Carbon pollution reduction schemes? - China one way, Australia the other?

In brief

As part of its commitment to solving serious air pollution problems, the Chinese Government has launched a variety of pilot schemes that will eventually pave the way for the establishment of a national emissions trading market. These steps are in marked contrast to the position in Australia, where the Coalition Government plans to repeal the carbon pricing scheme from 1 July 2014. Partners Kate Axup and Grant Anderson and Lawyer Shona Shang look at the Chinese schemes and the different approaches to emissions reduction being taken in China and Australia.

Background

In November 2009, prior to the United Nations climate change conference in Copenhagen, China pledged to reduce its CO₂ emissions per unit of GDP by 40-45 per cent by 2020, compared with 2005 levels. This commitment was then endorsed in two important national plans: the Twelfth Five-Year Plan for National Economic and Social Development (12th FYP)¹, which includes a goal to reduce carbon intensity by 17 per cent compared to 2010 levels by 2015, and the Work Plan on Greenhouse Gas Emissions during the 12th FYP Period², which provides a detailed action plan for achieving these reductions (including the launch of pilot carbon emissions trading schemes).

In June 2012, the Chinese macroeconomic management agency, the National Development and Reform Commission (NDRC), established the first regulatory framework for voluntary emissions trading in China by releasing the Interim Measures for the Administration of Greenhouse Gas Voluntary Reduction Emissions Trading (the interim measures)³. The interim measures permit any PRC or foreign entity, individual or association who has a qualified project⁴ registered with the NDRC or its branches at provincial level (DRC) to participate in voluntary greenhouse gas emissions trading⁵. The emissions reduction amount produced from qualified projects is certified by the NDRC as a 'China Certified Emissions Reduction' (CCER). CCERs can be traded on the local emissions exchange.

On 29 October 2011, the NDRC issued an official notice on the launch of compulsory pilot emissions trading schemes in Beijing, Tianjin, Shanghai, Chongqing, Shenzhen, Hubei province and Guangdong province. These pilot schemes are to be effective during the period 2013 to 2015 and are designed to pave the way for the eventual establishment of a national carbon emissions trading market.

China's pilot emissions trading scheme

To date, all of the designated regions (apart from Chongqing and Hubei province) have established pilot schemes as required by the NDRC. While each of the pilot schemes is different, all of them are based on a similar set of principles.

For example, all pilot schemes will primarily target emissions produced by the industrial sector, but consideration is given to emissions produced by the non-industrial sector (Shanghai) and large public buildings (Shenzhen). In addition, while coverage thresholds under each pilot scheme are based on the quantity of direct and indirect carbon emissions from participating entity (the pilot company) facilities in previous years, they differ between regions. Similarly, in each pilot scheme, a pilot company's allowed emissions (annual quota) is based on the historical carbon emissions from facilities in operation before 1 January 2013, albeit that allowance is made for the expansion of facilities in most pilot schemes.

Participation in a pilot scheme is compulsory for pilot companies, while voluntary participation by other companies and/or individuals is generally permitted.

Pilot companies may choose to trade any surplus annual quota (ie the amount by which their actual emissions are less than their allowed emissions) on the relevant exchange or carry over the surplus quota to the next year. The trading methodology is set out in rules stipulated by the emissions exchange of each region. Trading methods include bidding, fixed price trading and trading by bilateral agreement. Price control rules are yet to be specified by each region. However, all relevant DRCs have pledged to undertake measures to cope with the fluctuation of market prices.

Each year, the pilot companies must produce an annual report on the previous year's emissions that is submitted to the DRC for review. If a pilot company's actual emissions exceed its allowed emissions, it must make up that difference through obtaining CCERs as off-sets or buying surplus quota on the market.

The table below compares the key features of each of the current pilot schemes.

In most pilot schemes, failure to take certain actions (including the submission of the annual emissions report) may result in a fine or the DRC issuing a rectification order.

Australia – heading in another direction?

In 2011, the Australian Parliament passed legislation to establish a carbon pricing scheme that covers four of the six Kyoto Protocol greenhouse gases (carbon dioxide, methane, nitrous oxide and perfluorocarbons) emitted from the stationary energy, industrial processing, mining and waste disposal sectors.

Broadly speaking, this scheme imposes liability on entities that operate facilities that emit 25ktCO₂-epa or more of greenhouse gases. The scheme comprises two phases: a fixed price phase that commenced on 1 July 2012, followed by a floating price phase that commences on 1 July 2015.

During the fixed price phase, the scheme operates as a carbon tax under which liable entities are able to purchase from the scheme regulator as many carbon permits as they require to cover their emissions (this fixed price increases from $23/tCO₂-e for 2012-13 to $25.40/tCO₂-e for 2014-15). During the floating price phase, the scheme operates as a more traditional 'cap and trade' scheme under which the Federal Government sets caps on the number of carbon permits that may be issued for each year by the regulator, through auctions, and the carbon permit price is determined by the market forces of supply and demand (subject to a three-year price ceiling). Provision is also made for assistance, in the form of free carbon permits, to be given to emissions-intensive trade-exposed industries; the initial (2012-13) assistance rates equated to 94.5 per cent of industry-average direct and indirect (primarily electricity consumption-related) emissions for highly emissions-intensive activities and 66 per cent of direct and indirect emissions for moderately emissions-intensive activities, with the rate declining at 1.3 per cent per annum. In addition, during the floating price phase, liable entities can carry over ('bank') their permits into the future and can acquit up to 50 per cent of their scheme liabilities using international permits (including Kyoto Protocol units).

However, following a change of government in September 2013, the carbon pricing scheme is now likely to be repealed with effect from 1 July 2014.

Instead, the Australian Government now proposes to introduce an Emissions Reduction Fund which will provide up to $3.2 billion in funds (through to 2020) to be used to purchase emissions reductions from Australian projects that are generated in accordance with approved methodologies. The purpose of the fund is to buy the lowest cost emissions reductions on offer through periodic reverse auctions, with the qualifying emissions reductions being created from a variety of sources (such as biosequestration, waste coal mine gas destruction, landfill gas capture and combustion, energy efficiency activities, fuel efficient transport etc) and facility-level emissions reductions. It appears that there is also to be a 'safeguard' mechanism under which a 'sanction' will be imposed on companies that emit more than a baseline level of emissions; this sanction could conceivably take the form of a 'make good' obligation under which these companies must purchase and surrender sufficient qualifying emissions reductions to cover that excess.

It is somewhat curious that China is in the process of introducing emissions trading schemes, whereas the current Australian Government is in the process of dismantling Australia's emissions trading scheme and replacing it with a centralised taxpayer-funded purchasing scheme. Having said this, there is scope for the Emissions Reduction Fund to act as a market-based mechanism. One aspect of this is the fact that the fund will purchase lowest cost Australian emissions reductions through a competitive auction process, although the achievement of this objective is in part dependent upon the difficult task of establishing accurate normalised facility-level baselines so as to ensure that only genuine emissions reductions can be sold into the fund. However, the establishment of a liquid secondary market in emissions reductions is largely dependent on increasing demand for emissions reductions through imposing more rigorous baselines under the safeguard mechanism – a step that the Government is likely to be very reluctant to take.

Perhaps what this demonstrates is that there are different approaches that may be adopted by countries to address the task of tackling greenhouse gas emissions, each with their advantages and disadvantages. Albeit that the Australian emissions trading scheme is likely to be short-lived, there has been a lot of thought that went into its design. While this led to a lot of complexity and, at least in the eyes of the current Australian Government, a lot of unnecessary cost, there are some parts of it that may prove useful to the Chinese Government as it designs its national emissions trading scheme.