China’s Carbon Market Shows How U.S. Is Falling Behind: Q&A

China’s plan to trade carbon shows how far the U.S. has fallen behind other countries in managing emissions through financial systems, according to Paula DiPerna, special adviser with CDP North America (formerly the Carbon Disclosure Project).

On Dec. 19, China announced a cap-and-trade program aimed at reducing coal use in power plants, a move poised to create the world’s largest carbon market, even though it’s not as big as the country initially outlined. DiPerna, who helped set up the first of China’s regional carbon-trading pilots, said the plan could spur a push for carbon markets to link up globally to compete. About 40 countries or jurisdictions have developed emissions markets or plan to start them, currently led by the European Union.

DiPerna spoke with Emily Chasan on Jan. 2. Comments have been edited and condensed.

You say there’s some irony in China moving on carbon now. Why?

Cap-and-trade was a U.S. invention that was used to address the sulfur dioxide problem causing acid rain in the 1990s. The irony of China using this for carbon is that they have essentially imported a U.S. financial tool and modified it for their own purposes, while we in the U.S. have abandoned it and the Paris Agreement.

China really started looking at carbon markets after the House passed a bill that called for a national cap-and-trade, but that bill died in the Senate. A carbon market is a tool for greening the entire economy. The U.S. has no comprehensive approach to that right now. China is building this in, like a new skeleton to their body, and we have no skeleton, we’re just kind of structure-less.

What has China learned from pilot carbon pricing systems?

China is really taking the bull by the horns to manage emissions in the power sector. It’s a significant structural shift, but they legitimized the concept of cap-and-trade in these seven pilot programs that started after 2008. China had 10 years to train people and let them learn the ropes of carbon trading. They were a de facto university for a generation of emissions-market traders. The rest of the world has pretty much lost a decade.

How will China affect carbon trading around the world?

They are such a large emitter that the rest of the world’s carbon markets are relative pinheads by comparison — even the EU. All the carbon markets are tiny in themselves compared to the problem of climate change, but they are also tiny in comparison to China. China will become the dominant player gradually and the impetus to link up carbon markets around the world will grow stronger.

To use the market to price carbon at a level that remotely corresponds to mitigation is going to require a lot of trading and growth to get liquidity. You need a lot of people and traders to do that. The Chinese market coming online will really accelerate all of that, and markets will look to link up to get bigger. This should be a wake-up call to everyone else and they should all be accelerating their interest in linkage.

What kind of changes could this create for companies?

A carbon price is an inherent cost — a shadow price that will gradually become visible as cap-and-trade kicks in. It’s going to be in the power sector only at first, but that will have an implication for power users. The cost isn’t going to just sit on the top of the power sector like a cherry on a cake — it’s going to be transferred down throughout the electricity market.

Companies will have to improve their internal capacity, hire consultants and figure out how far downstream they are from the price of carbon. Carbon could cost $4 a ton in China, $13 in California and $6 in the EU, and companies will need to figure out how to smooth this out. They’ll want to see a global carbon price develop and they’ll have to start managing the cost of carbon as they do foreign currencies.

Is that where a lack of a U.S. carbon market is an issue?

The absence of a national program in the U.S. is such a detriment to companies here that are trying to be leaders on reducing emissions. Most carbon trading has gone to London with the EU Emissions Trading System and there aren’t really any carbon-trading desks in New York.

Ten years ago there was an appetite by American companies to grip this problem, deal with it, price carbon and reduce it. The Chicago Climate Exchange opened in 2003 and by the time they ended it in 2010, we had more emissions capped than any country in the world. I believe there’s latent appetite now as well, if only there was some leadership. We’ve lost a critical 10 years, we don’t have 10 years now to play with if you believe the science.

What challenges will China’s carbon market face?

The Chinese market has to be as credible to traders as any other commodity market. Traders need to know a bushel of corn is a bushel of corn, and a ton of CO2e [carbon dioxide equivalent] is a ton of CO2e. It has to be credible and transparent with bona fide environmental measurement and verification, so that people can come into the market, generate liquidity and eventually get a price that remotely corresponds to the cost of mitigation.

Assuming the market is financially and environmentally credible to people observing it, it could create price signals that stimulate a lot of innovation.

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