When it comes to learning about emissions trading, China has had a leg up.
The world's leading emitter of greenhouse gases has spent 15 years
scouting the globe to learn from the mistakes of other nations and find
the best ways to build a trading system of its own, which could become
the world's largest.
One of China's earliest mentors was Dan Dudek, an agricultural
economist and vice president of the Environmental Defense Fund (EDF)
who, early in his career, got into an argument with its president, Fred
Krupp, over whether China might be a big piece of the puzzle the group
was exploring: Was there a way to use economics, rather than politics
and regulations, to shift the world's businesses away from polluting the
environment toward protecting it and to reward low-cost innovations
that do that?
Dudek wanted to introduce a market-based system to protect scarce
resources that he'd seen debated in California, where for decades
disputes over water rights were settled by legal and political fights.
The winners were usually farmers and ranchers who lobbied the government
to dam the state's remaining wild rivers to irrigate more crops on dry
land. Once they'd won the fight, Dudek recalled, it was "use it or lose
it." He felt the government should be encouraging people to find ways to
save water.
As Dudek sometimes puts it, "the status quo is a vicious competitor."
In 1985, Dudek, who had watched this battle as a U.S. Department of
Agriculture economist and later as a professor at the University of
Massachusetts, Amherst, joined EDF, the one group he felt might listen
to his grand scheme to protect the environment.
The best place to do it was in China, Dudek urged Krupp, and the
resource in the most trouble there was not water, but air. Dudek noted
that China's economy was exploding, and air pollution in its major
cities was going to become a major health problem. He told Krupp he
wanted to go China to get the government to explore using economic
markets to provide incentives to reduce air pollution.
Krupp, a lawyer, was interested in economics, but he found the idea
of sending his chief economist to China to be mind-boggling. China ran
its economy on five-year plans, not Western-style economics. But Dudek
kept pushing and eventually managed to wear his boss down. He made his
first trip to China for EDF in 1991. He found government experts there
curious about a new U.S. approach to use economics to help curb
widespread damage from acid rain. That had started with an EDF project.
Since then, Dudek has made over 150 trips to China. He hired a staff
of Chinese nationals to run Beijing's EDF office and has worked with
Chinese experts in every province. Some of those who worked with him in
the early days have helped China navigate enormous shifts in its
environmental planning. They include Xie Zhenhua, currently China's top
climate change negotiator and one of the architects of China's national
climate change mitigation system, based on economic incentives, which is
slated to be unveiled next year.
Data drought a handicap for some, a boon for others
China has announced that in 2017, it will launch a national
cap-and-trade program involving six of its largest carbon-emitting
industrial sectors, beginning with coal-fired power generation. The
effort borrows ideas from the U.S. acid rain program and has learned
lessons from the European Union and also from California's efforts to
put an economywide cap on its greenhouse gas emissions.
Some of China's lessons have come from pilot programs where
governments and companies have tinkered with cap and trade in two
provinces and five cities. In the West, cap and trade has required
governments to locate the major sources of emissions, measure their
output and issue allowances that amount to a right to pollute a certain
level of greenhouse gases. Companies that innovate and reduce their
emissions below the government cap can sell their excess allowances to
companies that don't.
In the East, particularly in China's planning-driven economy,
innovators have had to confront some fundamental obstacles that don't
exist in the West. They include a deep-seated bureaucratic skepticism
about using markets and a lack of basic data to measure and track
pollution.
According to A. Denny Ellerman, a retired Massachusetts Institute of
Technology economist who has followed both Europe and China's programs,
companies in China's command-based economy had established no measure of
the heating efficiency of various types of coal.
"It was just a pile of black sludge they dumped at your plant," he said.
As it shifted its main environmental focus to climate change, China
also generated some spectacular homegrown mistakes to learn from. It
trained a large number of emissions trading consultants, who quickly
figured out that there was big money to be had from a lack of data,
loose market rules and the United Nations' "flexible mechanism" intended
to help draw developing countries, like China, India and Brazil, into
emissions trading.
It was called the Clean Development Mechanism (CDM), introduced into
the United Nations' Kyoto Protocol by the Clinton administration, and it
allowed industrial nations to buy and use credits from poorer nations
that had found ways to radically reduce emissions.
By 2008, China was raking in billions of dollars by selling credits
from one of these schemes, launched by companies that incinerated a gas
called HFC-23. The gas—over 11,000 times more powerful as a global
warmer than carbon dioxide—was a byproduct of making a refrigerant
called HCFC-22. HFC-23, normally vented into the atmosphere, could be
quickly and cheaply destroyed by incineration. Interestingly, the
normally predictable market growth for the refrigerant in China suddenly
shot up.
