Editor’s Note: This is the third part of a four-part series we will be publishing in the coming weeks reviewing some of the important developments in the field of sustainability in 2016. We focus here on the creation of two new emission trading schemes (ETS). The first is in China and represents a serious attempt by the world’s largest emitter to combat their carbon emissions. The second is an attempt by the global aviation industry to combat carbon emissions in one of the most carbon intensive transport sectors on the planet. Both represent major steps forward for ETS and the fight against climate change. Part 1 of this series can be seen here and Part 2 here.
2016 was a year of promise for market-based mechanisms for sustainable development. Two big plans were put on the table last year: (1) the start of China’s national carbon trading market and (2) a global market-based mechanism for the aviation industry.
One of the most common market-based measures for controlling pollution is an emissions trading scheme (ETS), which is a market for the sale and purchase of emission allowances of greenhouse gases (GHGs). While the European Union holds the title for the largest ETS in the world, that may soon change. If the ETS that China proposes becomes a reality, then it will be twice the size of the EU’s. President Xi Jingping made renewed commitments to establishing an ETS in China’s Nationally Determined Contribution submitted on January 19, 2016. According to that document, all of China’s major industries are to be included into the ETS: power, petrochemicals, chemicals, iron and steel, non-ferrous metals, building production materials, pulp and paper, and aviation.
Later, on March 16, 2016, China’s 13th Five-year plan (FYP) (2016-2020) was enacted with 97.27% approval by lawmakers during the annual National People’s Congress. Framed as the next step in China’s development process, the 13th FYP makes a shift away from high emission industries and manufacturing and towards consumption and services. One of the five guiding principles of the FYP is green development, which contains measures in pollution response, resource efficiency, and energy transitions.
As countermeasures to the high emissions of its industrial sector, the FYP includes plans to create a national monitoring system as well as operationalize a permit system that regulates not only emissions (ETS), but also water and energy usage. The FYP also includes, for the first time since five-year planning began, the mandatory reduction of volatile organic compounds (VOCs), which is a compound released as a result of combustion in industrial processes. In addition to policies to reduce wasteful use, the FYP also lays out plans for forest and genetic conservation as well as biodiversity. The State will also continue promoting the transition away from fossil fuels through improving infrastructure, raising energy conservation standards, and investing USD 6.6 trillion in the development of low carbon technology and renewable energies.
Jeffrey Sachs, the Special Advisory to former Secretary-General Ban Ki-moon on the Sustainable Development Goals (SDGs), believes that the 13th FYP and the SDGs are highly aligned. Yet while the overall framework may build off of the SDGs, whether they materialize is yet to be seen. Government reports at the end of 2016 stated that the FYP was “off to a strong start”, identifying a 5.2% drop in energy intensity per unit of GDP and a decrease in coal consumption by 2% after the FYP took effect. If China is to meet its goals, estimates show that energy intensity per unit of GDP will have to show annual falls of 15% and in carbon intensity by 18%, meaning that the challenge lies ahead.
With regard to the ETS, while China announced that it would operationalize its system in the 12th Five-Year Plan (2011-2015) and started several pilot projects, creation of a national system was pushed into the 13th Five-Year Plan (2016-2020) and then delayed from 2016 to 2017. While there are a number of reasons behind that delay, two major holdbacks include enforcement and allocation. Since carbon caps have to be enforced on both national and provincial levels, provincial administrators may lose negotiating power in deciding their contributions to the NDC. Furthermore, the State will undoubtedly face considerable administrative requirements to ensure compliance. In terms of allocation, the China ETS is learning from the EU ETS’ experience with over-allocation of emission permits, which caused considerable surpluses in Europe. Excessive surpluses in emission allowances can cause market prices for those permits to drop significantly, which was one of the major problems behind Europe’s ETS. China will have to gauge very carefully its allocation of permits, learning from the over-allocation that occurred in its pilot programs.
Meanwhile, while the European Commission has been attempting to confront many of the issues ensnaring its ETS, its methods spurred criticism from the start of 2016. For instance, the EU announced the creation of a market stability reserve (MSR) of permits in 2015 to come into operation in 2019 to respond to the large surplus of emission permits. The MSR withdraws a percentage of that surplus and puts it into a reserve when the surplus surpasses a certain threshold. When additional permits are needed, they are taken from the reserve and then injected into circulation. While the European Commission believes that this measure is sufficient and does not plan to take further action until 2020, France and the United Kingdom have voiced opposing opinions.
While the Chinese ETS underwent delay and the European ETS awaits further reform, a positive development in market-based mechanisms in 2016 has been the Carbon Offsetting and reduction Scheme for International Aviation (CORSIA). Operated by the International Civil Aviation Organization (ICAO), CORSIA sets out a phase-based scheme for airline operators to pursue carbon-neutral growth. Airline operators account for their emissions through standardized emissions units and then attempts to offset those emissions through the acquisition of emission units from another sector. In this way, the airline operator may nullify its total emissions by purchasing emission units from progress in carbon-neutral growth elsewhere. While participation in the CORSIA during its pilot (2021-2023) and first (2024-2026) phases is voluntary, currently 66 States, accounting for 86.5% of international aviation, signaled their intention to voluntarily participate.
Emissions trading schemes are broadly popular among economists as a method of combating climate change. That popularity is based in part on the numerous examples of successful trading schemes in the past (for example, the SO2 trading program in the United States). Because of that popularity, and success rate, there have been numerous attempts to create trading schemes for CO2. Unfortunately, many of these have been false starts as the political support evaporated (Waxman-Markey) or the scheme was watered down in implementation (New Zealand’s ETS). It is too early to say whether the new schemes we’ve seen in 2016 will be a continuation of this pattern or the start of an era with successful ETS programs. But either way, getting the world’s largest emitter and one of the most carbon intensive industries to take an ETS seriously is a major step forward.
Image courtesy of Flickr. Originally published by S&S on March 22, 2017.