China Adopts Cap-and-Trade to Curb Emissions
China emits more carbon dioxide than any other nation. But the country is trying to control its CO2 by using a cap and trade scheme in parts of the country. If the experiment works, China will consider extending the program all over the country, possibly linking up with international carbon markets. Host Bruce Gellerman talks with Republican Senator Johnny Isakson of Georgia about his recent visit to China, and Harvard Environmental Economic Professor Robert Stavins about what this means for America’s efforts to reduce carbon emissions.
GELLERMAN: From the Jennifer and Ted Stanley Studios in Somerville, Massachusetts, this is Living on Earth. I'm Bruce Gellerman. Confucius always seemed to have an appropriate comment for any situation - here's one we can all take to heart: "He who will not economize will have to agonize.”
Well it's doubtful that Senate Majority Leader Harry Reid had Confucius in mind when he recently visited China, but maybe he should have. The Nevada Democrat and nine of his Senate colleagues were in China for a weeklong official trip. There they met with government officials and toured clean energy companies. Reid returned to the US impressed with what he saw.
REID: China isn't investing heavily in clean energy because it's good for the environment - it's doing it because it's good for their economy. They're actually doing a lot more in many respects than we are and that's an understatement.
GELLERMAN: Actually, China outspends the United States two to one on clean energy research and development. But Senator Johnny Isakson, Republican from Georgia, - who also made the journey with Reid to China - has a different take.
ISAKSON: Well looking back on the trip, it was my first time on the mainland of China so it was an education on many, many levels. But the most remarkable thing of the trip was the difference in the air quality in China versus the United States. It was like night and day, and theirs is awfully polluted and awfully dirty so they have a huge challenge.
GELLERMAN: To meet that environmental challenge and make their economy more efficient, China has just announced a cap-and-trade program. The cap puts a limit on how much energy a Chinese company can use but also provides firms with an economic incentive to use clean energy alternatives.
If a company produces more goods using less energy, they can trade the savings on the open market. China plans to phase in its cap-and-trade program. Two years ago, the U.S. House of Representatives passed a cap-and-trade bill known as Waxman-Markey, but the measure died in the Senate. Leading the opposition was Senator Johnny Isakson.
ISAKSON: I think the cap-and-trade regimen is not the way to go. I think quite frankly, cap-and-trade just penalizes people for past decisions that they made. Give you a good example - Florida has a lot more nuclear production than Georgia does, so Florida would be selling us credits to offset our coal production. It would financially raise the cost of utilities in Georgia, lower them in Florida - all because of past decisions. I think if you’re going to make a decision on a reduction of anything or an increase in anything, that you do it prospectively, not by penalizing people retrospectively.
GELLERMAN: So you think cap-and-trade actually would put the United States at a competitive disadvantage?
ISAKSON: I think it would unfairly raise prices on people that have made decisions in the past that were perfectly consistent with U.S. policy. I think what you ought to do is establish future goals, not penalize people for the past.
GELLERMAN: So now you have China, which is now the world’s largest polluter of greenhouse gases and perhaps soon to be the number one economy in the world by about 2016 it’s predicted, and they’re committing themselves to a cap-and-trade program.
ISAKSON: Well they’re committing themselves in six provinces to an experimental program.
GELLERMAN: And they’re saying that if that works out by 2015, it will be nationwide.
ISAKSON: Well that’s fine. That’s what experiments are all about - to find out if they’ll work. And that’s the way they decide to do it - that’s certainly within their right.
GELLERMAN: But using, you know, your criticism of cap-and-trade, wouldn’t that put them at a competitive disadvantage with countries that don’t have it - like the United States?
ISAKSON: The Chinese have a huge problem with their atmosphere and pollution, far greater than the one that we have because we’ve been addressing ours for the last 25 or 30 years. And the decisions that they make in that controlled environment of their economy is going to be up to the people of China - I just don’t think it’s in the best interest for the United States.
GELLERMAN: So do you think what they’re doing in terms of cap-and-trade is for environmental reasons or economic reasons?
ISAKSON: Well I would hope it’s for environmental reasons because the environment is terrible, but I’m sure in part it has some economic reasons to it. But the one facility that we visited that was a solar facility - 95 percent of their sales were not in China, they were to the United States because we have a mature policy on renewable energy and a tax policy that incentivizes renewable energy. China is going to have to develop some targets of its own to do that.
GELLERMAN: Well one would ask the question then - why are we buying it from them? Why don’t we just make it here?
ISAKSON: Well we can make it here and we should make it here. Although, you know, I’m not the small-world type of a guy - I mean, some people are but I believe that Tom Friedman’s book “The Earth is Flat” is really true and that we are now a connected economy around the world and production in the United States selling to China is equally as good as production in China selling to the United States, as long as we’re competitive.
