No clear benefit for Hong Kong from mainland China's carbon trading scheme

Martin Adams considers obstacles China must overcome to cut emissions

PUBLISHED : Tuesday, 27 August, 2013, 12:00am
UPDATED : Tuesday, 27 August, 2013, 3:22am

Buses, lorries and ships: Hong Kong can do much to control these sources of its local pollution problem. But it has limited influence over the other significant source of its poor air quality: smog from mainland China. Thus, many Hongkongers have reason to be happy - in theory, at least - that Shenzhen and Guangdong are at the forefront of China's fledgling efforts to limit carbon emissions.

Seven cities and provinces around China are starting trial carbon-trading schemes. Shenzhen launched its pilot in June; Guangdong and other locations (including Beijing and Shanghai) are due to begin their own pilots later this year. Rationing permits to pollute and then letting companies trade them depending on their needs, at market prices, ought to spur carbon-emissions cuts.

Besides, slowing the rate at which carbon is pumped into the atmosphere will also temper toxic emissions. These are sparking social unrest in mainland China, on top of exacerbating Hong Kong's pollution troubles.

Lessons from these early forays in carbon pricing are supposed to inform the design of a national scheme that could become one of the world's largest. China pledges to cut its emissions per unit of gross domestic product by 40-45 per cent by 2020 compared to 2005 levels. If only it were so easy.

China must scale a number of big obstacles first. Since Shenzhen lifted the curtain on trading, to much fanfare, it has struggled to generate many actual trades. Companies don't yet grasp carbon trading: how to do it, or even why they should. Neither do many officials. This is hardly surprising: Europe, which now has the largest carbon-trading system, has laboured up a steep learning curve and still fails to run a scheme that actually cuts much carbon.

Indeed, it is ironic that China appears to be favouring carbon trading even as prices in the European Union languish at levels too low to force companies to pollute less. Oversupply of credits and slower-than-expected economic growth are largely to blame. Both problems could plague China, too.

Further, local officials, whose careers depend on delivering economic results, and powerful state-owned enterprises will machinate to protect their interests. Another problem is a general shortage of Chinese emissions data. Disturbingly, China does not publish estimates of how much carbon it pumps into the atmosphere.

Regulators' conservative proclivities will weigh further on progress. Chinese exchanges want to offer relatively exotic tools such as carbon-credit derivatives, which financial institutions use to mitigate their risks. Allowing them to dabble in such instruments will be crucial if lending to low-carbon projects - an important benefit of carbon trading - is to flourish.

So there are ample reasons to be pessimistic about carbon finance's future in China. Yet, top leaders know that they must deal with pollution.

Inevitably, China's carbon-trading regimes will hit hurdles. Some foreign sceptics will seize on such setbacks to argue that China's talk on the environment is disingenuous - mere "green-washing". Outside scrutiny is indispensible for carbon trading's prospects in a country where confidence in government statistics is low and official secrecy is commonplace.

The world also needs to be realistic about how much it can expect from China; it is many years away from having a fully functioning nationwide carbon-trading scheme, and energy use - and polluting emissions - will keep growing.

Hong Kong will have to rely mainly on itself to tackle its pollution problems.

Martin Adams is energy editor at the Economist Intelligence Unit, based in Hong Kong