can understand the caution that this approach embodies: the carbon-market risks the opposite problem of rushing into a big national scheme without enough preparation.
But there is at least one reason for optimism. The reforms outline not only what the government will do but also makes it public (“the system of public participation will be improved”). The government has already put a lot of information about air pollution online in real time. Ma Jun, an environmental campaigner who runs the Institute for Policy and the Environment, argues that the new reform plan’s talk of transparency, of holding officials to account and of giving the public enough data to apply pressure all amounts to a big step forward. “In China we can’t only have the government solve the problem,” he says. “It needs market measures and public involvement, too.”