China surprised and disappointed by Australia’s carbon repeal

Chinese officials have expressed their surprise and disappointment that Australia is seeking to repeal its carbon price, just as the world’s second largest economy and biggest polluter prepares to launch new carbon trading schemes of its own, and seek linkages with international markets.

Just hours after Australia’s Environment Minister Greg Hunt was hailing the passage of the carbon repeal legislation through the lower house in Canberra as a “victory for the people”, his somewhat more powerful and longer sighted Chinese counterpart, Xie Zhenhua, was hosting a presentation at the Chinese pavilion at the climate talks in Warsaw, hailing the start of pilot carbon trading schemes in Shanghai and Beijing next week.

China plans to have 7 such pilot schemes in operation within a year (Shenzhen has been trading for six months), and is looking to eventually link its scheme with other carbon markets in the Asia Pacific region, including New Zealand, California, South Korea and Japan.

That list was to include Australia, but the likely repeal of Australia’s carbon price next year (if it is passed by the Senate) has disappointed Chinese officials, who had spent some considerable time with the previous Australian government discussing the structure of carbon markets.

In a response to a question from RenewEconomy, Jiang Zhao Li, a director of the powerful National Development and Reform Commission, said China respected an individual country’s right to implement its own strategy, but expressed hope that the “right decision” will be made in the future and that a link between the two countries could be achieved.

Li Junfeng, the director general of the influential National Centre for Climate Change Strategy Research and International Co-operation, was less cryptic:

“It is not good news for us. This can serve as a reminder that carbon markets are man-made markets, with carbon quotas defined by governments,” he said. And governments, he said, needed to stick to their word to ensure market stability. “The most important thing we want to do through carbon trading is to lower our emission costs.”

Earlier, Jiang told the audience that  China hopes its nascent carbon markets would develop into a mature and global markets. He noted the recent central committee commitment to using markets to play a “decisive” role in resource allocation, and he too, noted the need for a government to stick to its word.

“We need to rely on concrete, legally binding systems, instead of slogans,” he said. “If we make a promise (to develop a market), we will definitely honour it. To develop low-carbon cities and green development is very important for us.”

The Chinese, however, are taking what could be described as a “suck it and see” approach to the development of their carbon markets, although they would probably define it as “learning by doing”. Rather than creating a binding framework around the individual pilot schemes, it intends to develop those rules as the markets evolve.

There is still debate around whether this should be a series of provincial schemes, which recognises the unique economic conditions of various regions, or one that is centrally controlled. The latter would likely be preferable if international linkages are to be achieved.

Li Xuedu, a former negotiator for China at the UN-sponsored climate talks and now with the Asia Development Bank, said the wider the market, the deeper and better it would be, and the lower the price.

He said international markets would help to find the lowest marginal cost of abatement. That could result in flows of capital into one market, but would offer other investors cheaper emissions reductions.

The hardest part of creating such structures was political will, and making sure that the level of ambition and monitoring and verification was also aligned.

“After 2020, a lot of carbon markets will likely be linked,” Li said. “If individual countries didn’t consider linkages, it would be problematic.”

Professor  Duan Maosheng, from Tsinghua University, said the ETS pilot projects would help Chinese economy be more market based.

He noted that the three pilot schemes that will be operating by the end of the next week would cover several thousand companies, 40-60 per cent of total emissions in each pilot area, and indirect emissions as well.

However, one of the major problems for Chinese carbon markets is the lack of data about individual company emissions. Some speakers said some companies had little information about the level of their own emissions.