Creating order out of HFC trading chaos
Eleven Chinese companies emerged as the world's most aggressive
HFC-23 incinerators, and, under the Kyoto treaty, they could be used to
offset the need for more expensive allowances needed to meet caps
imposed by the European Union on their companies. So Europe's leading
power and steel plants soon became addicted to buying them.
The practice diluted the waning power of market forces in Europe to
clean up local emissions problems. Environmental groups complained that
the Chinese companies were manufacturing a dangerous pollutant to solve a
pollution problem. After the United Nations rejected the idea that
fraud might be involved, the European Union banned such trading in
January 2011.
The result was financial chaos among China's thousands of
"matchmakers," consultants who linked HFC-23 sellers with European
buyers. By 2010, the Europeans were breaking their contracts, sending
some Chinese firms into bankruptcy.
"In many cases, these individuals were honest brokers, and in many
cases, though, they were given every incentive to be loose about it,"
explained Valerie Karplus, an MIT economist who has studied China's
early trading along with a team of experts from China's prestigious
Tsinghua University.
Before the HFC-23 trades collapsed, China used them to dominate over
half of the lucrative international CDM trades, involving hundreds of
billions of dollars. China's leaders valiantly defended them until
January 2013, when a more urgent political cause intervened. China's
most severe air pollution episode, later dubbed "airpocalypse," darkened
the skies over Beijing and other major cities, provoking a huge public
health outrage. One upshot was a new system of measuring health dangers
culminating in a "red alert."
More serious efforts to build a national cap-and-trade program got
underway, with China pushing its carbon traders to refocus their efforts
on cleaning up pollution at home.
Karplus thinks the incident helped China learn some valuable lessons
about the power and weaknesses of running markets. The new national
trading system that is expected to emerge along with a national
emissions cap as early as next year will include tighter controls on
traders and speculators.
"It's not just like they're going to flop a market on top of the old
system," Karplus explains. "There's a lot of caution built into the way
this system is being designed."
But some of China's basic data problems remain. It burns more coal
than it reports, and local authorities keep approving new coal-fired
power plants, despite the downturn in the nation's economy, because they
provide jobs.
Karplus, who began her visits to China in 2002, found that old
command-and-control systems were having trouble figuring out why
companies in some parts of China could reduce emissions cheaply and
companies in other provinces couldn't. If some companies were breaking
the rules, it was becoming increasingly expensive for central planners
to spot them.
But she also found cadres of younger scientists who had earlier
worked with EDF and U.S. EPA in setting up China's acid rain program who
saw this as a problem that could be resolved by markets that crossed
provincial borders.
"This was a big difference. Now they're into the nitty-gritty," she
explained. New measurements were implemented that exposed the moisture
content of coal. That helped the market-watchers track which companies
were being efficient and which ones weren't. "There has been a real
evolution in thinking," Karplus concluded.
China turns the tables on Congress
Henry Jacoby, a professor of applied economics at MIT, warns
outsiders not to expect miracles, but he thinks central planners are
beginning to ask the right questions. Running their economy is no longer
just a matter of maintaining control.
"China is a complicated place. You need to know how things actually
work in the provinces," he said. One of the reasons for using more
market tools, Jacoby thinks, is that "they're trying to use this to get
under control some of the big old rust-bucket industries they've got."
Dudek of EDF, who has devoted a major part of his career to
encouraging China to use markets to find ways to reduce energy needs,
remains optimistic that it has become painfully aware of the limits of
regulations.
"It's really difficult telling people what they must do at individual
locations," he said. Dudek thinks it would take some 20,000 planners, a
virtual army of government engineers, to sit down and "figure out, 'OK,
what's the best control technology for every [greenhouse gas] source
category?'"
He says there is now "a lot of design work" underway to structure
markets to reveal that. There is also a lot of local tinkering going on
so Chinese companies can find the answers themselves. Local governments
have begun to look at major energy waste by small businesses, such as
companies in China's sprawling textile industry.
That inspired Gan Weiming, the head of a small factory in the city of
Shaoxing, to buy a machine to capture the heat from wastewater and
recycle it into the dyeing process. It sharply cut the need for steam,
paying for itself in one year. Then Gan enrolled in a government course
in energy efficiency and sent company engineers to find more paths to
energy savings (ClimateWire, March 23).
On Sept. 25, 2015, China's president took his most ambitious step by
going to the United States—a nation that may still be years away from
creating a carbon market—and announcing China's national cap-and-trade
program.
That day, Dudek enjoyed a moment of quiet satisfaction. "The irony of
President Xi Jinping standing up in the White House and announcing the
policy is just too rich," he said.
Source: scientificamerican.com