The cap doesn’t fit

The economist.

ON JUNE 18th, China became the latest and largest country to trade carbon emissions. The southern city of Shenzhen started a pilot emissions-trading scheme (ETS), the first of seven citywide and provincial carbon markets which, when all up and running, will constitute the second-largest in the world, after Europe’s.

China needs to cut emissions. It also needs to shift from command-and-control limits on pollution to market-based ones, like an ETS. So on the face of it the idea is fine. But the actual pilot looks like charade.

An ETS is a kind of cap-and-trade scheme: a country caps the amount of carbon emissions and then trades permits to emit up to that amount. But China has no carbon cap. Its big, powerful polluters have vetoed the idea. So how can it have a cap-and-trade scheme?

Answer: it sets a target for carbon emissions, per unit of GDP. The 635 companies covered by the Shenzhen scheme (including PetroChina and Huawei, a giant electronics firm) will get allocations of roughly 100m tonnes of carbon in the next three years, which would represent a 30% cut in emissions per unit of output. But the exact amount will depend on their production of goods and services, so there will have to be adjustments at the end of trading. That sounds dodgy enough. To make matters worse, reckons Thomson Reuters Point Carbon, a firm of analysts, the 100m allocation is 10m more than the firms were already likely to emit between 2013 and 2015, so the market will be awash with redundant permits. (This is the same problem that has sunk Europe’s ETS).

The real point of the idea though is not apparent at first sight. It is to introduce a real carbon cap, in stages. The first step came in the period of 2006 to 2010 (the 11th five-year plan), with the introduction of a cap on coal output. From 2011 to 2015 we get the pilot ETS and a cap on total energy consumption. Then in the period from 2016 to 2020 there should be an absolute carbon cap (not just per unit of output), which would pave the way for a proper national ETS, to emerge between 2021 and 2025. In all it would take ten years. But that would not be bad. Europe’s scheme is almost ten years old—and still isn’t working.