Chapter 1 EU China Cooperation on Greenhouse Gas ( GHG) Mitigation Towards a Potential International Emission Trading Scheme Beatriz Perez de las Heras Introduction The European Union (EU) and China have often opposed each other in international negotiations on climate change. Over recent years, however, both parties have recognized the importance of climate change to their respective security concerns and strategies. This common understanding has enabled broader institutional coordination which has in turn strengthened dialogue on climate change and related policies. One of the most relevant outcomes of this rapprochement has been the development of joint efforts to reduce greenhouse gas ( GHG) emissions. Since early 2005, the EU has made emission trading the cornerstone of its mitigation efforts. Effectively operating since 2005, the EU emissions trading system (EU ETS) sets a valuable example of how an international ETS is possible if 3
4 Beatriz Perez de las Heras there is political will from participating states to address the threats posed by climate change. In recent years, China has also been gaining capacity and experience in the international carbon market. Initial experiments with CO 2 emission trading have already been carried out at local level; numerous Clean Development Mechanism ( CDM) projects have been implemented; low-carbon zones are being put in place, some within the framework of bilateral cooperation with the EU, and the first national carbon trading programme is planned for 2016. The development of carbon emission trading in China is of great international interest; China currently accounts for almost a quarter of global GHG emissions and about half of annual emissions growth. Assuming that a global carbon market is feasible, the efforts of the two partners will strengthen the growing acceptance of emissions trading as a cost-effective policy instrument and encourage the linking of both national and regional programmes. Respective Climate Change Policies: Promoting a Low Carbon Economy The EU has, since 2008, endorsed a series of different strategies to reduce significantly its GHG emissions by 2050, while promoting energy self-sufficiency and efficiency. In China, the 12th Five-Year Plan (FYP) adopted in 2011, also includes GHG emission reduction among its major goals, along with energy efficiency and renewable energy. The ETS as the key mitigation tool of EU climate change policy Current EU climate policy is inspired by the long-term goal of limiting any global temperature increase to a maximum of 2 C
EU China Cooperation on Greenhouse Gas (GHG) Mitigation 5 above pre-industrial levels, in line with the Fourth Assessment Report issued by the United Nations (UN) Intergovernmental Panel on Climate Change (IPCC). The ETS is the EU s most important mitigation tool for meeting this target. The mechanism was introduced by the EU in October 2003 under Directive 2003/87, almost a year and a half before the Kyoto Protocol came into force. The EU ETS is therefore the first and foremost international system of CO 2 emissions trading adopted in direct compliance with the Kyoto Protocol. The ETS is intended to achieve a 3.3% decrease in the EU s GHG emissions, out of the overall figure of 8% to which the Union committed for the first mandatory period (2008 2012) of the Kyoto Protocol. In December 2008, a year before the Copenhagen Summit (which sought to define a new and more ambitious global agreement for the post-2012 period), the EU adopted its 2020 climate and energy package. Under this new legislative framework, actions related to climate change are for the first time strategically tied to those aimed at encouraging energy self-sufficiency and efficiency in the EU. The specific targets of this integrated strategy are as follows: (i) A reduction of at least 20% in GHG emissions by 2020. This figure could rise to 30% in the event of a global agreement committing developed countries to comparable reductions and advanced developing countries to making adequate contributions. (ii) A 20% increase in the share of renewable energy sources by 2020. This target includes a binding minimum 10% share of biofuels and other renewable fuels in transport. (iii) A 20% increase in energy efficiency by 2020, through a comparable reduction in primary energy use as compared with projected levels. Additional key elements of the 2020 package include a commitment to co-finance the construction of up to 12 large-scale
6 Beatriz Perez de las Heras power plants using Carbon Capture and Storage ( CCS) technology, and an emission performance standard of 130 g CO 2 / km for all new cars by 2015. The measures outlined in this package, commonly referred to as 20-20-20, are governed by a raft of legislation adopted between 2009 and 2012, although effective implementation only began on 1 January 2013. The new legal regulations strengthen the EU s leadership position, making it and its Member States the first to have legislation approved and in place for the period 2013 2020. In 2011, in a further bid for strategic leadership, the European Commission proposed a roadmap to help the EU become a competitive low carbon economy by 2050. The programme of actions set out in this document is intended to achieve the target set by the European Council in February 2011 of reducing EU emissions by 80 95% by 2050 compared to 1990. These percentages would contribute to the overall target of keeping any increase in global temperature below 2 C, in line with the consensus reached at the Copenhagen and Cancun Agreements. Within this consistent framework, the ETS will still be the key element in the EU s efforts to contribute to a more sustainable economy, at both a European and a global level. The third phase (2013 2020) of ETS implementation began in January 2013, coinciding with the second period of the Kyoto Protocol, agreed on at COP-17 in Durban and confirmed by COP-18 in Doha. This new stage entails the enforcement of important changes and innovations in the design and operation of the ETS. The chief objective of these modifications is to enable the EU to reduce its GHG emissions by 20% by 2020. In particular, through the ETS, the EU aims to achieve a 21% reduction from 2005 levels in the fields covered by this system. These objectives make
