China's ambitious plan to limit carbon emissions, explained

Here in Washington, DC, you'll often hear conservatives argue that there's little point in the United States acting on global warming, because China is the world's largest polluter and will never do anything to rein in its carbon emissions.

But that line's looking increasingly silly. On Friday, Chinese President Xi Jinping announced that his country would enact a national cap-and-trade system to limit carbon emissions, starting in 2017. The program will eventually cover a number of key industries, including electricity, iron and steel, chemicals, building materials, and paper-making.

This is, potentially, a major step toward addressing climate change. It also shouldn't come as too much of a surprise. Since 2011, China has been experimenting with smaller cap-and-trade programs in seven major cities, including Shenzen, Beijing, and Shanghai. Despite a series of early missteps, these pilot programs have been showing promise, and China-watchers had been expecting they'd be scaled up.

Nor is it shocking that China is getting serious about emissions. After decades of rapid industrial growth fueled by coal, China has begun investing heavily in clean energy and moving to curtail air pollution. Last November, as part of a joint climate agreement with the United States, the Chinese government pledged that the nation's CO2 emissions would slow their relentless growth and peak sometime around 2030.

So, yes, China has ambitious climate plans. The harder question is whether those plans will actually work as intended. It's not so easy to curtail emissions in a country as sprawling and as coal-dependent as China. As always, we'll have to read the fine print carefully.

China's cap-and-trade is part of a bigger plan for peak emissions around 2030

There's no way to tackle global warming without China. The country uses as much coal as the rest of the world combined, it's the largest emitter of CO2 by a wide margin, and its emissions have been growing at an astounding rate over the last three decades:

(Global Carbon Project)

For years, China argued that this was only fair. The United States and Europe got to enjoy coal-fueled industrialization; now it was China's turn. The country still had hundreds of millions of people in poverty, and emissions should be allowed to grow without restraint.

But things are now shifting. China's per capita CO2 emissions are nearly on par with Europe's, and the idea that Beijing should be given a free pass no longer looks as compelling. What's more, China has developed a gruesome air pollution problem that is taking years off people's lives and triggering protests. And the country's industry-centric growth model has begun to hit diminishing returns. So the Chinese government has been seriously exploring ways to transition to a lower-carbon economy.

Those efforts have been brewing for some time now, with the government making major investments in wind, solar, nuclear, and efficiency. But the low-carbon push really hit its stride last November, when China pledged that its CO2 emissions would peak sometime around 2030, and possibly earlier. The government also vowed to increase the fraction of energy China gets from zero-emission sources from 11 percent today to 20 percent by 2030.

This was the first time that China had ever set a deadline for its emissions to peak, and it led to a fair bit of renewed optimism around ongoing global climate talks. True, China hasn't said what level emissions will peak at (a crucial question), and the world's still not anywhere near on pace to avoid 2°C of warming, the ostensible goal. But China's announcement was a sharp break from the past. The tide was finally turning.

The catch is that China's climate goals won't be easy to hit — they'll require all sorts of major policy changes between now and 2030. Which brings us to this week's summit between Obama and Xi Jinping, where China announced a barrage of new actions to help hit its emissions target. I'll quote from the White House fact sheet:

• China will promote green power dispatch, giving priority, in distribution and dispatching, to renewable power generation and fossil fuel power generation of higher efficiency and lower emission levels.
• China also plans to start in 2017 its national emission trading system, covering key industry sectors such as iron and steel, power generation, chemicals, building materials, paper-making, and nonferrous metals.
• China commits to promote low-carbon buildings and transportation, with the share of green buildings reaching 50% in newly built buildings in cities and towns by 2020 and the share of public transport in motorized travel reaching 30% in big- and medium-sized cities by 2020. It will finalize next-stage fuel efficiency standards for heavy-duty vehicles in 2016 and implement them in 2019.
• Actions on HFCs continue to be supported and accelerated, including effectively controlling HFC-23 emissions by 2020.

It's that second one, cap-and-trade, that grabbed a lot of people's attention.

China already has cap-and-trade pilot programs — but they haven't always gone smoothly

Many economists adore cap-and-trade as a policy for reducing carbon pollution. The basic set-up is pretty simple: The government sets an overall ceiling on emissions by distributing a finite number of pollution permits. And, over time, the number of permits goes down.

