This is exactly where the E.U. was in 2005, when it embarked on the pilot phase of its ETS—and the lack of emissions data allowed companies to game the system. E.U. governments asked companies to provide their own, unverified historical emissions data, and many inflated their numbers so as to claim more free allowances from government. This practice created an overhang of surplus permits that led to a price collapse in 2007.
Generous allocations of allowances are probably inevitable as the price paid for industry acceptance, however, suggests Karl Upston-Hooper, legal counsel of GreenStream Network, a Finnish carbon asset manager that is active in China. “You will struggle to find an ETS that is not overallocated” in its early phases, he says. Indeed, he argues that the pilots in China are less about creating carbon markets and more about gathering data. “I’ve taken the view that they’re implementing an emissions-monitoring system, not a carbon market—and I’m okay with that as a first step on the road.”
Most observers—including from the environmental movement—are prepared to give China’s regulators time to get things right. “It is our view that the first step for Chinese ETS is to get the system right from the beginning—the trading platform; the monitoring, reporting and verification system; [emissions] inventories; getting companies informed and cooperative—and gradually shift toward more stringent caps,” says Li Shuo, a climate and energy campaigner for Greenpeace East Asia. Plenty of studies see China’s emissions peaking by 2030. Some are more optimistic: recent ones predict 2025 to 2030.
A further data challenge is whether China’s regulators will be sufficiently transparent and even-handed when it comes to the country’s carbon markets. “In Europe and elsewhere, ETS data are under public scrutiny. That may not be the case in China,” says Point Carbon’s Chai.
Another concern is insufficient coordination among the seven pilots, Li says. Indeed, rivalry exists among the various authorities, with Beijing deliberately encouraging a degree of “policy competition” to test differing approaches to see which works best.
Last, despite a recent announcement by the powerful National Development and Reform and Commission (NDRC) that it is to propose a national carbon cap for China’s next five-year plan, which runs from 2016 to 2020, a national Chinese carbon market is not assured. Other methods could prove more effective. “In China the ETS is not the only tool,” says Wu Changhua, Beijing-based Greater China director of the nonprofit Climate Group. She notes that the nation’s finance ministry is promoting a carbon tax whereas other government ministries are considering a system for crediting and trading energy-efficiency improvements.
Wu also cautions that international media speculation around the introduction of a national carbon cap by 2016 is overblown. She argues that the NDRC is agitating for the inclusion of the concept in the next plan to ensure resources are available for more research and policy development. “One thing is for sure,” she adds. “The political leadership in China is much more serious, stronger and determined to tackle environmental problems. But it will be a journey. We’re not going to get there immediately.”