The Development And Influence Of Emissions Trading And CDM In China

Climate change is perhaps one of the most challenging and urgent issues that governments have to address. Global warming and its consequences have greatly influenced all forms of life on the planet Earth. Such a dramatic impact is not negligible, and multilateral cooperation is essential if our goal is to eventually mitigate negative outcomes induced by climate change.Over30years has passed since the international community’s first gathering for tackling climate issues. The advent of the Kyoto Protocol in2005further fostered rather successful global negotiations. Three flexible mechanisms were brought to the table under the Kyoto Protocol, namely Clean Development Mechanism (CDM), Joint Implementation (JI) and Emissions Trading (ET). Nevertheless, the Kyoto Protocol, along with its three mechanisms, is not the panacea for climate issues but a grand framework under which multilateral cooperation is made possible. Yet, the extent to which this framework works largely depends on policy makers’ unequivocal determination, which in turn is heavily altered by national interest.Under the Kyoto Protocol,15countries within the European Community (the then European Union-15) and another37industrialized countries made the commitment to reduce greenhouse gases (GHG) including carbon dioxide, methane, nitrous oxide,sulphur hexafluoride, hydrofluorocarbons, and perfluorocarbons. The whole process started in2008and ended in2012, which is referred to as the first commitment period. The second commitment period commences from2013onward with the expectation of more countries joining and braver endeavor undertaken. In this period, more attention will be given to developing countries in Asia, because new economic powers such as China and India have made increasingly substantial contribution to greenhouse gas emissions. In this thesis, we focus on the impacts of green gas emissions, the development and influence of Emissions Trading and CDM in China, and China’s countermeasures in post-Kyoto protocol era.The thesis starts with a general review of current knowledge on greenhouse gas emissions and their influence, which clearly shows that reducing greenhouse gas emissions is not just necessary but also urgent. Afterwards, a thorough introduction to the Framework Convention on Climate Change and the Kyoto Protocol is presented. China’s current status is also discussed, and it is clear that China is under great pressure from within and without. The international community, especially developed countries such as the United States, is focusing its attention on China because China has become one of the main contributors to greenhouse gas emissions. Furthermore, China’s economic structure, with disproportionately large energy-intensive industries, also calls for a change.To fully understand the relationship between carbon emissions and trading, as well as why carbon emission market could emerge, a brief introduction to a few trading theories is offered. Among these theories, the theory of comparative advantage and theories regarding technology transfer lay the foundation of today’s carbon mission market and CDM. Therefore, detailed attention is paid to elaborating emissions trading and CDM.The primary takeaway of theory of comparative advantage is that, as long as international trade is possible, countries are better off if they each focus on the tasks (such as producing goods) that they excel at; in other words, countries need to identify their comparative advantages. This idea applies to greenhouse gas emission reduction as well:Some countries, due to their economic, political, and geographic nature, enjoy relatively lower costs and are more efficient on greenhouse gas control, whereas others find it costly and inefficient to fulfill certain greenhouse gas control tasks. Hence, the former countries possess comparative advantage on this issue. Once an international market is open, countries should be able to trade their "abilities of reducing greenhouse gas emissions" so that eventually all the countries are better off.The world today is becoming an ever more knowledge-based integrated economy (Lai,2011). Knowledge and technology are two of the most important resources today for a nation (Laroche and Amara,2011), as they are playing the central roles in productivity and economic development. Yet, countries differ in terms of their technological advancement. Thanks to international trade, technology and knowledge can be transferred from technologically advanced countries to less advanced ones. The movement of skills, knowledge, and technologies among nations and companies is usually referred to as international technology transfer. Because technology is non-rival, one’s usage of a certain technology does not hinder other’s usage of it. Moreover, compared with the cost of inventing the technology, the cost of using an existing technology is nearly inconsiderable. Enabling technology transfer is one of the features that UNFCCC and the Kyoto Protocol bear. It is in fact the key to motivating and preparing developing countries to tackle environmental issues. A series of procedures under UNFCCC and the Kyoto Protocol enable developing countries to quickly absorb advanced knowledge and make big leaps to catch up with their developed counterparts.In addition, the thesis presents an introduction to emissions trading and CDM. to mechanisms that are important to China. Emissions trading is a market-based approach with the aim of controlling pollution by way of offering economic incentives for achieving emission reductions. To establish such a mechanism, a central authority, such as a government, is needed to settle a limit (i.e. a cap) with regard to the amount of pollutants that is allowed to be discharged. Once the cap is set, it is allocated to firms that further make adjustment based on the permitted amount of the specified pollutants in the form of allowances, carbon credits, or permits. The total number of allowances/carbon