China's grand plan

With a carbon price back on the agenda in the Gillard government's year of decision, similar momentum has been building within China as it prepares for its next five-year plan.

Early proposals for the 2011-2015 development plan, to be launched at next month's National People's Congress, included the promising statement that China "will gradually establish a carbon emissions trading market." There have been various other hints: Xie Zhenhua, vice chairman of the National Development and Reform Commission, stated last August that "setting up carbon exchange centres is the way we must go."

As part of China's long-term economic strategy, this makes good sense. All indications are that China has placed the low-carbon economy at the centre of its growth plans for the 21^st Century. This is exemplified by its intention, announced in 2009, to slash its carbon intensity per unit GDP by 40-45 per cent by 2020, compared with 2005 levels (a target that goes beyond what Garnaut's 2008 Review identified as China's fair share). A carbon price could well prove to be one of the primary instruments used to meet this ambition.

Those in support of carbon trading hope that it will be a more efficient mechanism than the previous administrative approach utilised under the previous five-year plan. This approach imposed different energy intensity targets upon different provinces, and directly shut down plants identified as inefficient – which has resulted in uneven impacts on GDP and job losses within sectors and between provinces. If carbon trading can help China meet its energy efficiency goals in a more politically popular and less disruptive way, it will move forward.

China's interest has also been driven by its positive experience with the Clean Development Mechanism. China is the source of 51 per cent of tradable certified emissions reductions (CERs) issued globally, the sale of which have provided almost $US1 billion in funds to invest in clean technology projects.

Market solutions have also seen some success domestically, in other areas such water management, demonstrating their potential for efficiency. 

To inform its approach, China has been examining the pros and cons of both sector-specific and economy-wide carbon markets, looking at the experiences of other nations. The EU's experiences with its ETS (encompassing 30 nations) have been of particular interest, shared in recent workshops in Beijing by the European Commission and China's National Development and Reform Commission, as well as by The Climate Group.

The expectation is that various carbon market pilot projects will be established to evaluate a range of different approaches. These are likely to take place in three areas of the economy:

– Low-carbon pilot regions, including Guangdong province's proposal to establish a regional trading platform pilot program amongst 11 of its cities;

– Energy-intensive industry sectors like electricity, chemicals and oil – starting with electricity; and;

– State-owned enterprises.

China already has some of the necessary infrastructure in place, including third-party verification for measuring energy consumption and over 20 environmental exchanges across the nation – but establishing a carbon market will not be without its challenges.

Three primary adjustments will need to take place before a fully functioning carbon market can succeed in China.

Firstly, electricity price reform must see the currently government-influenced prices for electricity, and its inputs such as coal and gas, replaced by an energy market that can better allow power generators to capture the value of energy efficiency and low-carbon fuels.

Secondly, China faces limits to administrative capacity and a lack of experience in implementing complex market systems. Aware of this challenge, China's financial institutions, exchanges and electricity market regulators are actively building capacity through research and information sharing.

Finally, data collection, monitoring and reporting need to be strengthened to ensure emissions and transactions are verifiable. Progress on emissions verification in COP 16 in Cancun was promising and, at the UN climate talks in Tianjin last October, China stated that it was working on a new publicly available national greenhouse emissions database.

Given the scale of its investments in clean and renewable technology to date, China has already signalled its intention to develop its economy along a low-carbon path. Should plans for a carbon price materialise this March, it will be yet another sign that China is committed to an economic and industrial evolution into the world's clean technology powerhouse.

Changhua Wu is greater China director of The Climate Group.