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China can learn from Australia when it puts a price on carbon

China’s people and politicians are keenly interested in reducing emissions: what can we learn from each other? EPA/Wu Hong

China’s political commitment and ambition on climate change allow it to take global leadership. Australia is well placed to provide guidance on suitable policy approaches, sharing its experiences with carbon pricing. And China is keenly interested in learning from us. While climate change does not seem to have figured prominently in Prime Minister Gillard’s consultations on her China trip, there is an active exchange between the two countries at the level of specialist policymakers and researchers.

As Vice Chairman Xie of China’s National Development and Reform Commission - effectively China’s climate change minister - said during a recent visit to Australia: “China is willing to be open, frank and pragmatic and to exchange views and experiences with other nations … The two countries have great potential for cooperation.” During the visit to UNSW and ANU, a high-level delegation of policymakers and researchers explained China’s goals and challenges for low-carbon development, and gauged opportunities for collaboration.

China has a target of reducing emissions intensity by 40 to 45% over the 15 years to 2020. Already there have been calls for greater ambition: ZhongXiang Zhang at Shanghai’s Fudan University wants a 46 to 50% reduction. And as analysis by Jiang Kejun of China’s Energy Research Institute shows, it is possible for China to achieve a peak and then have its emissions decline within perhaps a decade.

This would put China on track for deep reductions in coming decades, especially when coupled with a structural shifts towards higher value industries and a less prominent role for physical investment in the economy. The concept of “green growth” is gaining support in China, partly as a result of growing disenchantment with air pollution and other forms of environmental degradation, and partly out of the vision of China as a global leader in advanced technologies.

Whether we will see such low-carbon scenarios become reality depends on political commitment and the right policy framework. A myriad of government interventions and regulations is already in place in China, from energy efficiency standards to rapid expansion of renewable power and a directed shift away from low-value, high-energy industries.

But the future could well belong to carbon pricing. These days, it is a mainstream view among Chinese policymakers that there should be a price tag on emissions. Seven emissions trading pilot schemes are in preparation, with several expected to start this year. Altogether they cover a population of over 250 million people. A national emissions trading scheme has been foreshadowed, and recent public statements have again raised the prospect of a national carbon tax. Meanwhile, a major research program on the design of a national carbon trading scheme has been announced.

Designing an effective and efficient carbon pricing scheme is a big challenge in an economy that is partly free market, yet in many aspects still heavily regulated. The electricity sector is a prime example. The pilot emissions trading schemes plan to include the power sector, and national level decision makers have made clear that electricity would be subject to a national carbon pricing scheme. But electricity tariffs are fixed and power stations have locked in supply contracts.

Ultimately it will require comprehensive market reform in China’s energy sector. Indeed, market-based carbon policies could help accelerate other market reforms in China. These will bring their own economic advantages, quite separately from their environmental benefits.

In many other regards, the experiences with emissions trading in Australia, Europe, California and elsewhere are transferable to China. Chinese policymakers can observe the design of the different schemes and their performance in practice.

China already knows one thing it does not like the look of: the extreme volatility of carbon prices in Europe’s trading scheme. Starting a Chinese national scheme with a fixed, government determined price like Australia’s is clearly of interest: it behaves like a tax, but can easily be turned into a market-based system. Or China might choose a straight out carbon tax. That would mean forgoing direct international trading of emissions units, but this may not be as important to China as it is for many smaller countries.

Another important area of experience is the financial treatment of industries and the use of carbon revenue. Reports from the pilot schemes suggest that giving away the permits to emitters is the default position. The same was done in the early years of the EU scheme, to the detriment of consumers and taxpayers. But China need not repeat past mistakes of the West. Australia’s model of recycling about half the value of permits to lower to middle income households via tax cuts and welfare increases is a better way.

Of course, China is aware that there is deep political uncertainty over the future of Australia’s carbon pricing mechanism. But that need not affect opportunities for collaboration, nor the chance to learn from Australia’s experiences.

Update: On April 9, the Australian and Chinese governments announced the formation of a carbon market experts group.

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