Linking cap-and-trade markets across the Pacific

By Supriya Tandan March 7, 20177 March 2017

Linking cap-and-trade markets across the Pacific

China, the world’s leader in greenhouse gas emissions, is moving ahead with its plan to implement a national emissions trading (or cap-and-trade) system. Meanwhile in Canada, Quebec emitters can already trade with those in California, and Ontario is set to link with these markets in 2018.  Beyond that, the question is whether we will soon see a carbon market spanning both sides of the Pacific Ocean that could tie the currently fragmented approach to emission reductions, and that would hopefully help lower costs and encourage innovation.

So far there have been no formal announcements about linking a Chinese national market with North America ones but the Paris Agreement does encourage and provide mechanisms to support such a linking.

The Chinese government has been experimenting with a carbon market in two provinces and five cities since 2013. Local legislators, including municipal governments in both Shenzhen and Beijing, developed the legal framework. This unique regulatory approach to cap-and-trade is held up as a key factor in swiftly moving the Chinese experiment forward.

After nearly four years of experimentation, a national emissions trading system is expected in July 2017. It’s understood that local legislators at the provincial level will still be responsible for the implementation and monitoring of the emissions trading system while the central government will be responsible for oversight and guidance. The Chinese government is expected to ensure that this national market system is running smoothly before contemplating linkages with other jurisdictions.

If and when it does, it will face some of the hurdles that California and Quebec legislators encountered when linking their respective markets, including: offset rules, monitoring, reporting and verification provisions, market infrastructure and technology options. For North Americans, Ruth Greenspan Bell, an environmental lawyer and public policy scholar, also expresses concerns about carbon accounting practices in China:

I know from practice as well as theory why emissions trading in China is a risky bet. I was part of a team that tried to set up a pilot sulfur dioxide emissions trading system in Taiyuan, China, several years ago. What I learned was that China so lacked reliable monitoring that it would have been impossible to know whether emissions fell or went up, that there were huge disconnects between Beijing's pollution objectives and what was going on in the provinces and cities, and that reports of corruption raised legitimate concerns about the reliability of policies and rules.

That said, international cooperation to link carbon markets can be guided by Article 6 of the Paris Agreement which encourages the development of an international crediting mechanism and a goal to establish accounting rules for internationally transferable units. Finally, even if linkage of markets is not possible both Canada and China can benefit from domestic cap-and-trade systems. As Song and Kvisle from Blakes write:

A number of additional business opportunities may arise for a variety of Canadian companies, including those involved in renewable energy or emissions reduction technologies as the development of the Chinese Carbon Market with financial incentives to reduce GHG emissions may lead to an increase in demand for their products.  Similarly, financial incentives in China may encourage the development of new technologies that could then be utilized in Canadian jurisdictions to assist in their GHG reduction initiatives.

Photo licensed under Creative Commons by kevin dooley

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