New Publication on Chinese Climate Change Policy

Readers of this blog need not be reminded that climate change is a global commons problem and therefore necessitates cooperation at the highest jurisdictional level – that is, international cooperation among national governments – if it is to be adequately addressed. This points to the key role for national governments to put in place meaningful public policies, consistent with international cooperation.

But sub-national governments can also significantly advance efforts to mitigate climate change. Provinces and municipalities around the world have indeed undertaken initiatives – sometimes working together across national boundaries – to reduce greenhouse-gas emissions. This includes jurisdictions in the largest-emitting countries – China, the United States, and India – as well as in the European Union.

A New Publication Now Available on the Internet

We – the Harvard Project on Climate Agreements (HPCA) – have just released a new volume that examines sub-national climate-change policy in China.  The volume focuses to a considerable degree on carbon-pricing policy in China, including how China’s sub-national (pilot) emissions-trading systems can inform the emerging national carbon-pricing system.

The briefs in this volume – edited by Dr. Robert Stowe and myself – draw on presentations and discussion at a research workshop organized by the HPCA in Beijing on July 18 – 19, 2019. The workshop was hosted and co-sponsored by Tsinghua University’s Institute of Energy, Environment, and Economy, directed by Professor Zhang Xiliang. Workshop participants included 24 researchers and practitioners from China, Australia, Canada, India, Norway, the United Kingdom, and the United States. Chinese participants were based in Guangdong Province, Hubei Province, and Shanghai, as well as Beijing.  The agenda and participant list for the workshop are included at the end of the volume.

The volume – and the July 2019 workshop – are part of a larger initiative of the Harvard Project on Climate Agreements examining and comparing sub-national climate-change policy in China, India, the United States, and Canada. The Harvard Project is conducting a similar workshop in New Delhi in the summer of 2020 and will release a volume of briefs on sub-national climate-change policy in India in early 2021.

Overview and Framing

The volume begins with a brief by Zhang Xiliang and Zhou Li that details policies adopted by Chinese provinces and municipalities to address climate change. Ye Qi and Xiaofan Zhao then describe what they see as the most important drivers of climate-change policy in China, providing context for the volume.

Institutional Perspectives

Next, institutional perspectives are provided in four briefs by experts on center-provincial institutional dynamics in China, with applications to climate-change policy. Michael Davidson explores China’s “quasi-federalist” system, and discusses how this system might be leveraged to develop effective institutions for addressing climate change. Gørild Heggelund focuses on China’s national emissions-trading system (ETS).

Tan Xianchun provides a concise yet detailed analysis of China’s administrative systems and procedures for addressing climate change – both carbon pricing and other approaches to reducing emissions, including the results of modeling that estimates the potential impact of a range of “[l]ow-carbon measures and policies” in Chongqing municipality and Guangdong Province.

Providing the final institutional perspective, Christine Wong discusses how the implementation and enforcement of environmental policy in China have evolved over the last decade. She finds that although the central government places greater emphasis on environmental policy than in the past and has provided considerable financial support for implementation and enforcement, renewed financial constraints in a period of low economic growth may prompt sub-national officials to favor carbon pricing over more traditional top-down policy approaches.

Emissions Trading Systems in China:  Lessons for National Policy Design from the Pilots

Three contributors examine lessons for national policy design from experience with the pilot ETSs. Shaozhou Qi assesses the performance of the seven pilot ETSs. Tian Qi provides insights based on his study of Hubei’s pilot ETS, focusing on allowance allocation, as well as the closely-related topics of auction design and market-stability measures. Zeng Xuelan examines a range of GHG emissions-reduction policies in Guangdong Province, noting that Guangdong’s pilot ETS has been its “main mechanism for reducing provincial emissions.”

Zeng also notes the possibility of the central government terminating Guangdong’s ETS after lessons have been incorporated into the national carbon-pricing system.

