Market-Based Instruments with Chinese
Characteristics:
The Feasibility of Cap-and-Trade
Implementation to Reduce SO2 Emissions in
China and the Role of the EPA
June 20, 2007
The La Follette School of Public Affairs MIPA Workshop Project
Aditya Chandraghatgi * Brandon Lamson * Leah Larson-Rabin
Raul Leon * William Lipske * Allison Quatrini * Marta Skwarczek
Project 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 SO2 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 Statement
Chinese leaders face the challenge of
controlling SO2 emissions without derailing
economic growth.
Analytical Approach
 Assess the feasibility of implementing capand-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 Feasibility
 Political will
– Why it matters
– Economic development vs. environmental protection
 Political control
– Nomenklatura and Green GDP
– Directional flow of political power
 Regulatory clarity
– Accountability and predictability
 A role for social pressure
– Where governments cannot or will not act
– NGOs/GONGOs as extension of the State
– The Fire-Alarm System
Political/Regulatory Feasibility
Political and Regulatory
Criterion
Status Quo in China
Political will
Low: Economic development continues to be primary concern
Political control
Regulatory clarity
A role for social pressure
Moderate: Nomenklatura system potentially useful, but
ambiguous political organization creates complications
Low: Environmental regulation currently opaque
Low-Moderate: Very little political and regulatory space for
non-governmental entities
Administrative 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
35
30
20
15
10
Potential Capacity
Province
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.
Shaanxi
Chongqing
Hebei
Beijing
Tianjin
Shanghai
Guangdong
Shandong
Yunnan
Hubei
Heilongjiang
Sichuan
Zhejiang
Xinjang
Ningxia
Henan
Fuijan
Jiangxi
Liaoning
Jiangxi
Jilin
Anhui
Guangxi
Hunan
Guizhou
Gansu
Shanxi
Qinghai
Hainan
0
Inner Mongolia
5
Tibet
Ranking
25
Administrative Feasibility
Status Quo, by Local Capacity
Administrative
Criterion
Low Capacity Area
High Capacity Area
Accurate
Low: Material balance
measurement of
calculations not accurate
SO2 emissions
enough for measuring SO2
from all sources
emissions
Moderate: With increased
funding, continuous
emissions monitors would
better estimate emission
levels
Monitoring of
SO2 emission
sources and
permits
Low: Continuous emissions
monitors are needed but
costly
Moderate: State monitors
inspect more often and more
accurately
Consistent,
effective
enforcement
Low: Provincial compliance
varies
Moderate-High: Provinces have
ability to increase fines for
noncompliance
Economic Feasibility
 Focused on Guangdong, a single high
capacity province
 Selected power and cement industries
 Both industries are large emitters of SO2
Economic Feasibility
Status Quo in Selected Industries
Economic Criterion
Power Industry
Cement Industry
Area of targeted
emissions that is
regional or
global in scope
High: SO2 emissions travel
considerable distances
High: SO2 emissions are
regional. High concentration
of plants across province
Multiple firms
facing different
marginal
abatement costs
Moderate: Varying ranges of
technology, emissions
levels, and different
management efficiencies
High: Firms have different
technology and efficiency
levels
Ability of firms
to transfer
burden of
pollution
abatement onto
consumers
Low: Prices still highly
regulated
High: Cement prices generally
set by the market
Existence of
competitive
market
Low: Power plants not fully
independent in decision
making
Moderate: Wide variety of
ownership structure and
many firms
The EPA’s Role in Cap-and-Trade
Implementation in China
Feasibility Area
Political and
Regulatory
Feasibility
Change by Chinese Central
Government
Reprioritize environmental
protection
on par with economic
development
Build human capital
Administrati
ve
Feasibility
Economic
Feasibility
Feasibility of EPA’s Potential
Impact
Low-Moderate: The EPA must use
whatever leverage available
through its role as a U.S.
government agency
Increase incentives to break ties
between SEPA and industry
Moderate-High: EPA should assist
with training, seminars, and
hosting conferences to help build
human capital
Create an industry sector made
up of
multiple, independent firms
Low: The EPA will have a limited
role; technical assistance may
increase deregulation
Summary 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
Conclusion
 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 Session
http://www.lafollette.wisc.edu/publications/workshops/2007/china.pdf