EU China Cooperation on Greenhouse Gas (GHG) Mitigation 7 the ETS a more predictable, harmonized mechanism, in line with the international principle of common but differentiated responsibility. One of the most significant changes is the replacement of national caps by a single EU cap. In practice, this entails the elimination of National Allocation Plans as key elements in the sys tem. In autumn 2010, the European Commission fixed the Union-wide number of allowances for 2013 at 2,039,152,882. This total figure will decrease annually by a linear factor of 1.74% to 2020. In terms of coverage, the ETS has been extended to new sectors, such as chemical ammoniac and steel industries, and new GHG, such as nitrous oxide, which stems from the production of nitric acid, adipic acid and glyoxylic acid as well as from aluminium perfluorocarbons. In sectors excluded from the ETS transport, except by air, agriculture, waste and housing the EU intends to reduce emissions by 10% on 2005 levels by 2020. Decision 406/2009 establishes the individual effort to be made by each Member State, taking into consideration its respective GDP per capita. Under this criterion, commitments vary from country to country, from a 20% reduction in Luxembourg and Denmark to the 20% increase authorized for Bulgaria. This selective distribution, dependent on levels of wealth, reflects the way in which the international principle of common but differentiated responsibility has been assumed at a European level. This same principle also conditions the enforcement of the second target envisaged in the 2020 package, relating to renewable energy. The policy on renewable energy sources also takes into account each Member State s GDP. The increase in renewable sources not only seeks to ensure greater energy independence for the EU but also to reduce GHG emissions from fossil fuels. The new regulations allow Member States to
8 Beatriz Perez de las Heras participate in trading of renewable energy. However, in contrast to this greater differentiation introduced in the 20-20-20 package, a 10% biofuel consumption target for the transport sector has been established for the EU as a whole, and not on a state-by-state basis. Another substantial change in the new ETS is the introduction of auctioning as the main procedure for allocating emission allowances, contrasting with the trend of free allocation in previous periods. Although it is considered to be the most effective and transparent method of allocation, auctioning will only be implemented gradually, except in the electricity sector, where 100% of allowances must be acquired using this system from 2013 onwards. For other industrial sectors, auctioning will be introduced gradually over a period of time running to 2027. A more harmonized aspect of the new ETS is the number of allowances each Member State will have to allocate through auctioning. In principle, allocation will be based on the respective emissions verified during the second period. However, a proportion of the allowances of the richest states will be redistributed amongst the poorest states, allowing the latter to use the resulting revenues to invest in clean technologies. Another feature of the current ETS that will make it more centralized is the replacement of national registries by a single registry managed and supervised by the European Commission. All transactions are now subject to the endorsement of the European Union Transaction Log (EUTL), which replaces the former Community Independent Transaction Log (CITL). Apart from greater harmonization and differentiation, the changes planned for the third phase will also increase the flexibility and predictability of the ETS. In this respect, expanding the trading period from five to eight years, together with the specific linear reduction to be applied each year, will allow
EU China Cooperation on Greenhouse Gas (GHG) Mitigation 9 enhanced transparency and predictability, which is also expected to lead to greater price stability. China s climate and energy policies: in transition to a cleaner economic model In recent years, China has been paying serious attention to the linked issues of climate change and clean energy. The government is fully aware that the country still faces significant challenges to implementing long-term sustainable development. China is therefore now engaged in a transition to a cleaner economic model. In this process, carbon trading is also seen as a major market-based tool for reducing GHG emissions, as well as for improving energy efficiency. Thus, in China, as in the EU, energy actions are geared towards limiting the country s GHG emissions. The idea is that putting a price on carbon will encourage businesses to use energy more wisely, increasing their energy efficiency and getting more of their energy from renewable sources. At present, the most comprehensive framework for enacting legislation and implementing programmes on these issues is the 12th FYP. Approved in March 2011, the 12th FYP lays down the major strategies for economic development for the period 2011 2015. The plan, for the first time, sets out specific reduction targets for both energy and climate change. The chief goals of the plan are the following: (i) An 11.4% increase in the share of non-fossil energy in total energy use. (ii) A 17% reduction in carbon intensity (carbon emissions per unit of GDP). (iii) A 16% reduction in energy intensity (energy consumption per unit of GDP).