The fate of the pilot ETSs more broadly is the subject of Valerie Karplus’s brief. She discusses three scenarios: “(1) coexistence, that is, maintaining separate sub-national trading systems alongside the national system; (2) partial integration, which would mean allowing credits from one system to be used in other systems; and (3) full integration, which would involve subsuming the seven sub-national pilots under a single national ETS.” Karplus discusses the tradeoffs among these options and then suggests an approach to strengthening the pilot ETSs that is somewhat independent of the path chosen.

Designing and Implementing China’s National ETS

Four briefs focus on the development of the national carbon-pricing system, though in each case with some reference to the sub-national pilots. Pu Wang identifies a set of important challenges to the implementation of the national system, concluding in part – as did Heggelund – that “institutional capacity related to the carbon market needs to be significantly enhanced at all levels, from the central government to the local level.”

We Libo discusses the results of a modeling initiative that explores sub-national distributional impacts of various trading-intensity and allowance-allocation scenarios. Zhang Jianyu presents ten policy recommendations for the implementation of the national system. Among these, he suggests that the pilot ETSs can continue to play a useful role after the national system is implemented, and that the central government should continue to support the pilots.

Finally, Fei Teng examines the important relationship between the power sector in China and the performance of the national carbon-pricing system. The power sector is highly regulated, though the central government is pursuing market-oriented reforms. Teng presents three options for passing through higher electricity costs resulting from carbon-pricing to electricity consumers, with one option including trading in generation rights.

Comparative Perspectives on Sub-National Policy

The final section of the volume includes three briefs providing cross-national comparative context on sub-national climate-change policy.

Radhika Khosla writes on India, Robert Stavins on the United States, and Katie Sullivan and Ellen Lourie on Canada.

Final Thoughts

Each of the seventeen briefs in the volume begins with several key points, and the seventeen sets of key points are compiled immediately following an introduction. We hope that this structure renders the insights, research results, and analysis contained in the briefs more readily accessible.

The Harvard Project on Climate Agreements is grateful to the Harvard Global Institute, which provides generous support for the initiative of which this volume and the July 2019 workshop in Beijing are part. We are also grateful for our ongoing collaboration with Professor Zhang Xiliang and his colleagues – a collaboration that has yielded insights that we hope prove useful to researchers and policy makers working to address the problem of climate change.

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COP-25 Disappointment Should Not Be Due to Lack of Aspirations for Future Ambition, But to Lack of Support for Global Carbon Markets

On December 18th, The Conversation (“academic rigor, journalistic flair”) – published my brief essay (“The Madrid climate conference’s real failure was not getting a broad deal on global carbon markets”), and today – in this blog post – I wish to share a slightly edited version with you (without the excellent graphics included in the original article).

The Reality Behind the Press Coverage

Press accounts of the Madrid climate conference that adjourned on Dec. 15 are calling it a failure in the face of inspirational calls from youth activists and others for greater ambition. But based on my 25 years following and analyzing this process together with scholars and government officials from around the world, I believe the reality is more complicated.

True, this round of climate talks did not produce an aspirational statement calling for greater ambition in the next round of national pledges. In my view, that’s not actually very significant in terms of its real effects, even though organizations such as Greenpeace and Extinction Rebellion framed this as the key task for this meeting.

On the other hand, the talks failed to reach one of their key stated goals: writing meaningful rules to help facilitate global carbon markets. As an economist, I see this as a real disappointment – although not the fatal failure some portray it to be.

Tackling the free-rider problem

Here’s some context to explain why international cooperation is essential to tackle climate change. Regardless of where they’re emitted, greenhouse gases mix in the atmosphere. That’s different from other air pollutants, which can affect localities or large areas, but not the entire world.

This means that any jurisdiction that reduces its emissions incurs all of the costs of doing so, but receives only a share of the global benefits. Everyone has an incentive to free-ride, relying on others to cut emissions while taking minimal steps themselves.

Recognizing this problem, nations adopted the United Nations Framework Convention on Climate Change at the Rio Earth Summit in 1992. As with many other international treaties, member countries agreed to hold regular meetings to devise rules for achieving the goals set out in the agreement. That’s how the Conference of Parties, or COP, process was launched.

