China's plans to launch a series of pilot carbon trading projects starting next year underscores its need to curb its soaring greenhouse gas emissions -- now believed to be the world's largest.
With power capacity set to double again in the next decade to 1,600 gigawatts, far more than the United States, billions of dollars of investment in cleaner technologies will be needed, and a carbon price would help increase energy efficiency without jeopardising breakneck economic growth.
It could also be a boon to some domestic environmental exchanges if a compulsory national trading scheme is launched.
But experts say China, the world's second-largest energy consumer, won't be rushing to launch a national emissions trading scheme or to commit to absolute emissions reduction targets.
"The big picture will be worked out before March, but I believe there are going to be certain components that need more time to be worked out -- the details on how to implement it will take some time," said Changhua Wu, China director at the London-based Climate Group.
In the short term, China will want to protect its position in a U.N.-backed global carbon trading scheme that has earned it billions of dollars from rich nations in exchange for carbon offsets, known as certified emission reductions (CERs).
Beijing will also be cautious given that global climate talks on a "scaled-up" version of the Clean Development Mechanism (CDM), capable of delivering even more investment, have largely stalled.
EXPERT PANEL
A researcher at the National Development and Reform Commission told Reuters that an expert panel has been working for more than a year on pilot carbon trading schemes in high-emission provinces or sectors -- but dramatic gestures are unlikely.
"Nothing is decided yet and China is still looking to see what happens to the CDM and the global climate talks," said the researcher, who did not want to give his name because he was not authorised to speak to the media.
The NDRC confirmed on Tuesday this week it was looking into the possibility of using "market mechanisms" in a number of pilot low-carbon cities and regions.
A broad commitment to carbon trading will be included in China's 2011-2015 five-year plan, to be ratified by parliament in March 2011, but the full details are unlikely to emerge immediately, said Wu of The Climate Group, who has been involved in the consultations.
The cornerstone of any Chinese carbon market will be the country's pledge, made last year, to reduce its 2005 carbon intensity rate -- the amount of CO2 produced per unit of GDP -- by 40-45 percent before the end of 2020.
The China Daily newspaper said in July that officials had "reached a consensus" that CO2 trading would be a necessary component. [ID:nTOE66L02M]
ZhongXiang Zhang, a carbon expert at the East West Center in Hawaii, said China's intensity targets would eventually be "converted to absolute emission caps at company levels" and that this would form the basis for a domestic trading platform.
PROTECTING THE CDM
The CDM, part of the United Nations' Kyoto Protocol, grants CERs
While it remains unclear what the CDM will look like after 2012 when the Kyoto Protocol's first phase expires, its future direction is expected to shape China's own carbon market plans.
China has supported calls for a "scaling-up" of the old project-based CDM but it has also expressed opposition to reforms proposed by Europe that would commit entire sectors, rather than single projects, to reducing CO2.
While domestic sectoral targets are on its agenda, Beijing has complained that introducing such methods to the post-Kyoto CDM amounts to a "mandatory" cut and thus violates the Kyoto principle of "common but differentiated responsibilities". This says rich nations should bear most of the burden of cutting CO2.
China's concerns are practical as well as ideological. If a company already has to meet CO2 targets at home, it might find itself in violation of a key concept known as "additionality": if its carbon reduction plans would have gone ahead anyway, it is not entitled to "additional" CDM revenue through issuing of CERs.
Zhang of the East-West Center said China will make sure that any local market it sets up will remain strictly domestic and unconnected from the CDM or any of its potential replacements.
If the EU gets its way on CDM reform, it could complicate China's plans to cap sectoral emissions or force a level of market integration that it is not prepared to accept, Zhang said.
A FEW PIONEERS
Whatever happens to the CDM, China's 20 or so environmental exchanges are hoping government commitments to reduce CO2 will boost their own voluntary trading schemes and eventually put them at the centre of a single global market.
So far, Chinese voluntary emissions trading has remained negligible, with no compelling reasons to participate.
"I think they have explored all options and tried their best but the regulatory system is the major problem -- you cannot rely on a few pioneers," said Allan Zhang, director of sustainable business solutions at PriceWaterhouseCoopers in Beijing.
A compulsory, not piecemeal, scheme was also crucial.
The China Beijing Environmental Exchange (CBEEX) could benefit most if firms were forced to buy CO2 credits. Its general manager, Mei Dewen, said it was now a matter of preparation.
Mandatory "cap and trade" schemes might still be some way away, but the issue of pre-compliance -- buying carbon credits now in order to meet binding targets imposed in the future -- could still drive domestic buyers, he said.
"Cap and trade is the Ferrari," Mei told Reuters in June. "We are now just driving a tractor, but things could change -- if you can't drive the tractor then you won't be able to drive the Ferrari." ($1 = 6.778 Yuan) (Editing by David Fogarty)
