The latest Obama-Xi announcement sends a strong message: the two nations are acting fast to enable a global low carbon transition. Friday’s joint announcement is an unprecedented step by the world’s #1 and #2 emitters to commit, at the highest levels, to a strong set of domestic policies and to reinforce global mechanisms that will help to engage peers ahead of the upcoming landmark climate change negotiations in Paris. 

Pricing Carbon

Xi has committed China to launching a national emissions trading system for CO2 in 2017. An emissions trading system will directly constrain a large share of China’s CO2 emissions and, by putting a price on emissions, encourage reductions where they cost least. This is impressive in that China is pledging to reduce emissions at a time when its per-capita income is less than one-fifth of the U.S. and its economy faces headwinds. It recognizes the long-term benefits of action now—for local air quality, global climate, and its own long-term leadership in delivering innovative solutions that all nations will eventually need.

While China is not the first to establish an emissions trading system, China’s is likely to be the largest when it comes online in 2017. While the European Union has built an emissions trading system over the past two decades, the U.S. has so far not been successful in adopting a national system for greenhouse gases. In 2009 the Waxman-Markey Bill, which would have established an emissions trading system in the U.S., failed to pass Congress, leaving the U.S. to rely on a piecemeal approach that largely repurposed existing regulations, such as vehicle fuel economy standards and power plant emissions limits established under the Clean Air Act, to mandate CO2 emissions reduction. Indeed, these measures formed the cornerstone of the U.S. domestic action pledged on Friday, and they will have impact. However, an emissions trading system that could deliver the same reductions at lower aggregate cost has so far proven politically unpalatable. China’s latest move could prompt a rethink on emissions trading in the U.S.

Linking Global and Local Action

Along with a strong portfolio of coordinated domestic actions, Xi and Obama made progress on defining the architecture of a global climate agreement. The two leaders have agreed on the need for an enhanced system that monitors domestic action through reporting and review of progress, recognizing that some developing nations will still need time to put these capacities into place. Both sides also recognized the need to increase ambition over time. This is essential because even with all present contributions, the global emissions trajectory is not expected to bend down anytime soon. Recognizing that this will likely not be fully resolved in Paris, setting in place a timeline for assessing and revisiting commitments going forward will go a long way towards ensuring that the goal Xi and Obama reaffirmed at the outset of their remarks—deep reductions in GHG emissions that will markedly limit global temperature rise—does not slip off the radar.

Beyond generating momentum ahead of Paris, U.S.-China joint action will have far-reaching consequences at home when it comes to enabling a low carbon transition. Although many insiders anticipated that an emissions trading system in China would be established, efforts to codify this effort in a new Climate Change Law were moving more slowly—this high-level pledge will redouble the pressure. Beyond emissions trading, China has also pledged to promote “green dispatch” in the electricity sector, which will prioritize lower emitting plants. In China, generators are powerful interests entitled to supply a “fair share” of annual generation—now, their “fair share” will need to reflect environmental impact more strongly and directly.

Leading on Climate and Development

Perhaps the greatest promise of the latest announcement by China and the U.S. lies in its invitation to all parties to increase ambition, if not before Paris then as soon as possible as part of ongoing negotiations. On the eve of Paris, the world is poised to miss the 2 degree target—by a large margin. Stronger action will be needed by developed and developing countries alike. By committing to limit CO2 emissions, China has shown that domestic action on climate change does not need to undermine long-term development goals. In recent years, it has developed the domestic capability to assess—through research, modeling, and real-world experimentation—the advantages and disadvantages of various instruments for limiting fossil energy use and CO2 emissions. The results suggest that some opportunities, such as industrial energy efficiency and new energy development, can support cleaner air, better operational performance, and—in the case of, say, solar energy—open opportunities as a leading global provider of clean technology. Every developing country will have its unique set of opportunities. The architecture emerging on the road to Paris is shaping up in a way that will accommodate these differences, allowing the countries that are poised to grow the fastest over the next several decades to find ways to power this growth with clean, affordable, low carbon energy sources. Greater action from the developed world will also be essential. Ideally, the steps Xi and Obama have taken last week will inspire a broad-based, cooperative effort to deliver more than promised that carries both local and global benefits.

Dr. Valerie Karplus is a ChinaFAQs Expert at the Massachusetts Institute of Technology (MIT). She is an Assistant Professor in the Global Economics and Management Group at the MIT Sloan School of Management and Director of the China Energy and Climate Project (CECP) at MIT.

ChinaFAQs is a project facilitated by the World Resources Institute that provides insight into critical questions about Chinese policy and action on energy and climate change. The ChinaFAQs network is comprised of U.S.-based experts, including researchers at U.S. universities and government laboratories, independent scholars, and other professionals.

Photo Credit: U.S. Embassy the Hague via Flickr Creative Commons License