The regional development of domestic carbon markets in China

Dr Lo, Alex Yu Hong   (Principal Investigator (PI))

Dr Pei Qing   (Co-Investigator)

14

2017-01-01

90000

The regional development of domestic carbon markets in China

carbon market, clean development mechanism, emission trading, environmental economics, environmental policy, regional development

Human Geography

201602172003

Hui Oi Chow Trust Fund - General Award

2015

Completed

Background Climate change is one of the biggest challenges facing China in this century. In 2013, China produced nearly 90 million metric tons of carbon emissions [1], or 28%, and is the world’s largest greenhouse gas (GHG) emitter. To mitigate these emissions, China has participated in the international carbon market since 2005, mainly through the Clean Development Mechanism (CDM). CDM is one of the flexible mechanisms under the Kyoto Protocol. Developing countries can earn Certified Emission Reductions (CER) by developing emission reduction projects. CERs are available for purchase and can be placed on the market transactions. Industrialized countries can buy and use CERs to meet part of their emission reduction targets under the Kyoto Protocol. Over the past decade the Chinese government has actively participated in the CDM and has been the largest exporter of CERs. CDM projects hosted by China account for half of the world’s total (3,763, or 49%), with total expected emissions amounting to 600 million tons per year [2]. The Chinese government has shown an increasing interest in promoting the core concept behind the CDM, i.e. ""carbon offset""[3]. Carbon offsets require reduction or avoidance of actual emission reductions in one place and allow the holder to ‘offset’ their excessive carbon emissions in another. Abatement costs are usually higher in developed countries. The CDM allows the transfer of certified emissions reduction from the production side (mainly developing countries) to developed countries participating in the mechanism, in order to reduce their cost of reducing emissions. The differences in the costs of emission abatement between different places create demand for carbon offsets. The carbon market is set up to allow exchange between local carbon offset producers (or their representatives) and international buyers, effectively putting a price on carbon emissions. The carbon market in China is in a transition, moving from an export-oriented market towards one that primarily serves domestic consumption [4]. An important question about this transition is whether or not the properties and development patterns of the CDM-based system will apply to the domestic mechanism currently being developed. Since 2011, the central government has embarked on a new market building process. Pilot emission trading schemes (ETS) have been implemented in seven Chinese provinces and cities, creating a number of ""allowance-based markets"". Another form of carbon market, based on ""voluntary emissions trading"", is also rising in China. Carbon offsets allow entreprises to use ""Chinese CERs"" (CCER) to meet part of their emission reduction requirements. Together with the pilot ETSs, the Chinese carbon market will become the world's largest. The extent in which the CCER market is a replication of the CDM remains unknown. Bayer and other American scholars examine 2,097 Chinese CDM projects against standard economic theory. They found that CDM projects are concentrated in areas of high electricity consumption, low per capita income and lacking foreign direct investment, suggesting that the carbon market is able to identify low-cost, high-return opportunities for investment and offering supporting evidence for an economic theory of carbon market [5]. However, the CCER market is dominated by the state and has benefited from the central government's administrative intervention. As a domestic policy tool, the CCER market is designed to accommodate the variations in development levels and emission-reduction capacities among provinces and regions within China. Since the domestic CCER market is not export-oriented, it does not have to follow various assessment requirements defined by foreign countries and is not subject to the downturn of the international carbon market. The domestic system is crucial for protecting national interests, particularly for the western regions of China, where economic development falls behind and energy efficiency remains low, but natural resources are abundant (suggesting high potential for carbon offsetting). Therefore, the CCER market is unlikely to demonstrate the same pattern as the CDM-based market. For example, there may be more CCER projects in China’s midwest and more rural biogas projects. This may pose challenges to the view that the Chinese carbon market accords with economic theory. Dedicated research is needed to explore the future of China’s carbon markets and re-examine existing assumptions about these markets. This proposal can fill the void and offer long-awaited insights into the market-based climate policy development in China, which is currently in a transition toward a new regime that depends on more domestic efforts than foreign investments. The proposed study will address the following research objectives and questions: Research objectives 1. Examine the development of CCER projects in Chinese provinces in terms of local socio-economic parameters 2. Describe and explain the ways in which CCER market is different from the CDM market in China Key problems to address The primary research question is: ""What are the socio-economic factors affecting the regional distribution and development of China CCER projects?"", which is divided into two secondary research questions: 1. Can regional socio-economic variables explain the key properties of CCER projects? Significance: findings can help examine whether the Chinese carbon market follows a particular geographic pattern and accords with economic theory, and have practical implications for policy-making and business decision-making 2. What are the differences in development pattern between domestic CCER projects and Chinese CDM projects financed by foreign countries? Significance: findings can help understand the key characteristics of China’s carbon offsets market, and potentially generalize the knowledge to other emerging economies that operate a similar market system References: 1. International Energy Agency, CO2 Emissions from Fuel Combustion - 2015 Highlights. 2015, International Energy Agency: Paris. 2. UNEP DTU Partnership, CDM/JI Pipeline Analysis and Database (accessed 1 Feb 2016). 2016, UNEP DTU Partnership: Copenhagen. 3. Bumpus, A.G. and D.M. Liverman, Accumulation by Decarbonization and the Governance of Carbon Offsets. Economic Geography, 2008. 84(2): p. 127-155. 4. Lo, A.Y., National development and carbon trading: the symbolism of Chinese climate capitalism. Eurasian Geography and Economics, 2015. 56(2): p. 111-126. 5. Bayer, P., J. Urpelainen, and J. Wallace, Who uses the Clean Development Mechanism? An empirical analysis of projects in Chinese provinces. Global Environmental Change, 2013. 23(2): p. 512-521.