Unwilling and Able

 
 

In his recently released Interim Report on climate change, Professor Ross Garnaut argues that, absent early and deep emissions cuts, rapid economic growth and escalating greenhouse gas emissions in China and other developing countries will make dangerous global warming difficult to avoid in the 21st Century.

The challenge for Chinese development and the planet, Garnaut suggests, “is to end the link between economic growth and emissions of greenhouse gases.”

The goal of squeezing more growth from fewer emissions in China is especially pressing as the country moves rapidly to displace the United States as the single largest emitter on the planet. Best estimates and official data suggest that China emitted around 6.8 billion tonnes of carbon dioxide (equivalent) last year while the US came in at 7.1 billion tonnes. Both countries have refused to adopt hard emissions targets under the Kyoto Protocol.

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China boosts annual emissions growth of approximately 4 percent per year – among the highest in the world.

The crux of the issue is stationary energy and China’s insatiable hunger for it: greater than 70 percent of China’s electricity comes from emissions-intensive coal-fired power stations and the country is adding around two new medium-sized stations (5-10 Megawatts) to the grid per week. And most of this stock is very dirty. Experts believe that probably no more than a third of the new coal-fired stations being built in China today are likely to be the efficient “combined cycle” plants that are standard fare in Western countries.

Basic economics tells us that deep cuts in China’s greenhouse gas emissions will ultimately come down to the ability to put a price on carbon pollution that at least partially reflects its social cost. The trouble is that China has a poor record with getting prices right. Although things have improved considerably since the nation entered the World Trade Organisation in late 2001, subsidies, controls and conscious sins of omission mean accurate price discovery in China is a tortured business.

Within China’s “socialist market economy,” the very visible hands of bureaucrats are noticeable in the ticket price of everything from property to DVDs. Occasionally this tinkering reflects perceived national interests – as with China’s undervalued exchange rate – while often there is a strong flavour of sectional politics. China’s pervasive fuel subsidies, for example, are as much driven by an anxious need to pacify farmers and low income earners as by a desire to keep inflation in check.

In the five years to December 2007, the price of Chinese gasoline rose by just under 70 percent (to around US$0.72 a litre) while over the same period, the price of benchmark gasoline in Singapore soared 235 percent (to approximately US$1.40 per litre).

But a lack of will to get the prices right shouldn’t be confused with a lack of capacity. If China chooses to put a price on its greenhouse gas emissions, from a technical and administrative point of view, it can do it and possibly just as easily as Europe, the US or Australia.

To price carbon emissions, countries generally have two policy options open to them: cap and trade, and taxation. Cap and trade regimes require governments (1) to set an absolute ceiling on greenhouse gas emissions, and (2) to issue tradable emissions certificates up to this ceiling. The key advantage of this pricing system is that it simultaneously encourages firms and consumers to actively look for the cheapest emissions savings at their disposal.

Enforcing a cap on emissions is something the authorities in Beijing have some experience with through work on sulphur dioxide (SO2) pollution, another consequence of the country’s heavy reliance on coal as an energy source. Despite rapidly increased energy use, SO2 levels have been trending down since 2005 and, encouragingly, fell by 1.81 percent in the first nine months of 2007. While the goal announced by the government in January to reduce SO2 pollution this year by 6 percent over 2005 levels (24.5 million tonnes) appears optimistic, there are early signs here that a hard cap on carbon emissions is possible.

Trading emissions certificates is likely to be difficult as China’s formal securities markets – structured around the two exchanges in Shanghai and Shenzhen – remain immature. This said, China is fortunate to have Hong Kong on its doorstep and there is a well established pattern of shifting any serious financial business offshore. Around a third of the firms listed on the Hong Kong Stock Exchange (more than 1,100 in total) are Mainland Chinese or “red chip” companies.

Following this theme, the Hong Kong Stock Exchange released a feasibility study on emissions trading late last year. The study confirmed that key features of the local exchange, including regulatory transparency, market depth and strong international linkages, mean that it is well suited to serve as a trading platform for financial products linked to Chinese emissions.

Proposals for a carbon tax arise from the basic observation that when you place a tax on something, you generally get less of it. To implement a carbon tax regime, governments simply mandate a levy (either a nominal dollar-figure or a percentage) on a tonne of carbon pollution released into the atmosphere. While deciding the tax level up-front can be complicated, such regimes are usually lauded for their simplicity and ease of compliance.

At the start of the decade, the idea of introducing a nation-wide carbon tax in China would have seemed laughable – the nation’s tax system was fragmented, narrowly defined and haemorrhaging badly. At the local level, a bewildering array of fees and charges overlaid a system of personal, enterprise and value-added taxes that were internally inconsistent and poorly enforced. Best estimates by foreign observers put the amount of tax evasion in China at the turn of the century at around 50 percent of total government revenue.

Crucial reforms in the 2000-04 period changed all that, helping to improve annual government revenues (expected to be US$389.5 billion in 2007, up more than 30 percent on 2006) and China’s long-run fiscal position (total government debt currently sits at a manageable 30 percent of GDP). Against this backdrop of consolidation, tinkering with the tax system to target broader social outcomes has become possible.

In December last year, Minister of Finance Xie Xuren foreshadowed a further round of fiscal reforms that included, for the first time, a proposal for a generic environmental tax. A greenhouse gas emissions levy is reportedly part of the mix, but it remains to be seen if this will be given priority.

China has argued consistently for last two decades that it will not accept any “fixed commitments” to reduce its greenhouse gas emissions. Among the many reasons it has for maintaining this position, a lack of administrative and technical capacity is not one of them.

Craig Meer is an independent writer on Chinese development and environmental issues based in Canberra, Australia.

Vincent Shie is a lecturer in Sociology and Development Studies at Fuhren University in Taipei, Taiwan.

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