China’s experiment with cap and trade

by on August 10, 2013 at 10:11 am in Law, Uncategorized | Permalink

Dirk Forrister and Paul Bledsoe report from the NYT:

China, the world’s largest emitter of carbon dioxide, has begun its effort in the southern city of Shenzhen, paving the way for a national Chinese market in a few years. Like Europe, which voted to extend and improve its emissions market, and Australia and New Zealand, Shenzhen chose a carbon market as the most efficient way to lower its greenhouse gas emissions.

Under the Shenzhen program, the government will set limits on carbon dioxide discharges for 635 industrial companies and 197 public buildings that together account for about 40 percent of the city’s emissions. Polluters whose emissions fall below the limit can sell the difference in the form of pollution allowances to other polluters. These companies must decide whether it is cheaper to reduce emissions or pollute above their limit by buying allowances, whose price will be set by supply and demand. But the pressure will be on, because the limits will decrease over time. Six more regional pilot programs are planned over the next year.

This piece offers some further details, including this:

The caps require the emitters to collectively cut their carbon intensity by 6.7 per cent a year between this year and 2015.

After reading multiple sources, however, it seems that all these numbers involve fudges.  And over the longer run the cap is defined relative to gdp:

Beijing has not agreed to binding caps on its emission volumes, but has set a target to cut emission intensity – carbon emissions per unit of gross domestic product – by 40 to 45 per cent by 2020 from the 2005 level.

Here is further analysis from The Economist, which reckons that actual binding carbon caps will take ten years to evolve.  This will be one good way to study whether these regimes are time consistent, noting that Europe’s regime has been in place for about ten years and still doesn’t work.

1 Enrique August 10, 2013 at 11:00 am

My understanding about the European cap and trade market is that too many carbon credits were allocated … Hopefully, though, these markets will evolve and prove successful over time

2 David K August 10, 2013 at 11:10 am

I fail to see how European cap and trade “doesn’t work”. You set an acceptable path of carbon, give everyone permits, and let the market allocate. People will set the price of permits at the level that makes them indifferent between polluting more and keeping the permit cost. If people choose not to pollute rather than purchasing permits from others to do so, even at low prices, doesn’t that just mean that the cost of keeping pollution on its target path was lower than we thought, and demand for pollution more elastic? All should rejoice!

I could imagine a failure, if, for instance, the-powers-that-be were convinced to let people pollute more than their allowed permits or expand the number of permits or some such, but as far as I know the pollution targets are still on track.

3 Dylan August 10, 2013 at 12:20 pm

“Acceptable path of carbon” is where the European scheme doesn’t work.

4 Chris August 10, 2013 at 11:22 am

Who wrote that article. The main premise is that “more than a million people in China [die] prematurely each year from breathing its dirty air.” Limiting carbon dioxide emissions will do absolutely nothing to address this.

5 Therapsid August 10, 2013 at 11:59 am

Contemporary environmentalists suppress the distinction between carbon dioxide and particulate pollution because of their myopic focus on climate change, despite the fact that the former is responsible for far more death and injury.

6 Willitts August 10, 2013 at 1:22 pm

Particulates are dangerous, but invisible gases such as carbon monoxide cause most of the health problems, Los Angeles and Denver being the most conspicuous examples of the “brown cloud.” Geography and weather contribute to the problem of emissions by trapping them over the sources. The visible portion is mostly road dust. The brown cloud does show where the invisible gasses are because the visible and invisible are coincidental.

You are correct that CO2 is not a health hazardous gas at those concentrations. If CO2 is a global problem, then local efforts are doomed to failure. The inefficiency of voluntary provision of public goods is well known.

7 TallDave August 10, 2013 at 11:40 pm

Environmentalism has been forced to morph into something more resembling a generalized anti-industrialism, since air and water in the West is already the cleanest civilization has ever enjoyed. I think what it achieved was awesome in its way, and a lot of what they do is still certainly very useful, but a movement wants a cause…

8 The Anti-Gnostic August 11, 2013 at 8:58 am

Powerful financial interests are aligned with moving factories to areas where labor is cheap, moving cheap labor to non-tradable domestic sectors, increasing consumption levels in Third World population groups, and resource extraction from previously virgin areas. With 7.1 billion people on the globe, there’s really no room left for environmentalism. At best, we just cordon off a few areas for some bourgeois to go camping in.

The environmentalists recognize this, many have been complicit in it all along, so they’ve moved on from hard, gritty things like land stewardship and species management to vague, incorporeal concepts like ‘climate change,’ which is basically just a cover for transfer payments and rent-seeking at this point. Absolutely no ‘environmentalism’ is going on here.

9 Tom T. August 10, 2013 at 11:47 am

Surely the Chinese government would not fudge official numbers?

10 Willitts August 10, 2013 at 1:15 pm

I used to be a proponent of cap and trade until I realized that a poorly-set cap would only result in convergence to an inefficient allocation of resources. The cap itself would be subject to rent seeking, and enforcement would be subject torent seeking, capture, regulatory arb, and more blatant forms of corruption.

China is not the least bit serious about the environment. Like most leftists they prefer to be admired for helping the environment rather than actually doing so. And regulation there is subject to all the corrupting influences I stated above and with less transparency than here, if you can believe it.

11 TallDave August 10, 2013 at 11:17 pm

Did they stop building coal plants? This seems like an awfully small fig leaf…

12 Dan Cole August 11, 2013 at 8:05 pm

Why would anyone suppose that a market-based approach to pollution control will work better in China than it did in other socialist economies before the fall of communism in Eastern Europe? In the 1980s, Poland had the world’s most extensive system of environmental taxes, fees, and fines, which had virtually no effect on state-owned polluters that were completely insulated from market pressures because of endemic soft-budget constraints. Their “profitability” depended exclusively on meeting planned production targets. The same is true of state-owned enterprises in China today, which are responsible for the lion’s share of pollution and which have been completely unresponsive so far to China’s existing system of environmental fees and fines. Why should we expect them to be any more responsive to a cap-and-trade system? Does anyone truly believe the Chinese governments (including regional governments, where officials have incentives only to maximize production) will strictly enforce quota-limits, even if those limits would result in economic production?

Those who have promoted the use of market-based instruments for controlling pollution in China’s non-market economy are disingenuous, grossly over-optimistic, and/or never read Janos Kornai.

Dan Cole

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