China to Launch National Pollution-Trading System to Cut Emissions

Will a Cap-and-Trade Agreement Slow China's Economy?
  • Joint announcement intended to push forward UN climate talks
  • Market to cover power, iron, steel, cement industries

China will start a national pollution-trading system to cut global warming emissions, and make a 20 billion yuan ($3.1 billion) commitment to help poorer countries move away from fossil fuels.

China also is announcing changes intended to favor electricity produced by sources that will pollute less, according to a joint statement between the U.S. and China issued Friday to coincide with Chinese President Xi Jinping’s state visit to the White House.

“I want to commend China for announcing that it will begin a national market-based cap and trade system to limit emissions from some of its largest sectors,” President Barack Obama said during a news conference Friday with the Chinese leader.

The two presidents discussed the challenges of climate change during a private dinner on Thursday night, Obama said, and spent Friday morning in a series of Oval Office meetings. Leaders of the two largest economies are using the announcement as a way to prod talks on a global agreement to stem climate change.

Xi said the U.S. and China are working together “to push the Paris climate change conference to produce important progress.” Obama said that “when the world’s two largest economies, energy consumers and carbon emitters come together like this, there’s no reason” for other countries not to follow.

“This announcement is another sign of the continued leadership of China and the United States on climate action,” Fred Krupp, president of the Environmental Defense Fund, said in a statement. “Their partnership is necessary to solve the global challenge of climate change.”

Financial Incentives

China has also agreed to limit public financing of infrastructure projects across the globe which feature high pollution and carbon emissions. And the two countries said they would implement new fuel efficiency standards for heavy-duty vehicles by 2019.

The measures are a follow-up to a 2014 announcement, made when Obama and Xi met in Beijing, in which China and the U.S., the world’s No. 1 and 2 greenhouse polluters, jointly promised to limit their emissions.

That agreement injected new life into United Nations-sponsored climate talks. Those negotiations are barreling toward a conclusion in Paris in December, where envoys from more than 190 countries are expected to gather. In a bid to give momentum to those talks, Obama and Xi also outlined a series of shared principles they want to see in the final deal.

“Having the two largest emitters committing to increased action and also providing at least some clarity on the key issues for Paris really does help pave the path for a strong agreement,” David Waskow, director of the World Resources Institute’s international climate initiative, said by phone.

Pilot Programs

At the moment, China’s economy is still largely driven by fossil fuels. Even as policy makers push aggressively to develop cleaner sources of energy, coal still accounts for about 64 percent of the nation’s primary energy, according to National Energy Administration data.

China’s emissions trading system would expand on seven pilot programs already operating in the country. The national market would open in 2017 and would cover industries including power generation, iron and steel, chemicals, building materials including cement, paper-making, and non-ferrous metals.

“According to our tracking, a lot of provinces haven’t made a lot of progress on this front yet,” said Sophie Lu, an analyst at Bloomberg New Energy Finance in Beijing. “If President Xi commits China to a 2017 start date, then he will effectively be lighting a fire under the seats of provincial governments who still need to complete carbon inventories.”

Such systems typically put a cap on total emissions and then allow factories, power stations and other sources to buy and sell pollution credits. Proponents say the market encourages innovation and lowers the cost of reducing pollution.

Carbon Prices

For more, read this QuickTake: The Cost of Carbon

“Expanding a nationwide price on carbon is an important step to help China deliver its climate targets and shift away from coal and towards renewables,” Li Shuo, a Beijing-based policy officer at Greenpeace, said in a statement. “In addition, it will place pressure on the U.S. to implement similar measures.”

China’s climate finance commission slightly exceeds the $3 billion in U.S. support pledged in 2014 by Obama to the UN-organized Green Climate Fund. The money has been a key demand of developing nations who say they can’t agree to avoid cheaper but more polluting fossil fuels without financing from richer nations.

In their joint announcement in December, the U.S. promised to cut greenhouse pollution by more than a quarter over the next decade. China pledged its emissions would reach a peak by about 2030 and to boost its use of renewable energy.

To cut its reliance on coal, China is aiming to derive 20 percent of its energy from renewables and nuclear by 2030, almost double the current share.

“This is part of a growing effort to shift from high-carbon investments to low-carbon ones,” the WRI’s Waskow said. “With the falling price of renewable energy, what we’re seeing internationally is that making that shift in fact makes a lot of economic sense in many places.”

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