credits/permits cannot exceed the emission cap. Therefore, firms that have to increase their emissions are obliged to buy allowances/carbon credits/permits from those who have extra allowances/carbon credits/permits to spare, which is referred to as a trade. Once such a mechanism is established, firms who need to increase their volume of emissions pay a charge for the heightened level of polluting in terms of buying extra allowances. On the other hand, firms who have reduced emissions are rewarded via selling their credits. The Clean Development Mechanism facilitates the development and implementation of emissions reduction projects with the goal of1) helping countries not included in Annex I achieve sustainable development and prevent negative climate change, and2) helping countries included in Annex I fulfill their emissions reduction commitments. CDM in effect offers a win-win solution: developing countries enjoy the benefit from absorbing new technology and knowledge from developed countries, while developed countries fulfill their commitments by investing in developing countries and gaining Certified Emission Reduction units.Furthermore, the relationship between China and carbon emissions trading is discussed thoroughly. By discussing China’s economic profile, energy profile, and greenhouse gas emissions, the thesis shows that it is absolutely necessary for China to reduce greenhouse gas emissions from status quo. The advent of CDM offers unique opportunities for China to take advantage of advanced technologies from developed countries. Hence, possible pros and cons of joining CDM are presented. Joining CDM generates economic benefits in many aspects, including increase in tax revenues, comparative advantages in the global supply chain, chances of obtaining new technologies, and increase in employment rate. In addition, China’s participation in CDM also brings about ecological benefits and social benefits, including improved environment and better living standard. Admittedly, China is faced with a few barriers that hinder it from performing well in CDM, including low awareness of environmental protection among local governments and citizens, the lack of financial incentives for foreign investors and financial subsides for local residents, and possible, high transaction cost.Some suggestions are proposed. First of all, China should continue facilitating the development of CDM projects in China. Given that China has become one of the biggest greenhouse gas emission contributors, attracting CDM projects will certainly benefit local environment. Furthermore, many Annex I countries under the Kyoto Protocol, as well as a few developed countries outside the circle of the Kyoto Protocol (e.g. the United States), have proposed that big emerging economies, such as China, should be given greenhouse gas emission targets as well. By showing its readiness to welcome CDM projects, the Chinese government could demonstrate that China has determined to battle against global environmental problems and that specified greenhouse gas emission reduction obligations for China are not necessary. In order to attract CDM projects and help existing projects develop well, the Chinese government should make sure that all related regulations and financial incentives will be bring into force very soon.Secondly, China could start establishing a domestic trading scheme that, after years of evolution, could be linked to existing carbon markets and emission trading systems. China could learn from, for example, the EU ETS, where a few golden rules with regard to setting up emission trading schemes could be drawn. Thirdly, China should continue refining its economic structure. The China’s economy features disproportionately large energy-intensive industries. This situation is unlikely to change in a short period. Therefore, the Chinese government should strive for the development of low-carbon technologies. This means that China should not only welcome foreign investments in CDM projects but also take advantage of these CDM projects and absorb new technologies accordingly. To achieve this goal, it is urgent that the universities and research institutes cooperate with local government and businesses. Moreover, policies that help vocational schools attract students should be implemented so that enough number of professional workers will be provided to quicken the transfer of technologies from developed countries.China’s economic profile determines that China will be one of the major contributors in terms of greenhouse gas emissions in a foreseeable future. This situation will not change within a short period of time. As China is undergoing industrialization, it is irrational to halt greenhouse gas emissions abruptly. Instead, China need to balance between the intrinsic need of boosting domestic economy with the external pressure that requires further reduction of greenhouse gas emissions.Today’s global climate change issues are largely due to the economic activities done by developed countries decades ago. Hence, it is necessary that developed countries shoulder larger share of responsibilities. However, some developed countries (e.g. the United States) are reluctant to do so due to their national interest. This is obviously unfair to developing countries. China, as the second largest economy in the world, should become the role model in the sense that she should take initiatives to set up negotiations with developed countries on how to deal with the global climate change issues in a collective manner.Moreover, China should be more active in future multilateral actions. The current Kyoto Protocol was proposed based on a top-down manner; that is, policies were made by central policy-makers. Much attention has been shifted from developed countries to developing countries, which suggests that developing countries should take initiatives to get their voice heard. Therefore, we expect China to be more active in future multilateral actions so that developing countries shall benefit more from those actions.