Time to Link Northeast Asia's Carbon Markets

 
 

The major economies of Northeast Asia are developing carbon markets to help meet their climate change commitments. They would benefit from doing so in concert.

Like much in the current climate change arena, market activities beneath the global scale are booming. Carbon markets have almost doubled since 2012, with 40 states and 23 cities, regions, and provinces pricing emissions worth some $50 billion. Amid vocal calls from the business community for greater continuity in carbon pricing policies, market linkages among national and subnational systems are gaining traction.

Linking carbon markets in Northeast Asia would represent the greatest such connectivity to date, and provide one of the world’s most populous and economically dynamic regions with an integrated platform for reducing emissions.

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China, Japan, and South Korea have each made carbon markets a key element of their climate change mitigation strategies –providing the starting point for regional linkage efforts.

In 2013 and 2014, China launched pilot markets in five cities – Beijing, Tianjin, Chongqing, Shanghai, and Shenzhen – and two provinces – Hubei and Guangdong. Combined, these trading systems make up the second largest carbon market in the world, and set the stage for a nation-wide emissions trading system to be progressively brought online from 2016 to 2020. When fully implemented this market will become the largest in the world and roughly double the size of the European emissions trading scheme.

Japan has implemented carbon market mechanisms since a 1997 measure allowed companies to offset their emissions through a crediting system. Efforts later expanded to allow Japanese firms to earn offset credits by investing in emission reduction projects in developing countries. In 2010 and 2011, the Tokyo and Saitama Prefectures entered into Japan’s first mandatory emissions trading schemes, which they subsequently linked.

South Korea launched a green growth plan in 2010 to transition toward a lower-carbon economy and set emissions reduction targets to guide its national carbon market – the first of its kind in the region. The market, launched in January 2015, will progressively allow more emissions allowances to be auctioned off and international emissions reduction activities will become eligible for emissions credits.

Linking these markets would provide Northeast Asian emitters with a wider range of emissions reduction options, some of which will be cheaper than those they have access to at home, and help provide the scale and liquidity needed for a robust trading platform.

By expanding the scope of markets, regional linkages would also reduce price shocks from unexpected events and in turn lessen price volatility. Increasing size likewise reduces the market influencing power of singular large actors, and decreases administrative burdens as costs are shared among multiple parties and duplications avoided. Ultimately, as the resulting mitigation costs go down, national levels of ambition could go up.

More vitally, carbon market linkages would better reflect the economic interconnectedness that already defines Northeast Asia, and disincentivize the movement of emissions-generating activities to jurisdictions with less stringent climate policies. Carbon prices currently vary widely in markets across the globe, from $2 a ton in Japan to $130 a ton in Sweden. Greater regional carbon price continuity in Northeast Asia is a step toward addressing this disconnect, as regional market cooperation around the globe will help to drive prices to a global equilibrium.

Linking Northeast Asian carbon markets will take time, and require technical expertise, strategic vision, and diplomatic energy. Regional efforts must avoid the pitfalls suffered elsewhere – particularly the oversupply of emissions allowances that has depressed carbon prices – and cultivate the levels of trust, political will, and institutional capacity needed to harmonize standards and practices across national boundaries.

The Northeast Asian powers are well-placed to accept these challenges.

Close to home, building a shared carbon market would build confidence between countries that have complex and at times fractious relationships. The pressing security and diplomatic challenges that shape much of Northeast Asian relations amplify the need for these powers to pursue impactful cooperation where possible. Given the significant shared problems of carbon emissions – and the transboundary public health impacts of the conventional air pollution that accompanies them – linking carbon markets could improve wider regional affairs and help temper future tensions.

Globally, China, Japan and South Korea have the opportunity enhance the Northeast Asia’s international climate leadership. Linking their carbon markets would signal a redoubling of cooperation to address one of the great challenges of the modern era, and be a major boon for global climate mitigation efforts. Beyond these optics and signals, it would have enormous material relevance given that the countries account for over 21 percent of the global economy and over 30 percent of global emissions.

China, Japan, and South Korea are understandably currently fixated on developing their fledgling domestic markets. However, these formative phases must yield markets that are flexible and, in the words of one regional official, “linkage ready” if the benefits of market connectivity are to take shape. Recent roundtable discussions by international thought leaders and regional actors on the sidelines of the global Carbon Expo are a positive start. The time is now for China, Japan, and South Korea to further develop robust dialogue on their respective market developments, pilot market linkages in select sectors and among cities, provinces, and prefectures, and establish a roadmap to future market connections at the national level.

Doing so now would pay future dividends greater than the sum of their parts.

Dr. Jackson Ewing is the Director of Asian Sustainability at the Asia Society Policy Institute (ASPI) in New York, where he leads projects on environmental cooperation, responsible resource development, and international climate change policy.

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