10 Beatriz Perez de las Heras Over the previous five years, various policies and programmes had already been put in place driving reductions in both energy intensity and GHG emissions intensity in several industries. According to data provided by the central government, energy consumption decreased by 19.06% between 2005 and 2010, just below the 20% goal set by the 11th FYP. The 12th FYP sets a new target of 16% reduction in energy intensity. It also provides an opportunity to improve energy efficiency in commercial buildings. This action is especially relevant in the context of the rapid and irreversible urbanization already happening in the country. Since 1992, roughly 200 million people have moved from rural to urban surroundings, and the current migratory flow of about 15 million Chinese moving into cities is likely to continue over the next two decades. Recent projections estimate that, by 2028, approximately one billion people will be living in cities in China and 221 cities will each have a population of over one million. As a consequence, commercial floor space is likely to increase by 12% from 2010 to 2015. The key industries needed for urban infrastructure development cement, steel, petrochemicals and aluminium are also the leading sources of GHG emissions. In line with previous programmes, the 12th FYP envisions the commercial buildings sector delivering 16% energy intensity reductions by 2015. This ambitious target will require substantial changes in rules and practices regarding both the construction of new buildings and the renovation of existing ones. Further proposals also target an increase in non-fossil energy sources to 11.4% of total energy use. This goal includes hydro, nuclear and renewable energy. Programmes to promote the use of alternative energy sources have already been put in place as of 2008. Indeed, in recent years, China has
EU China Cooperation on Greenhouse Gas (GHG) Mitigation 11 become the world s leading producer of solar panels and wind turbines, and has the largest concentration of hydropower facilities in the world. Achieving these energy efficiency and clean energy targets depends to a very large extent on China s increasing capacity for innovation. This is probably the most dramatic need to be addressed in the county s transition to a more sustainable economic model. Although China has made significant investments in research and development (R&D) over the last 10 years, increasing on average by 20% per year, R&D spending still accounted for just 1.7% of GDP in 2011. The 12th FYP sets a target of increasing this percentage to 2.2%. Innovation and technical capacity are also key challenges to achieving the goal of a 17% reduction in carbon intensity. The target is in line with the Chinese government s pledge of a 40 45% reduction from 2005 levels by 2020, made in the lead-up to the Copenhagen climate negotiations. Having become the world s largest GHG emitter, this target appears difficult to achieve without further aggressive policies to promote low-carbon energy development. As a key tool, the 12th FYP envisages the gradual establishment of a carbon trading market by 2015, though it does not set out the specific means of achieving it. In November 2011, the State Council, under the direction of the National Development and Reform Commission ( NDRC), published the Work Plan for Controlling Greenhouse Gas Emissions during the 12th FYP period. This plan sets out the overall requirements and main objectives for the control of GHG emissions to 2015 and stresses the need to establish carbon trading schemes. Almost immediately after release of the Work Plan, the NDRC officially approved pilot carbon trading programmes in seven provinces and cities: (i) Guangdong, (ii) Shenzhen, (iii) Hubei, (iv) Chongqing, (v) Shanghai,
12 Beatriz Perez de las Heras (vi) Tianjin, and (vii) Beijing. Throughout 2012, the NDRC worked on the regulations for the pilot carbon emissions trading programmes, calculating and defining overall caps for GHG emissions in the designated areas and formulating plans for distributing specific emissions targets. Trading platforms were also set up in each pilot area. Beijing, Shanghai and Guangdong launched their pilot programmes in March, August and September 2012, respectively. The target is for these regional pilot carbon trading schemes to be fully operational in 2014, so that a national carbon ETS may be established in China by 2016. China is thus in the process of testing carbon trading. The results of this experience will determine the future development of carbon markets in China. Effective implementation of the current pilot programmes will have to overcome the shortcomings observed in previous experiments on CO 2 emissions trading. Specifically, critical elements that will need to be put in place include basic GHG emission indicators for key sectors in the government s statistics system, official accounting guidance for industries and enterprises and a reporting system. In addition, an improved system for monitoring GHG emissions will help to prepare the national GHG inventories which will have to be submitted more frequently to the United Nations Framework Convention on Climate Change (UNFCCC) under the Cancun Agreements. Domestically, a lot of work needs to be done before determining how the pilot schemes in operation can be integrated with the existing EU ETS and any future international scheme. For now, the main concern centers on the way to build markets in a country with no solid free-market economy. The Chinese economy is still characterized by strong government control and intervention, a significant proportion of stateowned enterprises and an un-liberalized price-control system,