Why climate change is a wicked problem

If the pace of progress at these meetings seems slow, keep in mind three factors that make their task enormously challenging.

First, every nation has an incentive to exploit the atmosphere and rely on other countries to cut emissions.

Second, making reductions costs money up front – but since carbon dioxide emissions remain in the atmosphere and warm the Earth for up to a century, many of the benefits of cutting emissions accrue much later.

Third, the costs of cutting emissions fall on particular sectors – notably, fossil fuel interests – that have a strong monetary incentive to fight back. But the benefits are broadly distributed across the general public. Some people care passionately about this issue, while others give it little thought.

At the COP-1 meeting in 1995 in Berlin, members decided that some of the wealthiest countries would commit to targets and timetables for emission reductions, but there would be no commitments for other countries. Two years later, nations adopted the Kyoto Protocol, which set quantitative targets only for Annex I (largely wealthy) countries.

That wasn’t a broad enough foundation to solve the climate challenge. Annex I countries alone could not reduce global emissions, since the most significant growth was coming from large emerging economies – China, India, Brazil, Korea, South Africa, Mexico and Indonesia – that were not part of the Annex I group.

Everybody in

At negotiations in 2009 in Copenhagen and 2010 in Cancun, distinctions between wealthy and developing countries began to blur. This culminated in an agreement at Durban, South Africa, in 2011 that all countries would come under the same legal framework in a post-Kyoto agreement, to be completed in 2015 in Paris.

The Paris Agreement provided a promising, fresh approach. It proposed a bottom-up strategy in which all 195 participating countries would specify their own targets, consistent with their national circumstances and domestic political realities.

This convinced many more nations to sign up. Countries that joined the Paris Agreement represented 97% of global greenhouse gas emissions, compared to 14% currently under the Kyoto Protocol. But it also gave every country an incentive to minimize its own actions while benefiting from other nations’ reductions.

Growing carbon markets

Are there ways to persuade nations to increase their commitments over time? One key strategy is linking national policies, so that emitters can buy and sell carbon emissions allowances or credits across borders.

For example, California and Quebec have linked their emissions trading systems. On Jan. 1, 2020, the European Union and Switzerland will do likewise.

Note, however, that such linking need not be restricted to pairs of cap-and-trade systems. Rather, heterogeneous linkage among cap-and-trade, carbon taxes and performance standards is perfectly feasible.

Expanding carbon markets in this way lowers costs, enabling countries to be more ambitious. One recent study estimates that linkage could, in theory, reduce compliance costs by 75%.

But for such systems to be meaningful, each country’s steps must be correctly counted toward its national target under the Paris Agreement. This is where Article 6 of the Paris Agreement comes in. Writing the rules for this article was the primary task for negotiators in Madrid (28 other articles were completed at the 2018 COP in Katowice, Poland).

Unfortunately, Brazil, Australia and a few other countries insisted on adopting accounting loopholes that made it impossible to reach agreement in Madrid on Article 6. Negotiators had an opportunity to define clear and consistent guidance for accounting for emissions transfers but failed to close a deal.

But if they had adopted guidance that extended much beyond basic accounting rules, as some countries wanted, the result could have been restrictive requirements that would actually impede effective linkage. This would have made it more expensive, not less, for nations to achieve their Paris targets. As Teresa Ribera, Minister for the Ecological Transition of Spain, observed at COP-25, “No deal is better than a bad deal” on carbon markets and Article 6.

The baton for completing Article 6 has been passed to COP-26 in Glasgow in November 2020. In the meantime, without agreement on an overall set of rules, countries may develop their own rules for international linkages that can foster high-integrity carbon markets, as California, Quebec, the European Union and Switzerland already have. If negotiators can keep their eyes on the prize and resist being diverted by demands from activists and interest groups, I believe real success is still possible.

