Julia Pyper, E&E reporter
A national emissions trading system in China, placed over the existing patchwork of provincial climate markets, would be the most cost-effective way for the world's top emitter to reduce its carbon footprint, according to a new report by researchers at the Massachusetts Institute of Technology and Tsinghua University in Beijing.
China took a major step forward in combating climate change earlier this year by launching a set of pilot greenhouse gas trading systems within several of its provinces. This is the first in a series of reforms that will help China meet its larger aim to reduce carbon intensity by 17 percent in 2015, relative to 2010 levels.
Ultimately, China's goal is to reduce its carbon dioxide equivalent emissions per unit of gross domestic product by 40 to 45 percent between 2005 and 2020.
But while setting targets at the provincial level is an effective way to cut emissions, a national target would result in a 20 percent lower cost while achieving the same goal, according to the MIT-Tsinghua study published today in the journal Energy Economics.
"If you set targets at the level of individual provinces, there's no opportunity, for example, for one province where the cost of reducing emissions is higher to do less and another province where the cost of reducing emissions is lower to do more," said Valerie Karplus, director of the Tsinghua-MIT China Energy and Climate Project and an author of the study. "A national system achieves the same reduction at lower cost."
Opportunities to reduce emissions in China's eastern provinces are generally more expensive than in western ones, where improving the efficiency of coal-fired power plants, for instance, is relatively cheap, Karplus explained. A national system would improve the distribution of burden among provinces by allowing for exchanges between them.
"To make current approaches increasingly cost-effective, and tailored to meet both ... long-term climate goals as well as near-term air pollution targets, the next step is to move to a national emissions trading system," she said.
Alternative to direct regulation
Harvard University economist Robert Stavins said it's no surprise that aggregating provinces in a single system is more cost-effective than regulating several geographic areas separately. In fact, he would have expected the benefit to be greater than 20 percent.
The Chinese government, eager to reduce its environmental footprint while continuing to grow, has already expressed its intent to move away from siloed provincial policies toward a national system at some point after 2015. The same thing could happen in the U.S., too, said Stavins, who was one designer of the U.S. cap-and-trade system that failed to pass Congress in 2009.
In the absence of a national policy, some parts of the U.S. have established subnational systems, such as California's cap-and-trade program and the Regional Greenhouse Gas Initiative in the Northeast. As in China, the U.S. could eventually move toward a unified pricing policy, Stavins said.
International linkages among early movers are already starting to form, he said. California and Quebec joined forces this year, and Australia is planning to partner with nascent carbon markets in New Zealand and South Korea.
While many countries face political resistance to putting a price on carbon, it remains the single most effective way to address climate change, Stavins said.
"In an economy such as China or the U.S. -- in the industrialized world as well as in the major emerging economies -- the only policy approach that is feasible to achieve truly significant emissions reductions is going to be some kind of carbon pricing regime, whether that is done through a carbon tax or a cap-and-trade system," he said.
"It's inconceivable that direct regulation for these hundreds of millions of different sources of carbon dioxide emissions and, more broadly, greenhouse gas emissions ... could ever be achieved," he added.