A carbon tax might be better for China than emission trading

“I was responsible for milk quotas in my previous Commission position. Emission trading for carbon dioxide is not something I believe in.”

The director in DG Environment was sceptical when a guest asked about emission trading as a policy option back in 1992. Later, the successful Swedish green tax reform was one of the inspiration sources behind the Commission proposal for a European energy and carbon tax. The first choice for the climate experts in Brussels was a tax, not emission trading.

However, it was not possible to achieve consensus around the European Commission proposal due to objections from in particular the United Kingdom. The European emission trading system (ETS) emerged as an alternative. Now, the ETS is well established, but still has problems after many years of low prices for the certificates.

Against this backdrop, the enthusiastic statements from Brussels policy-makers on the new Chinese emissions trading system seem oversimplified.

During recent years, there has been problems in the Chinese pilot markets with inter alia too many emission permits issued and a lack of tough sanctions towards companies not paying for emission certificates.

The national system will to start with only cover power production. Experts have questioned the lack of a ”hard cap” for total carbon dioxide emissions from the sector. Instead, emission certificates will be allocated to power plants according to their electricity production.

There are a number of other question marks. In addition to the lack of a cap for total emissions, the crucial issue of effective verification is not convincingly addressed and it is unclear how transparent the system will be to the public.

An upstream carbon tax on coal and oil has been identified by the OECD and others as easier to implement than emission trading permits. Even when China has now decided to try a national ETS, there is still the opportunity to apply a carbon tax in the non-ETS sectors. Such proposals have been developed, and even if there are recent negative statements from Chinese policy-makers regarding a carbon tax, the idea should not be abandoned.

The European Commission is investing heavily in promoting emission trading in China. A few weeks ago, ICF was awarded a ten-million-euro contract to support cooperation between the European Union and China in this area.

To help China avoid the mistakes in Europe is certainly a worthy task. However, the Commission’s approach is unbalanced, strongly promoting one of the possible economic instruments. Maybe one reason is perceived economic benefits from a future linking between the European and the Chinese ETS systems, but such a linking is unlikely to happen.

A strategy to promote effective policies against climate change in other countries should take a wider view and for example devote more resources to advise on the introduction of carbon taxes. In the case of China, such a broader approach seems well-motivated.

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