When China announced that it would institute a cap-and-trade program to control greenhouse gas emissions, many environmentalists praised the development. They took it as a sign that the world’s second-largest economy is serious about becoming a leader in the fight against climate change
But does China have the institutions to make cap-and-trade, a system suited to Western capitalist countries, work? Or should it apply its own governance traditions — which have functioned incredibly well to create a vibrant economy, develop a highly educated workforce and turn a developing country into a world leader — as principal tools for emissions control?
The legitimacy of carbon emissions trading is dependent on domestic institutions that can police transactions and make sure they are honest. In the United States, the acid rain trading system — the template for other cap-and-trade systems — has not been remotely laissez faire. Regulators require that emissions steadily decrease over time, and they apply very tough penalties against violators. Traders must use elaborate, mandated accounting measures, and transactions are transparent, tracked on the website of the Environmental Protection Agency. Independent courts back up all of this, to ensure that the outcomes support the objective: reducing emissions of sulfur dioxide and nitrogen oxides created from the combustion of fossil fuels.
Think for a moment about the Volkswagen scandal. VW was caught cheating on emissions because independent academic researchers ran tests in countries with robust systems of law and enforcement. When the EPA learned of the test results, it threatened VW with the immediate decertification of its 2016 diesel vehicles. Eventually, the automaker admitted to putting cars on the road that were polluting at levels far beyond what their test results showed.
Now think about the Chinese system. There are no independent courts, nor are there independent regulatory bodies. Even the independence and integrity of academic institutions are in question when they touch on or challenge Communist Party ideology or issues of importance to the state.
I know from practice as well as theory why emissions trading in China is a risky bet. I was part of a team that tried to set up a pilot sulfur dioxide emissions trading system in Taiyuan, China, several years ago. What I learned was that China so lacked reliable monitoring that it would have been impossible to know whether emissions fell or went up, that there were huge disconnects between Beijing’s pollution objectives and what was going on in the provinces and cities, and that reports of corruption raised legitimate concerns about the reliability of policies and rules.
Since that pilot project, China has put in place a vast amount of continuous emissions monitoring, or CEM, equipment, and yet there is still no guarantee of fair and reliable data. The equipment can relatively easily be set for cheating. Research by an EPA scientist and a Stanford scientist, published in 2011, shows inconsistent operation and supervision of the CEM equipment and a lack of quality control at power plants that are supposed to be using it. We also know from the explosions at the port city of Tianjin in August that people with the right connections continue to bypass environmental rules and regulations in China.
There are other reasons to be dubious about greenhouse gas cap-and-trade in China. In a 2007 commentary in the journal Nature, Stanford law professor Michael Wara showed how the Kyoto Protocol-based emissions trading system was being distorted to achieve huge profits while thwarting the policy objectives of reducing greenhouse gas emissions. Projects to control a potent greenhouse gas brought returns to carbon traders that were as much as 50 times greater than the actual cost of installing the relatively simple emission reduction technology. In China, the proceeds were used to build factories emitting the same offending gas.
The urgency of the climate threat demands reality-based tools, not a hope and a prayer. It is in everyone’s interest for China to genuinely control emissions. We can applaud its announced commitment to carbon trading, but we should be forewarned: Cap-and-trade is a tool lifted from a very different system of governance. Carbon trading in China may be an experiment the world cannot afford.
Ruth Greenspan Bell is an environmental lawyer and a public policy scholar at the Woodrow Wilson International Center for Scholars.