During the Eleventh Five-Year Plan, 2006 2010, the PRC achieved a reduction of about 19.1% in the energy intensity of its economy. Since it relies heavily on coal, the energy intensity reduction in the PRC proportionately reduced carbon emissions. The energy intensity reduction recorded in the eleventh plan was accompanied by an increase in the share of non-fossil fuel sources of energy (i.e., renewable and nuclear) and low-carbon fossil fuel (i.e., natural gas). This energy intensity reduction was achieved primarily through a set of administrative measures that included (i) targeted energy efficiency improvement in the country's largest energy-intensive industries, (ii) incentives for energy efficiency improvements for bulk users, and (iii) phasing out of obsolete and inefficient industrial capacity.
The PRC has committed to reduce its carbon intensity by 40% 45% in 2020 compared with 2005 and to increase the share of non-fossil fuel in the primary energy supply to 15% by 2020. In line with this, the Twelfth Five-Year Plan, 2011 2015 has set targets for reduction in energy intensity (16%) and carbon intensity (17%) by 2015 compared with 2010 and to increase the non-fossil contribution in primary energy supply to 11.8% by 2015 compared with 7.8% in 2009. In addition the twelfth plan set specific targets to improve the urban air quality through emission reduction as some of the urban areas of the PRC are suffering from poor air quality.
While administrative measures achieved substantial energy efficiency savings during the eleventh plan, these measures need to be complemented by more market-oriented approaches to provide economic incentives for emission reduction. One such approach is to enable the trading of emission reductions between enterprises that have obligations for emission reduction. This would provide incentives for emission reduction to be achieved in economic sectors that have the least cost for emission reduction. The government has proposed to pilot test cap-and-trade of carbon dioxide emissions in selected industry sectors and regions during the twelfth plan by establishing provincial emission trading systems (ETSs). The carbon dioxide trading can also provide co-benefits such as reduction in local pollutants. This would improve the urban air quality and will result in indirect socioeconomic benefits in terms of reduction in respiratory diseases.
The emission trading markets have evolved since 2005 in many developed countries with mixed results. The evolving emission trading markets can be broadly classified into cap-and-trade and baseline and credit markets. Both of these market structures transform emission savings into a tradable commodity. When the market participants voluntarily set a cap on their emissions, it is referred to as a voluntary cap-and-trade market, and when a regulator sets a cap on emission from certain economic sectors, it is referred to as a mandatory cap-and-trade market. A cap-and-trade-based market is usually referred to as ETS; the European ETS is the best known mandatory cap-and-trade market.
The baseline and credit and cap-and-trade markets can be linked through offset mechanisms. In offsetting, credits generated through baseline and credit markets, in economic sectors or regions not covered in the cap-and-trade market, are used to offset emissions within the capped regions. The cap-and-trade market regulators usually stipulate the type and quantity of offsets that can be used in lieu of emission allowances. The European ETS (i.e., cap-and-trade market) accepts the certified emission reductions under the Clean Development Mechanism (i.e., baseline and credit market) as an offset subject to certain limitations.
Given the complexities and potential economic impacts of emission trading, the government has decided to pilot test cap-and-trade-based emission trading at the provincial level. This would enable useful lessons to be learned on the challenges of designing a national ETS in a rapidly growing developing economy, as international experience, with respect to emission trading, is limited to more mature moderately growing economies.
Tianjin had been designated a low-carbon city by the government, and has been invited by the National Development and Reform Commission to submit proposals for establishing a pilot ETS (other cities and provinces that were identified for pilot testing ETS are Beijing and Shanghai, Chongqing municipalities, Guangdong and Hubei provinces). TMG has approved the overall plan for establishing the Tianjin emission trading market and formally submitted the proposal to establish a pilot cap-and-trade-based TETS in August 2011. It was proposed that the (i) feasibility study for emission trading would be approved by the National Development and Reform Commission before the end of 2011, (ii) pre-conditions for emission trading would be established by the end of 2012, and (iii) TETS would commence operations in 2013. This would enable the government authorities to gather useful lessons from the TETS to be incorporated in the national ETS, which is expected to be established in 2015.
As a first step toward establishing a carbon market in Tianjin, TMG, in collaboration with Petro China, established the Tianjin Climate Exchange (TCX) in 2008. TCX has undertaken several pioneering initiatives and research studies on carbon markets. These include (i) structuring carbon neutrality products, (ii) attempting to establish a voluntary emission trading mechanism among several industrial establishments, (iii) establishing an electronic trading platform for major pollutants (sulfur dioxide), and (iv) conceptualizing the reduction of energy intensity in civil building sector using market-based approaches.
TMG, in consultation with the government, will have to decide several key strategic issues prior to establishing the TETS. These include the following:
(i)Whether the emission trading system would be based on intensity-based targets or absolute targets? Although the intensity-based target is consistent with the stated pledge of the PRC for emission reduction, the monitoring and verification requirements are more complex for intensity-based ETS.
(ii)How the emission trading system interacts with other administrative policies aimed at reducing carbon and energy intensity? These include energy conservation performance targets for key enterprises, phasing out of obsolete technologies and industrial capacities, and fiscal incentives and penalties for inefficient industries. The ETS should be designed to complement these policies.
(iii)Sector scope of the emission trading system.
(iv)Determination of the emission target.
(v)Price control mechanisms.
(vi)Allocation methodology of allowances. The emission allocation methodology needs to be determined at the outset. Free allocation wins the support of market participants, but it may result in windfall profits, while the auctioning of allowances would provide a more market-oriented allocation of allowances.
(vii)Offsets and linkages with other markets, including voluntary markets.