Market-Based Instruments with Chinese Market-Based Instruments with Chinese Characteristics: Characteristics:

The Feasibility of Cap-and-Trade The Feasibility of Cap-and-Trade Implementation to Reduce SOImplementation to Reduce SO22 Emissions in Emissions in

China and the Role of the EPAChina and the Role of the EPA

June 20, 2007June 20, 2007

The La Follette School of Public Affairs MIPA Workshop ProjectThe La Follette School of Public Affairs MIPA Workshop Project

Aditya Chandraghatgi * Brandon Lamson * Leah Larson-Rabin Aditya Chandraghatgi * Brandon Lamson * Leah Larson-Rabin Raul Leon * William Lipske * Allison Quatrini * Marta SkwarczekRaul Leon * William Lipske * Allison Quatrini * Marta Skwarczek

Project MotivationProject Motivation

China and the U.S.: Can markets deliver ecological results?

Policy Report for Jeff Smoller, President of the Multi-State Working Group

June 15, 2006 Trilateral Agreement between the EPA, ADB and SEPA

Why SOWhy SO22 for Cap-and-Trade? for Cap-and-Trade?

China has the world’s highest sulfur dioxide emissions.

SO2 emissions in China are mostly generated from burning coal for electricity production.

SO2 causes severe health problems and environmental damage.

Problem StatementProblem Statement

Chinese leaders face the challenge of controlling SO2 emissions without derailing economic growth.

Analytical ApproachAnalytical Approach

Assess the feasibility of implementing cap-and-trade mechanisms in China

Evaluate feasibility in the current Chinese context based on three categories of criteria: political/regulatory, administrative, and economic

Identify the changes necessary for a successful cap-and-trade mechanisms and the potential role of the EPA

Political/Regulatory FeasibilityPolitical/Regulatory Feasibility Political willPolitical will

– Why it matters– Economic development vs. environmental protection

Political controlPolitical control– Nomenklatura and Green GDP– Directional flow of political power

Regulatory clarityRegulatory clarity– Accountability and predictability

A role for social pressureA role for social pressure– Where governments cannot or will not act– NGOs/GONGOs as extension of the State– The Fire-Alarm System

Political/Regulatory FeasibilityPolitical/Regulatory Feasibility

Political and RegulatoryPolitical and RegulatoryCriterionCriterion Status Quo in ChinaStatus Quo in China

Political willPolitical will Low:Low: Economic development continues to be primary concern

Political controlPolitical control Moderate:Moderate: Nomenklatura system potentially useful, but ambiguous political organization creates complications

Regulatory clarityRegulatory clarity Low:Low: Environmental regulation currently opaque

A role for social pressureA role for social pressure Low-Moderate:Low-Moderate: Very little political and regulatory space for non-governmental entities

Administrative FeasibilityAdministrative Feasibility

A relationship exists between institutional capacity and compliance in emission control

Capacity and commitment necessary for environmental policy to be effective

Administrative challenges: accurate measurement of emissions, monitoring of emission sources, and enforcement of policy present

Provincial Capacity Provincial Capacity

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25

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35

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Potential Capacity

Realized Capacity

Li, Wanxin. “A Survey of Institutional Capacity of Local EPBs in China.” Paper presented at 2005 Urban China Research

Network Annual Conference: Chinese Cities in Transition, 2 May 2005, in Shanghai, China. 

Administrative FeasibilityAdministrative FeasibilityStatus Quo, by Local CapacityStatus Quo, by Local Capacity

AdministrativeAdministrativeCriterionCriterion Low Capacity AreaLow Capacity Area High Capacity AreaHigh Capacity Area

Accurate Accurate measurement of measurement of SOSO

2 2 emissions emissions

from all sourcesfrom all sources

Low:Low: Material balance calculations not accurate enough for measuring SO2

emissions

Moderate:Moderate: With increased funding, continuous emissions monitors would better estimate emission levels

Monitoring of Monitoring of SOSO

2 2 emission emission

sourcessources and and permitspermits

Low: Low: Continuous emissions monitors are needed but costly

Moderate:Moderate: State monitors inspect more often and more accurately

Consistent, Consistent, effective effective enforcementenforcement

Low: Low: Provincial compliance varies

Moderate-High:Moderate-High: Provinces have ability to increase fines for noncompliance

Economic FeasibilityEconomic Feasibility

Focused on Guangdong, a single high capacity province

Selected power and cement industries

Both industries are large emitters of SO2

Economic FeasibilityEconomic FeasibilityStatus Quo in Selected IndustriesStatus Quo in Selected Industries

Economic CriterionEconomic Criterion Power IndustryPower Industry Cement IndustryCement Industry

Area of targeted Area of targeted emissions that is emissions that is regional or regional or global in scopeglobal in scope

High:High: SO2 emissions travel

considerable distances

High:High: SO2 emissions are

regional. High concentration of plants across province

Multiple firms Multiple firms facing different facing different marginal marginal abatement costsabatement costs

Moderate:Moderate: Varying ranges of technology, emissions levels, and different management efficiencies

High:High: Firms have different technology and efficiency levels

Ability of firms Ability of firms to transfer to transfer burden of burden of pollution pollution abatement onto abatement onto consumersconsumers

Low:Low: Prices still highly regulated

High:High: Cement prices generally set by the market

Existence of Existence of competitive competitive marketmarket

Low:Low: Power plants not fully independent in decision making

Moderate:Moderate: Wide variety of ownership structure and many firms

The EPA’s Role in Cap-and-Trade The EPA’s Role in Cap-and-Trade Implementation in ChinaImplementation in China

Feasibility AreaFeasibility Area Change by Chinese CentralChange by Chinese CentralGovernmentGovernment

Feasibility of EPA’s Potential Feasibility of EPA’s Potential ImpactImpact

Political and Political and Regulatory Regulatory FeasibilityFeasibility

Reprioritize environmental protection

on par with economic development

Low-Moderate:Low-Moderate: The EPA must use whatever leverage available through its role as a U.S. government agency

AdministratiAdministrative ve FeasibilityFeasibility

Build human capitalModerate-High:Moderate-High: EPA should assist

with training, seminars, and hosting conferences to help build human capital

Increase incentives to break tiesbetween SEPA and industry

Economic Economic FeasibilityFeasibility

Create an industry sector made up of

multiple, independent firms

Low:Low: The EPA will have a limited role; technical assistance may increase deregulation

Summary of FindingsSummary of Findings

Cap-and-trade would not be successful in China under current conditions.

Significant changes would be necessary; it is unlikely that they will be implemented in the near future.

The EPA has little power to induce change in China to make cap-and-trade successful.

Final Recommendation and Final Recommendation and ConclusionConclusion

The EPA should focus on helping SEPA strengthen existing environmental command-and-control regulation.

A strong command-and-control foundation supports progression towards market-based instruments, and will provide immediate results in SO2 reduction.

Question & Answer SessionQuestion & Answer Session

http://www.lafollette.wisc.edu/publications/workshops/2007/china.pdf