If China Can Do It, Why Not Us? Carbon Pricing and Cooperation on Climate Change

September 28, 2015
Rachel Cleetus
Policy Director

Last Thursday night news broke of the impending announcement of a national cap-and-trade program for carbon in China, as part of a U.S.-China joint climate announcement. This market-based approach, pioneered in the U.S. with the sulfur dioxide trading program, has clearly come to be seen as an essential policy tool to combat climate change, increasingly embraced by countries, policymakers, and global business leaders of all political persuasions.

Carbon pricing: Innovation without borders

The 1990 Clean Air Act Amendments that established the Acid Rain program to limit emissions of sulfur dioxide (SO2) and nitrogen oxides was a milestone for market-based environmental policies. It led to the creation of the SO2 trading program, which has helped cut those emissions at a lower cost than many had envisioned at the start of the program. The experience with this program also provides critical lessons on the importance of good policy design that can help inform future policies. (For example, the need for updating emissions caps to reflect the latest science and declining technology costs.)

Since then, cap-and-trade systems have been successfully established in Europe (the EU ETS), California (via AB32), and the nine Northeast RGGI states, among other places. Many other places, including the Canadian province of British Columbia, have a carbon tax or plan to implement one. In fact, a recently-released report from the World Bank and Ecofys states that:

Currently, about 40 national jurisdictions and over 20 cities, states, and regions—representing almost a quarter of global greenhouse gas (GHG) emissions—are putting a price on carbon.

Credit: Ecofys and World Bank.

Credit: Ecofys and World Bank.

As with all policies, good policy design is critical to the success of a carbon price, whether it takes the form of a tax or a cap-and-trade program. Along the way, we’ve learnt a lot about how to design a carbon pricing policy to address a range of issues including equity concerns, transition assistance for workers, smart use of carbon revenues, science-based targets, and robust monitoring and verification protocols. These lessons can help inform future programs, or updates to existing ones.

Taking China’s pilot cap-and-trade programs to the national level

Starting in 2013, China began to pilot carbon cap-and-trade programs at the sub-national level. The pilot programs now extend to six cities (Beijing, Chongqing, Hangzhou, Shanghai, Shenzhen, and Tianjin) and two provinces (Guangdong and Hubei). The experiment has had some encouraging results, and (together with lessons from the EU ETS, California, RGGI, and other carbon trading regimes) provide the real-world experience needed to design a national system to limit emissions in a cost-effective way. China’s INDC announced earlier this year signaled the country’s intention to use carbon pricing to help meet its goal of peaking CO2 emissions by 2030, if not earlier.

China’s work on carbon pricing and cutting pollution has included dialog with the EPA and with the state of California. There are clearly a number of details that still need to be figured out, and opportunities to improve upon the pilot cap-and- trade programs. But the significance of China’s announcement that a national cap-and-trade program will be launched in 2017, along with other measures, cannot be underestimated.

The U.S.-China Joint Climate Announcement

Friday’s joint climate announcement from two of the world’s leading carbon emitters and economic powerhouses signals an opportunity for a real breakthrough at the international climate negotiations in Paris this December. It has three major elements:

  1. A shared vision for the outcome at Paris, reaffirming a commitment to the 2°C climate goal, the principle of common but differentiated responsibilities, and the need for mobilizing finance and technology to enable the transition to a low-carbon, resilient global economy.
  2. Domestic policies to cut emissions. Building on the announcement the two countries made last November, the latest announcement detailed steps each country would take to implement emissions-reduction policies. For the United States, this includes the Clean Power Plan to cut power sector emissions 32% below 2005 levels by 2030; efficiency standards for heavy duty vehicles; methane standards and limits on HFCs. For China this includes a national cap-and-trade program launched in 2017 to cut power sector and industrial carbon emissions; green power dispatch to prioritize renewable energy; vehicle efficiency standards, building efficiency standards; increasing its forest stock; and limits on HFCs.
  3. Efforts to enhance bilateral and multilateral cooperation on climate change. A striking element of this was the announcement that China would contribute ¥20 billion (equivalent to $3.14 billion) for setting up the China South-South Climate Cooperation Fund to support climate action in other developing countries. This is on par with the $3 billion that the U.S. has committed to the Green Climate Fund. Other elements include an initiative to cut emissions in cities; and a commitment that China will work to limit public financing of high carbon projects domestically and internationally (somewhat analogous to the 2013 announcement from the U.S. to stop its public funding of new coal-fired power plants in all but the poorest countries, although the details of China’s effort still need to be worked out).

Global cooperation is the key to success on climate

Last week was a momentous one for climate action, book-ended by the Pope’s address to Congress and the joint climate announcement from Presidents Obama and Xi. The economist in me cannot help but wonder: If China can do it, why not the U.S.? It’s time for a national price on carbon in the country that invented the concept.

For those of us who have been working to advance climate policy for years, the many encouraging commitments from an array of countries creates genuine hope that perhaps, finally, the world will come together to do the right thing—starting with a strong global climate agreement in Paris. There is obviously much more that needs to be done to limit climate change and its impacts on people and our planet.