Markets working to support sustainable development

China: carrots and sticks for a low-carbon transition

06 Jul 2015

In a critical time for climate action, the world is looking at China’s policies and plans to cut carbon emissions and curb pollution. On a global scale, China has been responsible for around 8 percent of historical global emissions (with the U.S sitting around 20 percent). Pollution is a constant cause of domestic unrest and severe health problems, with industrial-induced fog blanketing many Chinese cities. In the lead up to the Paris climate talks, China has committed to reduce the carbon intensity of its economy by 65% by 2030, alongside a peak in greenhouse gas (GHG) emissions by 2030 at the latest. To match this ambition, there is an appetite for new mechanisms that incentivise sustainable markets, alongside reform of existing mechanisms.  

New business incentives for renewable energy

In forging a renewable energy economy, China is changing tack on low-carbon innovation. Traditionally the low-carbon sector has been stimulated by subsidies for research and development in large companies and universities. Demand-side policies such as feed-in tariffs or standards in technology are starting to be utilised. For example, Chinese businesses are embracing environmental certification. Globally, over a third of the 300,000 businesses following the ISO 140001 standard are located in China. However, greater reform is needed. Researchers from both Harvard and Tsinghua University have argued for a shift of subsidies away from large established companies to targeted interventions for small and medium size enterprises (SMEs).

Wind farm in Gansu province, China. Source: Wikipedia

Carbon pricing roll-out

One of the biggest leaps in developing incentives for industry to reduce their GHG emissions has been the roll-out of carbon pricing. There are currently seven pilot cap-and-trade programmes in China; in five provinces and two cities. Analysts have expressed concern over whether penalties for non-compliance are adequate under the existing trading schemes. Some of the pilots contain 'maximum penalties' which once reached by a business negated any incentive to comply at all. However, in a positive step, Chinese Commercial Banks have made considerable loans to firms trading on the carbon pricing pilots. A national expansion of carbon trading is planned to cover the country by 2020. At first, permits will be dispensed to companies for free, but eventually a charge will be imposed on the bulk of permits. Furthermore, for every tonne of carbon that companies fail to submit a permit for, there will be fines of 300 Yuan ($48.50). Some control will be given to regional government, with officials able to strengthen schemes in their province, by including more sectors or allowing fewer permits. 

A renewed war on pollution

To combat pollution, China's State Council has recently proposed levies on air and water pollution and solid waste.  These would replace a system of voluntary pollution fees which have been sporadically collected since their 1982 inception.  Senior Chinese officials, like Jia Kang, Head of the Ministry of Finance's Research Institute for Fiscal Science, have made the case for environmental taxes. Jia argued that: “relying on traditional administrative interventions is clearly no longer adequate”.  Questions remain over how the environmental taxes would work. These include: whether the income will go to environmental protection; if the still-to-be-set rate will be high enough to incentivise pollution reduction; and whether there should be differing rates imposed on certain GHGs, for example methane compared to carbon dioxide or nitrous oxide. 

While many details are still to be confirmed, China is clearly both scaling its ambition and changing its approach to a more nuanced and comprehensive package of environmental laws and market incentives.