EU China Cooperation on Greenhouse Gas (GHG) Mitigation 13 all of which pose fundamental difficulties to the establishment of a free market-based structure. Nonetheless, China s determination to change the trajectory of its traditional growth, as the 12th FYP clearly illustrates, may now enable the country to build an innovative national carbon market. Lessons learnt from both domestic experiments and cooperation with the EU on emission reduction projects will prove critically important in achieving this goal. The EU China Partnership on Climate Change: Successful Cooperation on Emission Mitigation Policies and action taken by the EU and China over the last five years show a common interest in reducing GHG emissions, ensuring energy security while promoting clean energy sources and developing green technologies. This convergence of strategic goals has favoured the establishment of a significant partnership. A positive joint experience on CDM projects On 5 September 2005, a milestone agreement establishing a bilateral partnership on climate change was signed between the EU and China. Through this partnership, the EU tried to influence China s position in international climate change negotiations, by providing assistance for specific projects thus offering the country valid alternatives for economic development. Two of the major projects of the partnership are the EU China CDM Facilitation Project, and the EU China Cooperation on CCS.
14 Beatriz Perez de las Heras The first project extended from 28 June 2007 to January 2010. It contributed significantly to China s transition to a low carbon economy. Despite initial reluctance, China is now greatly interested in attracting foreign investment for its energy and industry infrastructure development through CDM projects. As a result, it has become an ardent advocate of the CDM and backed its continuation into the post-2012 period. On the European side, there is also clear interest in the CDM market. The governments of many Member States are providing support to their domestic companies for purchasing Certified Emissions Reductions (CERs) from China, and some have even put in place governmental CER-purchase programmes as a critical tool for meeting their mitigation targets. Of all the EU-financed CDM projects, the EU China CDM Facilitation Project, with a budget of D 2.8 billion, is the largest to date. Both public and private actors were involved in its implementation, and it covered a wide range of activities, such as policy research, capacity building and the creation of a CDM market. The EU has become the main investor in CDM projects and the main purchaser of CDM CERs. China has emerged as the largest CER producer and thus the largest supplier of emissions reduction credits. In general, the two partners have been successful in meeting many of the objectives set out. However, there has also been a disparity of interests and views in some areas, such as the impact of CDM on sustainable development and the extent of technology transfer within CDM projects. In the first of these areas, the final report on the Facilitation Project notes that many CDM project stakeholders participated primarily with a view to obtaining greater profits and had no interest in promoting sustainable development. The most serious
EU China Cooperation on Greenhouse Gas (GHG) Mitigation 15 problems concern the transfer of technology. The most widely debated question continues to be how to safeguard intellectual property rights: without a certain degree of protection, European enterprises are reluctant to transfer technology to China. Technology transfer as a leading challenge: the EU China project on CCS Technology transfer is also the main objective and, thus, the greatest challenge of the EU China project on CCS. The project aims to develop and demonstrate advanced near-zeroemission coal ( NZEC) technology through CCS. This technology is also being tested in developed countries, since it is considered a useful, complementary tool for reducing CO 2 emissions. As noted above, the EU plans to undertake a number of pilot projects by 2015 within the third phase of the ETS. The EU China project is expected to come to an end in 2020, with the construction and operation of a commercialscale demonstration plant fired by NZEC using CCS technology. China has already started to develop alternative energy sources, but coal and other fossil fuels still play a major role in domestic energy as a whole. CCS involves capturing the carbon dioxide in fossil fuels either before or after combustion and storing it for the long-term in geological formations, such as depleted oil wells. CCS technology is expected to reduce CO 2 emissions in large industrial sources and coal-fired power stations by around 85%. This technology therefore offers a valid way of continuing to produce energy from coal combustion without emitting high levels of CO 2, by making it possible to capture and store emissions.
