Will carbon pricing in China be regional or national?

Regional differences are already an important feature of carbon pricing in China.  These differences seem unlikely to stop the emergence of carbon pricing across the country, but prices and scheme designs may continue to vary between regions for many years.  Something may emerge with characteristics between the complete integration of the EUETS and the diversity of provincial schemes in Canada.

Policy developments in China, the world’s largest greenhouse gas emitter, are critical to global prospects for limiting climate change.  The trial emission trading schemes being implemented in seven provinces and cities, accounting for around a quarter of the economy, are, taken together, by far the world’s largest carbon pricing system, after the EUETS.  However wealth and economic structure are very different across China.  The seven trial schemes are in the richer eastern and central parts of the country, with as yet nothing equivalent in poorer provinces.  This raises the question of whether economic diversity will be a barrier to establishing national carbon pricing in China.

A unified emissions trading scheme might prove possible despite differences in wealth.  The chart below compares the percentage variation in GDP per capita across the twenty-seven countries in the EU with the thirty-one provinces in China in 2030 (see note below chart for details).   The variation between rich and poor countries in the EU is substantial. The three richest countries (Denmark, Sweden and the Netherlands) have per capita incomes around 4.8 times those of the three poorest (Bulgaria, Romania and Poland).  The range of incomes among China’s provinces is slightly smaller, with the three richest provinces, the cities of Tianjin, Shanghai and Beijing, having incomes around 4.5 times those of the three poorest (Gansu, Yunnan and Guizhou).  However the variation in the middle of the income range is greater in China.  Thus, very broadly, the variation in incomes across China is comparable to that across the EU.  As it has been possible to establish and maintain a unified emissions trading scheme across the EU with its diversity of income then it may be possible to establish something similar in China.

Relative wealth chart

The countries/provinces are arranged in order of increasing GDP per capita.  The horizontal axis shows the cumulative proportion of the population in countries/provinces with GDP per capita below a certain level, relative to the national mean per capita GDP (population weighted average across provinces/countries).  The vertical axis shows the relative GDP per capita of countries/provinces.  The blue arrows indicate the positions of the Chinese provinces with trial ETSs.  Data sources are World Bank and China NBS Database.  Data for China is for 31 provinces (taken to include the 22 provinces – Taiwan being excluded – 5 autonomous regions and 4 municipalities). Hong Kong and Macau are excluded.  Data for the EU is for the 27 Members States.  Data is for 2011 in both cases. 

Furthermore, emissions trading creates the potential for transfers of wealth from richer to poorer provinces.  If richer provinces in China have more demanding emissions caps they may buy in allowances from the less prosperous provinces, transferring funds in the process.  Such differences in stringency may to some extent resemble the EU’s burden sharing agreements.  Wealth transfer may stimulate further economic integration and convergence, especially if there is also a transfer of administrative infrastructure and capabilities to less developed provinces as part of the process of building a national scheme.

These considerations lend credibility to a scenario in which there is a single national scheme with uniform prices, but different stringencies of cap in different provinces, and perhaps different allocations of allowances to industry and other sectors across different provinces.  Coverage of sectors and facilities may also vary between provinces.

Nevertheless, even in the EU diversity of economic circumstances is proving an obstacle to reform of the EUETS, with poorer countries in eastern Europe more resistant to reform than more prosperous countries in western Europe.  China’s provinces remain economically diverse and politically distinct, and this may form a barrier to establishing a national trading scheme.  A scenario in which there are separate regional schemes, each having its own rules and prices, with prices generally lower in poorer regions, seems at least as plausible as a fully national scheme, and perhaps more so.  There might be some linkage and trading between schemes, perhaps in the form of offsets, but this might not be enough to fully equalise prices.  Over time schemes might converge, and perhaps eventually merge, but this may take many years.  (Alternatively, differing regional carbon taxes might be introduced.)

Canada is the clearest example of distinct regional pricing in a single country.  Despite total 2011 emissions in Canada being only about 6% of China’s, Canada has three separate provincial carbon pricing schemes (British Columbia, Alberta and Quebec), with other provinces currently considering what, if anything, they might implement.   Any unification of these schemes seems a distant prospect.   Although British Columbia is, like Quebec, a member of the Western Climate Initiative it does not currently appear to be moving towards introduction of an ETS.

Among the barriers to unification of carbon pricing are the different economic structures and resource bases of Canadian provinces, for example hydropower rich Quebec contrasting with fossil fuel rich Alberta.  Similarly, differences in the economies and resource endowment of provinces across China may create persistent barriers to full integration of emissions trading schemes, although there may be greater commonality of design than between the Canadian carbon pricing schemes, which are notably diverse in their approaches to pricing.

Whichever model it chooses it seems clear that China is pursuing carbon pricing as an important component of its emissions reductions programme.  Carbon pricing will surely spread across the country.  And there may well be much in common between regional schemes, and increasing linkage.  But although a national price may emerge in the next few years it also appears possible that pricing could remain diverse for many years to come.

Adam Whitmore  –  17th June 2013   

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