Companies can then choose whether to reduce their emissions or buy permits to pollute — whichever is cheaper. This effectively sets a price on carbon. It also means that whoever can cut emissions cheaply and easily is likely to act first. That's why cap-and-trade is considered far more flexible and market-friendly than traditional regulations that require all companies to cut by the same amount.

Back in 2009, President Obama proposed a cap-and-trade system for the United States as part of a comprehensive climate bill. But Republicans (and some Democrats) in the Senate killed the idea, and that was that. Instead, the Obama administration has been resorting to more traditional regulations to restrain carbon emissions.

It fell to China to keep the cap-and-trade dream alive. Back in 2011, the government launched pilot programs in seven cities around the country — cities that accounted for 18 percent of the population. As this paper from the Paulson Institute explains, the details vary, but they all had the basic cap-and-trade flavor:

(Paulson Institute)

What China discovered, though, is that cap-and-trade is a lot messier in practice than it is in theory. Some of these pilot programs struggled to get up and running, either because companies didn't want to participate, or because enforcement was uneven, or because regulators struggled to measure the exact amount of pollution that was coming out of factories, power plants, and so on. (Cap-and-trade doesn't work if you can't measure pollution accurately to prevent cheating.)

The good news is that, after some early turmoil, these cities mostly figured out how to make cap-and-trade work. As a 2015 paper by Fudan University's ZhongXiang Zhang pointed out, regulators eventually got a handle on the biggest pitfalls and companies began complying. "The first-year performance of the five pilots examined is generally good," Zhang concluded.

The bad news, Zhang noted, is that scaling cap-and-trade up nationwide is likely to create plenty of additional headaches. Just for starters, China isn't exactly a free-market economy, which means carbon pricing won't always work as elegantly as economists might hope. Electricity rates are often fixed via price controls, for instance, so if the government imposes a carbon price on electric utilities, they won't necessarily pass that price on to electricity consumers. (The government does have plans to liberalize the electric sector, but that's a herculean task in itself.)

Other potential problems? There's local corruption to worry about (i.e., companies might persuade government officials to go easy on enforcement.) There's the risk that regulators might hand out too many permits, making the cap toothless (this is basically what happened to Europe's cap-and-trade system). There's the ever-present problem of measuring pollution from emitters (China's energy statistics are notoriously unreliable; no one can even agree on how much coal the country uses). In theory, these issues are are all solvable, but they're far from simple.

We also still don't know how many industries the national cap will cover or what the ceiling on emissions will be. (Will China set a cap on overall emissions, or will it set a cap on emission rates?) These vexing details aren't likely to generate front-page headlines, but they're crucial for the success of China's climate policies. For a good analysis of how China can roll out a successful emissions-trading system, this paper is a good place to start.

The big picture: What do China's moves mean for climate change?

So what does this all add up to? Recall that right now, the overarching goal of global climate efforts is to prevent the Earth from heating up more than 2°C (3.6°F) above pre-industrial levels.

At the moment, the world's on pace to blow past that goal. According to the Climate Action Tracker, if you add up all the promises that countries have made on CO2 emissions so far, we're likely to warm between 2.5°C and 3.8°C above pre-industrial levels by the end of the century. That assumes China's emissions peak at around 14 gigatons per year by 2030, as well as Obama's pledge to cut US emissions, as well as what Europe's promising, and so forth.

There are two ways to look at this situation. One, this is better than the alternative: the tracker notes that without all these pledges, we'd be on pace for between 2.9°C and 5.2°C of warming. So it'll be a big deal for the US, EU, and China to meet their goals.

Second, everyone could be doing more. China, for instance, has said emissions will peak sometime "around" 2030. But what if they peak earlier? Or at a lower level than 14 gigatons. That'd make a huge difference. As Edward Wong and Chris Buckley recently explored in a great piece for the New York Times, China's recent economic turmoil have led to a drop in coal consumption, raising the possibility that the country might be able to curtail its fossil-fuel use more sharply than expected. But doing so will likely require smart policy — and it remains to be seen whether China's new cap-and-trade plans can help pull that off.

Further reading

-- Here's an earlier piece on China's falling coal consumption. Note that even if the country's coal use stops growing, it still has hundreds of existing coal plants that will continue running for many years. It's one thing to hit peak emissions. It's another thing to push emissions sharply downward.

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