Climate change

How China turned an interest in emissions trading into a cutting-edge tool against climate change

The carbon market concept is complicated, but China has learned it thoroughly, leaping into a mechanism that, ironically, was invented in the US, Paula DiPerna writes

PUBLISHED : Monday, 04 June, 2018, 6:33pm
UPDATED : Monday, 04 June, 2018, 10:54pm

I could not resist taking the photo. “Green Finance Street Tunnel”, said the road sign in a new area of the southern Chinese city of Guangzhou. “Is there any other such tunnel name in the world?” I had to wonder. “What a marquee!”

Nearby, three gleaming new buildings called the Green Finance Centre, dedicated to research and innovation, dominated the area. And inside one was the home of the young but sophisticated China Emissions Exchange, where I was headed to join a panel to discuss green finance advancement and carbon trading.

I was coming a bit full circle. Just about 10 years ago, I had flown across the Pacific to be in China on August 8, 2008 – also the day of the opening of the Beijing Olympics – at the opening day of one of my “children”, the first of China’s pilot carbon markets, the Tianjin Climate Exchange (TCX).

That day had also been thrilling, as scores of dignitaries and I shared celebratory remarks on the milestone we had achieved.

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Led by my colleague, the renowned economist Richard Sandor, China National Petroleum Corp and the city of Tianjin, I had helped spearhead our first-of-its-kind joint venture to create TCX, an affiliated exchange with our Chicago Climate Exchange (CCX), the world’s first and only integrated cap-and-trade for all six gases.

In September 2008, TCX opened formally, and a cannon was fired on stage that shot red and gold confetti into the air.

Ten years ago, China had the appetite to get started on emissions trading and did so with gusto, even though carbon markets and cap-and-trade can be controversial tools. In the meantime, China has trained an entire generation of thinkers on the topic, and there is a buzz to all discussions on carbon markets in China today.

Eventually setting up seven pilot markets to experiment with approaches, China in 2015 at the historic Paris conference on climate change stated its intention to create a fully fledged national carbon market.

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Then, this year, China delivered on the promise, announcing the establishment to cover its power sector and, eventually, other sectors of the economy, with further details to come.

The decade of training, practice and education China invested in its pilot markets since the TCX opening could prove to be one of the most important and fascinating capacity-building investments a nation has ever made in environmental improvement, because human and intellectual capital is as important as technological innovation in complex problems such as climate change.

Carbon cap-and-trade systems try to put economic enterprises that emit carbon dioxide by burning fossil fuels on a “carbon diet”, gradually reducing their permission to pollute, akin to gradually reducing an allotment of calories.

Each dieter either buys or is given a beginner’s calorie quota. Then the dieter must stay under that quota and begin to “lose weight” compared to peers.

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Those who lose weight faster and have “surplus” calories to sell, can sell their extra to those who are slower to lose weight, for whatever reason. But collectively, the group must stay below the overall diet level. No group surplus, only individual.

In this way, carbon markets try to tangibly price the cost of intangible and invisible pollution, gradually tightening the supply of calories and making it more expensive to keep buying allowances than to reduce pollution.

Ten years ago, students in the audiences for talks about carbon trading in China had excellent questions. Today, they have become leaders.

Staff working in carbon markets must have solid financial background, plus environmental understanding, because if carbon markets are inefficient or inaccurate, they can become just like any other gambling casino and there would be no environmental benefit.

Exchanges make money on transaction and service fees, not the price of allowances per se. To make money, exchanges must offer better customer service, real price discovery and impeccable financial standards. And even though rule books and approaches can vary globally, carbon markets must share one objective in common: to set up a race for excellence and to incentivise reductions in energy waste and atmospheric pollution.

And so, in balancing public good and private profit, to work in carbon markets is to be at the forefront of green finance.

It is conceivable that China’s progress has inspired the world. In the US, the spotty carbon markets existing in California and the northeast states stand poised to expand, and it was recently announced that low prices in the European carbon market “could double by 2021 and quadruple by 2030 if the European Commission legislates to align its current emissions targets with the Paris Agreement”, according to Carbon Tracker.

This means that carbon markets could give further structure to the historic international agreement made in Paris in 2015 that is to be reviewed in 2020. This prospect is encouraging as higher prices to pollute mean less pollution. Ultimately, though, since climate change is a global problem, a global market will be needed.

So what is next? Given the latent appetite to act and implement the Paris Agreement, what would perhaps jump-start the world would be a demonstration trade to link up the fledgling markets worldwide.

Needed? Just one visionary company with operations in China, the US and Europe to volunteer.

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What to do? That company could stipulate that it would retire some emissions permits in one jurisdictional diet and apply them to the quota in another, thus transferring emissions permits across borders, making them fungible assets.

The demonstration transaction could be handled by an experienced trading firm almost anywhere in the world, including and especially Hong Kong, given its pre-existing financial infrastructure and stated interest in being a green finance hub.

All in all, there is no time to waste in tackling climate change, but China has used its recent time well. The carbon market concept is complicated, but China has gradually mastered it, taking a big leap into a market mechanism that, ironically, was invented in the United States.

Even 10 years ago, when we gave talks about CCX and carbon trading in China, students in the audiences had excellent questions, having studied the US experience. Today, those students have graduated and become leaders.

I took a long walk on Green Finance Street and smiled.

Paula DiPerna is special adviser to CDP, the operator of a global environmental disclosure platform. She served as president of CCX-International, which pioneered emissions trading worldwide, and was a visiting fellow at Civic Exchange in Hong Kong