China Sets New Greenhouse Gas Emission Reduction Goals

By Dezan Shira & Associates

Posted: 30th January 2012 11:32

In its newest “12th Five-year Plan on Greenhouse Emission Control (guofa [2011] No. 41),” China has set its new goals of reducing carbon emissions in the next five years and called for pilot programs that aim to promote a low-carbon economy.

New goals

The newly released Plan aims to reduce China’s carbon intensity – the amount of carbon emitted per unit of GDP – by 17 percent by 2015, compared with 2010 levels. Energy consumption intensity by GDP will also be reduced by 16 percent during the same period.

In addition to the general goals, each province/municipality/autonomous region has been given specific carbon intensity and energy consumption intensity targets. Regions more economically developed or more heavy industry centered – such as Guangdong, Shanghai, Jiangsu, Zhejiang and Tianjin – are required to meet higher goals.

China is also quickening its pace with regards to industrial upgradations, vowing to restrict high energy consuming industries while developing services and strategic emerging industries. By 2015, the newly added value of services and strategic emerging industries will take up 47 percent and 8 percent of China’s GDP, respectively, according to the Plan.

The change in China’s industrial policy environment – which is also well reflected in the recently issued Foreign Investment Industrial Catalog  is a mixed blessing for many industrial manufacturers. For example, with the withdrawal of government support for foreign capital in the auto manufacturing sector, foreign conventional carmakers may feel frustrated by the reduced fiscal incentives in the near future, but may also find new opportunities in emerging sectors such as new-energy vehicles.

Manufacturers engaged in new energy development will continue to benefit from China’s ambition to raise its portion of non-fossil energy to 11.4 percent in its total use of primary energy by 2015.

It is still worth noting that, despite the promising targets, the challenge of carbon emission control in the rapidly developing country remains significant. China has grown into the world’s largest carbon dioxide emitter, witnessing a more than 10 percent increase in its carbon emissions in 2010. In this new Plan, there is zero mention of reducing the absolute amount of carbon emissions – bringing about questions on whether or not less carbon will actually be emitted in the next five years, given the high GDP growth levels China is expected to reach.

Pilot low-carbon programs

While the new Plan mentions briefly about commencing pilot low-carbon programs in some regions, a separate Circular issued by the National Development and Reform Commission (NDRC) (fagaibanqihou [2011] No. 2601) specifies that seven cities and provinces – namely Beijing, Tianjin, Shanghai, Chongqing, Guangdong, Hubei and Shenzhen – will become the first batch of pilot areas that start a carbon emission rights exchange.

The new concept of carbon trading is designed to resemble the European Union’s Emissions Trading System, according to Zhang Zhuotan, assistant-secretary of the Carbon Reduction Association in Wuhan, Hubei Province (one of the seven pilot areas included in the NDRC circular). The exchange will set a maximum amount of carbon dioxide that participating firms are allowed to emit every year and grant each firm an emission quota. Firms which emit more than what they are allowed may buy permits from firms that emit less than their quota.

In addition to establishing carbon exchanges in cities, the Plan also calls for the building of pilot low-carbon development zones and residential communities, in a move to create a cluster effect among both businesses and consumers.

China’s rush to try new carbon trading experiments has revealed the country’s sense of urgency to gain a say in the global “green” competition. When the right to emit carbon can be tagged with a price, and when carbon emissions become more costly (e.g. the implementation of carbon tax in some countries), the ability of producing less carbon has gradually grown into a new comparative advantage in the global economic race.

However, just as many other developing countries, China’s implementation of the innovative carbon exchange program could run into some roadblocks due to the lack of a legal framework and expertise.

Without a national law on carbon emissions in place, it will still take local governments some time to work out an effective enforcement system. The failure of the previous voluntary carbon exchanges – the ones that were set up in Beijing, Shanghai and Tianjin back in 2009 – has proved that businesses lack the self-motivation to participate in carbon trading. Therefore, feasible regulations with punishment specified are highly necessary for the success of carbon exchanges.

China also lacks the expertise in carbon emission measurement. The measurement in the past mainly took electricity and coal consumption into account, but missed many other types of emissions, such as those from agriculture, Zhang pointed out. The lack of accuracy in carbon emission measurement will directly affect the fair distribution of emission permits to companies.

The shortage of experienced carbon trading designers and administrators could become another concern.

“We need people who know environmental science, as well as economics…there are very few people in China with those qualifications,” Zhang said.

The good news is that China has decided to include greenhouse emission measures into the government statistical indicators system, and ordered pilot cities to establish dedicated funds that ensure financial support for the implementation of the new program. Foreign companies and individuals with knowledge in the related field will likely find a new “blue ocean” during China’s transition to the low-carbon age.

 

Dezan Shira & Associates is a specialized foreign direct investment practice, providing business and legal advisory, tax, accounting, payroll and due diligence service to multinationals investing in the emerging markets of Asia. Established in 1992, the firm is a leading regional practice in Asia with twenty offices in five jurisdictions, employing over 170 business advisory and tax professionals. For information or advice on establishing business operations in China, please contact Dezan Shira & Associates at info@dezshira.com or visit www.dezshira.com.


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