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Sub-National Climate Change Policy in China

At a time when there are considerable political challenges in some countries (such as my own!) for national governments to institute meaningful climate change policies, the potential role of sub-national policies becomes more important than otherwise.  In other countries, sub-national climate policies may be a stepping stone to significant national efforts, as in China.  Partly with this in mind, the Harvard Project on Climate Agreements (HPCA) conducted a research workshop in July of this year on “Sub-National Climate Change Policy in China.”  Tsinghua University’s Institute of Energy, Environment, and Economy — directed by Professor Zhang Xiliang — hosted and co-sponsored the workshop, which was organized by my colleague at the Harvard Kennedy School, Dr. Robert StoweTwenty-seven experts from China, Europe, Canada, India, Australia, and the United States participated (see the photo below).  In addition, a group of students observed the workshop, and the Environmental Defense Fund’s China Program hosted a dinner for workshop participants.  The Harvard Global Institute provided major support for the project.  Here is a link to the full agenda (in both Chinese and English).

Background

Climate change is a global commons problem, and, as such, requires cooperation at the highest jurisdictional level — that is, international cooperation among national governments — if it is to be adequately addressed.  Participation by national governments is key, and sub-national governments can also play important roles. Provinces and municipalities around the world have undertaken initiatives — sometimes working together across national boundaries — to reduce greenhouse-gas emissions. These include jurisdictions in the largest-emitting countries — China, the United States, and India — as well as in the European Union.

The Workshop and its Analyses

Participants in the Beijing workshop examined how Chinese provinces and municipalities work with the central government to implement policy — and discussed challenges to such cooperation. They focused to a considerable degree on the implementation of China’s national carbon-pricing system, including approaches to integrating the seven pilot sub-national market-based systems into the new national scheme, scheduled to launch in 2020 (see “What Should We Make of China’s Announcement of a National CO2 Trading System?,” January 7, 2018).  Participants also addressed sub-national dimensions of other policy approaches to reducing greenhouse-gas emissions in China.

As we have done with previous HPCA research and policy workshops, participants in the Beijing event are now writing briefs on topics related to their respective presentations.  We will edit and compile these short papers in a volume to be released later this year.  In the meantime, you can view the PowerPoint presentations from the Beijing workshop:

  • China’s National Emissions Trading Program (Zhang Xiliang)
  • Ten Drivers Behind Climate Policy Making in China (Qi Ye)
  • Creating Sub-National Climate Institutions in China (Michael Davidson)
  • Multi-Dimension Post-Assessment of China’s ETS Pilots (Qi Shaozhou)
  • Political Economy Framework for Climate Change Policy in China (Christine Wong)
  • Canadian Climate Change Policy (Katie Sullivan)
  • Sub-National Carbon-Pricing Policy in the USA (Robert Stavins)
  • Integration of China’s National ETS with Provincial/Municipal Pilots (Valerie Karplus)
  • Introduction of Beijing ETS (Mei Dewen)
  • Sub-National Implementation Pathways for the National Pricing System (Goerild Heggelund)
  • Assessing Regional Implementation Pathways of National ETS In China (Wu Libo)

The Larger Context

The Beijing workshop was part of a larger initiative of the Harvard Project on Climate Agreements, supported by the Harvard Global Institute, examining and comparing sub-national climate-change policies in China and India. We will conduct a similar workshop in New Delhi next year.

The Harvard Project has previously conducted three workshops addressing climate-change policy in — or related to — China:

  • “Bilateral Cooperation between China and the United States: Facilitating Progress on Climate-Change Policy,” June 2015.  This was hosted by China’s National Center for Climate Change Strategy and International Cooperation (NCSC).  You can read more about this workshop here, and read the full workshop report here.
  • “The Design, Implementation, and Operation of China’s National Emissions Trading System,” December 2016.  Our host was NCSC.  The participants explored technical issues related to the design of China’s emerging national system, including allowance allocation, point of regulation, and price management.
  • “Cooperation in East Asia to Address Climate Change,” September 2017.  This was hosted by the Harvard Center Shanghai, and supported by the Harvard Global Institute. You can read more about the workshop here, and read the complete volume of briefs based on the workshop here.
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