16 Beatriz Perez de las Heras Working Together in a World Emission Trading Scheme The common experience, the lessons learnt and the mutual knowledge and trust generated by dialogue between the EU and China should foster more ambitious bilateral cooperation in coming years, despite the two partners continuing differences on the definition of a post-kyoto agreement. Greater collaboration between the two partners will strengthen the acceptance of emissions trading as a cost-effective policy instrument and encourage the emergence of a global carbon market. Development of carbon markets and survey of CDM in the prospect of a post-kyoto regime A well-designed and implemented cap-and-trade scheme will create incentives for industries to reduce emissions at the least possible cost and generate incentives for investments in cleaner, innovative production methods. The Kyoto Protocol established an ETS for industrialized countries with mandatory targets. Outside Europe, other markets are developing across the world, including those already in operation in the US, Canada, Australia, New Zealand and Japan. Others are expected to be launched over coming years, including those currently at a pilot phase in India, South Korea, Mexico and China. The proliferation of carbon trading schemes indicates that this mechanism is being consolidated as a major instrument in climate policies. The Kyoto Protocol s ETS for industrialized countries sought to create a global price that would benefit developing countries. In practice, this has not been the outcome, since CDM projects have not been as effective as expected. This is
EU China Cooperation on Greenhouse Gas (GHG) Mitigation 17 mainly due to high transaction costs and the concentration of such projects in certain regions and countries. In addition, over recent years, the CDM mechanism has been viewed as an obstacle to a global climate agreement, in that it provides developing countries with an instrument that allows them to obtain considerable revenue without signing up to binding agreements. In the short term, there is no prospect that developing countries will accept absolute caps, a critical condition for a global trading scheme based on the Kyoto Protocol model. China has no obligation to cut emissions under the Kyoto Protocol because the country was still classed as developing when the Protocol was drafted. However, China is now the largest GHG emitter and is likely to overtake the US as the world s largest economy in a few years time. This places the country under increasing international pressure not only to accept emission targets but also to provide finance to poorer countries. One option for China to contribute to international mitigation efforts might be for it to join an international ETS. Linking carbon trading schemes as a bottom-up option Difficulties in establishing a global Kyoto carbon price have led to other bottom-up proposals for establishing a global market. One such alternative is to link domestic emissions trading schemes, such as the EU s and the emerging schemes in China. This merger could then be extended to embrace other national trading programmes. According to the EU s estimates, in particular, the more harmonized, predictable character of the European ETS in its third phase of implementation (2013 2020) could make it the central pillar of a future global carbon market, which would allow its advantages to be maximized and globalized.
18 Beatriz Perez de las Heras More specifically, by 2015, the EU proposes to develop a joint emissions market with some OECD member countries. Towards 2020, that market could be expanded to include China, as well as other countries such as the US, Japan and Australia. In August 2012, in a first and major step towards a global linking of emissions trading schemes, the EU and Australia reached an agreement to link their respective cap-and-trade systems by no later than 1 July 2018. An interim link is expected to be established from 1 July 2015. Another initiative that could contribute to shaping a carbon global market is the International Carbon Action Partnership (ICAP). Launched on 29 October 2007, the ICAP is made up of countries and regions that have implemented or are actively pursuing the implementation of carbon markets. The EU is a founder member. China is not an ICAP member, but this international partnership provides assistance to any government interested in establishing cap-and-trade systems. It is the only multilateral forum in which governments discuss relevant issues relating to the design and compatibility of any linkage in ETS. The ICAP could help lay the foundations for a global network of regional carbon markets sharing a common price. Any attempt at linkage, whatever its geographical scope, will require a minimum of harmonization between the linked schemes in order to prevent competition distortions between different economies. To date, the convertibility of emission permits across different markets has been limited. The most striking differences concern inter alia mandatory emissions targets and compliance, eligibility for credits, compensation and cost containment measures. The establishment of a Chinese ETS is a significant step. Linking it to a growing international scheme, such as the EU ETS would be an even greater achievement.
Conclusion EU China Cooperation on Greenhouse Gas (GHG) Mitigation 19 Climate change is the most difficult issue on the EU and China s agenda. It is also the area where a rapprochement is currently developing most rapidly. Different approaches to the post-kyoto regime as well as the parties different economic and political systems and their different positions in the current context of economic recession are likely to create problems. Linking carbon markets must be a common interest and objective for greater cooperation. With mounting international pressure on China to commit to absolute emission targets, emissions trading is a valuable policy tool to reduce the energy- and carbon-intensity of its economy. Any support the EU may provide to the Chinese government should therefore help it not only to address its emission targets but also to ensure the inter-changeability of emission allowances with the EU ETS. At the same time, this compatibility will enable further linkage to carbon markets in other countries and regions. Strengthened interaction on research, capacity building and technology transfer will be crucial to achieving this target. Enhanced cooperation between the EU and China will also strengthen their credibility as global actors in international climate negotiations.