Carbon pollution exacts a tremendous cost on our economy, environment and health. One key action we can take to reduce these damaging emissions is to put a price on carbon.
A carbon price can take several different forms, but the concept is simple: require polluters to pay for the greenhouse gases they emit, thereby assigning to them the cost of the environmental damage they cause – and reducing emissions overall. In many instances, the proceeds can then be invested in projects and programs that make our communities greener and more sustainable; some jurisdictions even return a portion of the proceeds to the citizenry.
This is not the entire climate solution, but it is certainly a critical part of it and to date, more than 45 countries and 30 cities, states and provinces have pursued carbon pricing programs. These programs cover more than 12 billion metric tons of carbon dioxide equivalent emissions in 2020, representing more than 22 percent of global greenhouse gas emissions.
California and China are among the jurisdictions that have established these programs. California’s cap-and-trade program, the product of the landmark Global Warming Solutions Act of 2006, has been operating since 2013 and is one of the largest carbon markets in the world with a cap of 334 million metric tons of carbon dioxide equivalent emissions in 2020. It covers electricity generators and large industrial facilities with significant emissions as well as distributors of transportation, natural gas, and other fuels. In the program’s first five years, the state’s greenhouse gas emissions dropped by 3 percent and since its inception, cap-and-trade auctions generated more than $13 billion for the state.
China announced its emissions trading system in 2011 and two years later established regional pilot programs in Beijing, Chongqing, Shanghai, Tianjin, Guangdong, Hubei and Shenzhen. Sichuan and Fujian provinces added emissions trading system pilot programs in 2016. By early 2020, accumulated trading for all pilot programs covered 643 million metric tons of carbon dioxide equivalent emissions across various sectors, valued at approximately 13.8 billion Chinese Yuan (or approx. 2 billion US dollars). These regional pilot programs will gradually be incorporated into the national system, which covers the power sector and was launched in 2017 (though trading has not yet begun). It is expected to become the largest market in the world, covering an estimated 3.3 billion metric tons of carbon dioxide equivalent emissions.
As these carbon markets mature and new emissions trading programs are created throughout the world, it’s critical that we explore ways to learn from one another and expand collaboration. One approach is to link carbon markets, which California did with the Canadian province of Quebec in 2014 and the province of Ontario from January 1, 2018 through June 15, 2018.
While the word “linkage” is generally associated with the type of direct, bilateral – or “full” linkage – that California and Quebec have pursued, in reality, jurisdictions may also consider unilateral, or “indirect” linkage, as well as even less formal alignment, including sharing expertise, information and best practices. This is an idea known as “linkage by degrees.” Even informal linkages between programs offer potential benefits including the more efficient reduction of global emissions and the important political signal of solidarity towards a shared objective of reducing greenhouse gas emissions.
While formal, direct linkage between California and China is not possible in the near term – given California’s statutory requirements and because China’s national system has not yet launched – in many ways the two jurisdictions have already begun the process of informal linkage. This includes alignment of design elements and sharing of best practices.
In fact, since 2013, California has hosted dozens of visiting delegations, webinars, and video conferences with Chinese officials. Additionally, California delegations have travelled to China both to share information about California’s program and to learn more about China’s developing carbon market. Based on these exchanges, California has focused much of its work on supporting and encouraging China’s efforts to build strong compliance and enforcement mechanisms and incorporate rigorous, reliable reporting and verification protocols in its programs.
As a result of this collaboration, and other cooperation between Californian and Chinese universities, institutions, and municipalities, California’s cap-and-trade market and China’s emissions trading system share a number of similarities in auctioning, offsets, banking, and program coverage. Both systems also established roughly the same emissions thresholds for program participation (differing by only 1,000 metric tons of carbon dioxide equivalent emissions) and require annual emissions reporting and third-party verification. Additionally, firms operating in California and China – from multinational companies to brokers – could swap or trade credits from one carbon market for credits in another through structured financial deals. This means, even in the absence of linkage, compliance entities operating in both jurisdictions could soon be making decisions based on the internalization of both carbon prices.
Looking to the future, researchers at the California-China Climate Institute, Tsinghua University, Wuhan University, UCLA and other institutions have identified several areas for further informal alignment in the operation and design of China’s program, including:
Operation. In general, operational considerations include the technical and platform infrastructure that make the market work. Currently, the state of California and other subnational jurisdictions engage in emissions trading over platforms such as the Western Climate Initiative, Incorporated. In China, each of the pilot programs operate on different platforms.
- Standardizing trading platforms: With the emergence of the national program, China could standardize its trading platform, and even seek to align key elements of infrastructure security by working with California and Quebec to better understand their tracking system and auction platform. Doing so would give China clear insight into how to operate a robust, secure platform that would have environmental benefits.
- Providing a model for the rest of the world. While aligning operational elements might seem quite technical, it is also important. Imagine if different jurisdictions had cooperated to standardize electrical outlets years ago. The benefits of different platforms speaking the same language are significant and this alignment could help inform development of other new carbon markets, while making it easier to link with other jurisdictions that have carbon markets, like the European Union and New Zealand.
Design. China has already made a number of design decisions for its market based on California’s program, and as it’s implemented, adapted and improved, there will be further opportunities for alignment, including:
- Expanding the program’s scope: California brought upstream emissions from fuel usage into its program in 2015, an example China might follow.
- Incorporating consignment auctioning: Chinese researchers have been interested in learning more about California’s approach to consignment auctioning.
- Improving carbon market management and oversight: This includes allowance management, market volatility, market liquidity and credit validity.
- Bolstering cost management systems: China can benefit from California’s experience (e.g., with price collars) to help ensure that the price of carbon is sufficient to incentivize emissions reductions and to maintain some price certainty.
- Developing additional complementary policies: California and China stand to benefit from sharing information regarding emissions reporting requirements, allowance allocation, leakage prevention rules, allowance prices, enforcement mechanisms, offsets, banking and borrowing, market integrity, approaches to program changes and use of program proceeds.
Expanding even informal linkages between California and China’s carbon markets sends a strong signal to the rest of the world that despite our differences, climate collaboration is not only possible, but necessary. Importantly, further alignment could also move the world closer to a universal carbon price. We have a long way to go, but there is a clear path to progress in front of us.