Research Report
Ⅰ. Background and Purpose
□ Research Background
○ Referring to the so-called differentiated responsibility, China has maintained a lukewarm attitude toward the introduction of a mandatory greenhouse gas emissions trading system, which is one of the three key agreements of the Kyoto Protocol intended to reduce the greenhouse gas emissions.
○ However, with the gradually increasing international pressure on the Chinese government, combined with the Chinese government’s realization that the energy, climate change mitigation and economic development are closely interconnected since its 11th Five-Year Plan (2006-2011), began to take greenhouse gas emission reduction measures.
○ In the process of these changes of its position, the Chinese government has permitted two provinces and five cities to carry out the ETS pilot program at the local government level on November 2011 as the preliminary step to a gradual introduction of the ETS.
○ Considering the importance of China’s role and the introduction of the ETS in achieving the global GHGs reduction target, and that China is the largest trade and investment counterpart of Korea, the Chinese move in regard to the ETS has significant implications for Korea, which plans to implement the ETS from 2015.
□ Research Purposes
○ This paper has reviewed the present situation of the Chinese ETS implementation to provide useful implications for the design and operation of the ETS for which the Korean government has been preparing.
○ It also aims to provide Korean businesses that have entered the Chinese market, or are prepared to do so, with information that equip them for a change in the business environment.
Ⅱ. Key contents
□ China’s Goals and the Macro Policy to respond to Climate Change
○ The statistics of the IEA show that the total greenhouse gas emission of China in 2010 was 8.94billion tons, accounting for about 35 per cent of the world’s total CO2 emission, 33billion tons. The Chinese CO2 emission is the world’s largest and has grown very rapidly.
○ Considering such situation, the Chinese government has set up a long-term plan on November 2009 to reduce emissions per unit of GDP by 40-45 per cent by 2020, compared to the 2005 level. China also has established a mid-term plan, during its 12th Five-Year Plan, to reduce energy consumption per unit of GDP by 16 per cent and CO2 emissions intensity per unit of GDP by 17 per cent.
○ To achieve these goals, China put heavy focus on supporting the energy sector, especially the increase of energy efficiency and the development of clean energy, and at the same time decided to introduce the ETS, which is a cost-efficient and market-based mechanism.
□ The Environmental Pollution Emissions Trading System
○ China has carried out ‘The Environmental Pollution Emissions Trading System’ at the level of local government since the late 1980s prior to the introduction of the ETS. The system started as a part of a policy to improve water and air pollution, focusing on sulfur dioxide and COD (Chemical Oxygen Demand).
○ The Environmental Pollution Emissions Trading System is similar to the ETS (Carbon Emissions Trading Scheme) especially in terms of the following: target pollutants; the target participants; restrictions on the total pollutant; allocation of the pollution permits; collection and buyback of the permits by the government; permits trading methods; management on the permits; and fines for the failure to comply.
○ However, the actual operation of the system has not been successful, mainly due to the following: lack of limit on total emissions; a system too backward to measure, report and verify; unreliability of the permits due to errors in the system framework; weakened execution due to information asymmetry; lack of willingness of the government to regulate the emissions trading market; and lack of participants in the system, etc.
○ Nonetheless, the Environmental Pollution Emissions Trading System has an operational mechanism very similar to that of the Carbon Emissions Trading Scheme. Thus, it would be fair to say that China has obtained meaningful experiences to a certain extent in operating the ETS down the road.
□ The Current State of the Establishment of ETS Pilot Program of the Seven Provinces and Cities
○ On the whole, in evaluating the Current State of the Establishment of ETS Pilot Program of the Seven Provinces and Cities, Beijing, Shanghai, Tianjin, and Guangdong show a relatively rapid progress, while the overall speed of implementation for others still seem to remain in the early planning stage.
○ Especially, apart from some provinces and cities, specific methods of implementation or legislation, in the formulation of policy and the legal system for implementing the pilot program, do not exist yet.
○ However, some contents are worthy of notice. First, it is unusual that Beijing has adopted such strict a limit, for mandatory ETS participants, as 10,000 tons of CO2 yearly, which is much more stringent than the Korea’s criteria of 25,000 tons.
○ Second, the allocation of emissions permits in Beijing and Shanghai was calculated based on the past emission level. It is likely that the permits can be allocated mostly free of charge in the early stage of implementation, as done similarly in Korea.
○ Thirdly, the seven regional pilot sites have, or plan to build, their own exchange center. In addition, most of the exchange centers trade not only carbon but also carbon dioxide, COD and other various air and water pollutants.
○ The exchange centers mostly run on a membership basis and consider it important to maintain cooperation and networks with domestic and foreign carbon credits exchange centers as well as other related institutions.
Ⅲ. Conclusions and Implications
□ First, when we make improvements to our own system, we need to consult detailed researches on what is different in China’s than ours, such as industry selection criteria for mandatory participation in ETS.
□ Second, since Korea has neither a specific plan or experience related to emissions exchange, aggressive activities and experiences of China’s major exchanges can give us some guidance. We need to build legislations and conduct pilot projects on the establishment and operation of the exchange soon.
□ Third, Korean businesses must consider the introduction of mandatory ETS by the Chinese government as a threat and an opportunity at the same time. Enterprises which would enter the Chinese market must prepare for China’s ETS.
○ On the one hand, the introduction of ETS in China will increase the cost of the Korean businesses that emit many GHGs. Therefore, our enterprises that may be participants must prepare, with timely understandings of the content of China’s ETS, to minimize potential burden by the system.
○ On the other hand, our businesses that have GHGs reduction technology need to consider entering the Chinese carbon market, and our government needs to support such businesses.
□ Finally, in preparation of the implementation of ETS in 2015, 15 local governments of Seoul, Pusan and other municipalities are implementing voluntary ETS, mainly for public institutions, from 2010.
○ But, since the program is voluntary, the range of participants and the amount of emission trades are insufficient. To energize the program, its executors need to consider partially adding forceful measures, such as a mandatory participation of businesses and public institutions whose emissions exceed the standard limits.