GELLERMAN: Well Senator Johnny Isakson, thank you so very much.
ISAKSON: Thank you very much and have a great day!
GELLERMAN: Senator Johnny Isakson is a Republican from Georgia. Harvard professor Robert Stavins also met with Chinese officials - they came to his office at Harvard University where Stavins is Director of the Environmental Economics Program. Professor Stavins says besides the economic and environmental benefits, China may have another motivation for instituting a cap-and-trade program.
STAVINS: Part of it is that China may realize this current century is the Chinese century, and it's very important to them to be responsible citizens of the world, to take on that role - and I think they see as one part of that being a good actor in terms of the environment.
GELLERMAN: So Professor, China is going to start a cap-and-trade program, but two years ago, the House approved one and then last year the Senate defeated it - so we don’t have a cap-and-trade program.
STAVINS: Well there’s a remarkable irony. The home of cap-and-trade is certainly the United States. We’ve used it to get the lead out of gasoline, we used it to cut acid rain by 50 percent; but we’ve decided, at least the Congress has decided, not to go ahead. And, ironically, the European Union is going forward with its emissions trading scheme and now a set of other countries - China, Japan, Australia, New Zealand - are moving forward with cap-and-trade to address climate change.
And what it does is achieves the overall target - the cap - in the lowest cost possible ways because it provides incentives through the market for those who can cut back at relatively low cost to take on an added share of the burdens.
GELLERMAN: That’s basically the trade: if they lower their emissions, they can trade that amount and sell them on the open market.
STAVINS: That’s precisely correct.
GELLERMAN: Now the Chinese method for doing cap-and-trade is not exactly the way we would have done it here - they measure their energy in intensity.
STAVINS: That’s right. The Chinese pledge, in terms of their goal, focuses on what we usually refer to as emissions intensity, or even energy intensity. That is, think of it as emissions per unit of gross domestic product, per unit of economic activity - not emissions per say. So we have to be careful when we think about this because remember, China is a country that’s been growing at an average annual rate over recent decades of eight percent. And so when you see their emissions intensity decrease - nevertheless, given their rate of economic growth, we anticipate that emissions in gross terms would still be increasing.
GELLERMAN: A few years ago - their last five-year plan - they failed to meet their goals and they took very dramatic action. They’re very serious about this.
STAVINS: Well they are very serious. What China has done, remember, is in some cases actually just shut down plant and equipment to virtually close companies. And they can do that under their political system - that’s not an approach that either we can take, or, clearly in the West or in the United States, that we ought to take.
GELLERMAN: California is scheduled to institute a very ambitious cap-and-trade program next January.
STAVINS: That’s right. It’s a significant program. The cap-and-trade system itself for carbon dioxide would cut emissions by 2020 back to their 1990 level, so it’s very ambitious. It’s more ambitious than, for example, the Waxman-Markey legislation that passed the House of Representatives.
GELLERMAN: If California can pull this off, they could then become international traders in their emission credits - because there are provinces in Canada that would want to trade with them.
STAVINS: Well that’s right. The Western Climate Initiative, which was earliest on thought of as the major Western states, has evolved into now being, really, California, plus a number of Canadian provinces. And Ontario plus California together account for more than 50 percent of the emissions from the Canadian provinces that border the U.S. plus all of the Western states.
So it’s a very significant program indeed. They’re going to be engaged in trading among themselves. And with that - and with the failure of Washington, obviously, to take action with an economy-wide cap-and-trade system - we may see the movement of the North American Climate Initiative, if you will, from Washington to Sacramento.
GELLERMAN: So can California and Canada link up with the market in China?
STAVINS: Oh, absolutely. California has already been engaged in talks with the European Union - that’s been going on for two to three years that I’ve been going out to Sacramento and been involved in this. So there’s interest there, and there will certainly be interest when and if the Chinese systems are really up and running.
All that has to happen for any of these markets to link up with one another is for the government in a particular market to say to the firms that comply with its cap-and- trade system that in addition to using the allowances you got from our government, you can use the allowances that are generated by some other government. That then links markets together.
GELLERMAN: So you could have U.S. companies getting emissions credits, selling them in China, and lowering the emissions here through a cap-and-trade system that’s actually in China.
STAVINS: Well that’s correct. And actually, if I had to guess right now, Bruce, of what the future international policy architecture is going to be - what’s going to be, in other words, the successor to the Kyoto Protocol, which, as you know, sunsets at the end of 2012 - I would say that the de facto future is probably going to be linkage of national, sub-national, and then regional. The case of Europe - cap-and-trade systems with one another.
GELERMAN: Well, Professor Stavins, thanks so much.
STAVINS: My pleasure!
GELLERMAN: Robert Stavins is Director of Harvard's Environmental Economics Program.
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