The gilets jaunes (“yellow vests”) protests in France have highlighted the critical role that consumers must play in defining how we decarbonize our economies. In light of this and similar setbacks for action on climate change, such as the November 2018 defeat of a carbon tax proposal in the U.S. state of Washington, it might be tempting to conclude that the public is unwilling to pay to reduce greenhouse gases. But this would be wrong. The gilets jaunes and Washington voters are not opposed to actions that reduce greenhouse gas emissions. Rather, they are against what they see as bureaucratic impositions on their behavior for which they will not receive any economic benefits. The two events differ in factors that influenced the consumer behavior: In France, people thought the government was acting bluntly without any opportunity for public input, while well-financed opponents in Washington painted a picture of “secret government” actions that proponents of the carbon tax were unable to overcome. These two events share an outcome that reflects the importance of consumer input to any decisions on how greenhouse gas emissions should be reduced.
In contrast to the events in France and Washington, the successful, decade-old Regional Greenhouse Gas Initiative (RGGI) in the U.S. suggests an alternative conclusion.
China’s policymakers don’t need to choose between meeting their carbon goals and protecting consumers. RGGI shows that carbon prices & complementary policies cost-effectively reduce emissions, save consumers money, and strengthen the economy.
China’s Market-Based Approach Consistent with Best Practices
China is implementing the world’s largest greenhouse gas mitigation program. Its decision to focus first on the power sector makes sense. This sector is well-regulated, operates continuous emissions monitoring systems to ensure compliance, and consists of a number of affected sources (i.e., fossil-fuel-fired power plants) that is relatively small compared to other sectors. China initiated its carbon trading program concurrently with efforts to move to market-based electricity systems like those in Europe and the United States. These efforts bear resemblance to those in the RGGI states, as many of them were in the process of restructuring their electricity sector to market-based systems at the time RGGI was being designed.
RGGI’s market-based approach, which has reduced CO2 emissions from the power sector in the northeastern United States by more than 50 percent, offers a model for reducing carbon while protecting consumers. Based on that experience, we offer four program design principles to help guide China as it implements its carbon trading program.
By transparency, we mean that all processes and procedures are open, welcome public comment and input, and are consistent, routine, and replicable. Transparency is essential to ensure that:
- the value of the reported carbon price is based on actual emissions,
- the levels of reported emissions are accurate, and
- the program administration processes are replicable, consistent, and predictable.
RGGI ensures transparency by relying on an independent program administrator and third‑party verification of auctions and revenues. Independent and third-party mean that the organization has no connection to the government or government influence. The program administrator and third-party entities providing verification also adhere to the transparency principles of openness, replicability, and consistency. The auctions are sales of emissions allowances conducted each calendar quarter. An emissions allowance is equal to one ton of CO2. RGGI’s inclusion of routine reviews to assess program experience and to make possible adjustments also enhances overall acceptance and trust.
China can overcome concerns about the transparency and accuracy of its reported data, such as the recent upward adjustments to the actual quantity of coal consumed, by improving emission monitoring, reporting, and record keeping for sources subject to the carbon trading system. These steps will improve acceptance of the relevant data and provide support for the value of the currency traded. Adhering to the transparency principle will also improve the credibility of China’s city and provincial trading platforms.
Design for Flexibility
All trading programs are imperfect at the outset. Governors, mayors, and other elected officials are not usually familiar with market-based environmental programs and worry that any cap will lead to economic harm or decrease the economic competitiveness of their state or province. These political considerations have led to initial emissions caps that are not binding. For example, RGGI was criticized initially for being weak and for having a “loose” emissions cap that was several million tons higher than actual emissions. However, the design of RGGI is flexible. It calls for periodic reviews to adjust emissions caps and their trajectory based on feedback from actual experience.
As a result, the first program review in 2012 reduced the emissions cap by 45 percent based on actual operating experience and evaluation. That review also established cost-containment allowance reserves to protect consumers and businesses should the greenhouse gas prices reach a designated ceiling for a particular year. The 2016 program review determined that actual emissions continue to remain below the level of the cap, that complementary energy policies also helped to reduce criteria pollutant emissions like PM2.5 and NOX, and that participating states have made long-term (2030 to 2050) commitments to sustain a trajectory of emissions reductions.
China’s initial program design is inflexible, as each boiler is categorized by the fuel it burns or the type of boiler. This design is complex to administer and works at cross purposes with efforts by China’s electricity grid operators that are developing a system where boilers are dispatched based on their costs of operation and fuels. In a market-based program, one ton of CO2 (or greenhouse gases) has the same effect on the climate and air pollution, regardless of its source. One ton of CO2 in the RGGI region is treated the same as every other ton—no matter the source or the combustion technology that produced it. The next phase of China’s program should focus on streamlining the categories into one system that includes all combustion sources. Streamlining the categories will also better serve the way in which China’s electricity grid will be operated in the future.
Cap and Invest to Protect Consumers
Once a greenhouse gas cap is put into effect, the affected electricity generators will include the “carbon adder”—that is, the cost (or value) of the carbon they emit—in their operating costs. RGGI’s designers understood, in part on the basis of EU experience, that a carbon cap-and-trade program gives the holder of carbon allowances a “right” to emit carbon dioxide. That right has value and it causes the market price for electricity to rise. Giving the allowances to emitters for free is, in effect, giving them money for nothing in exchange. That money, of course, comes from consumers, who are paying higher prices for electricity. In order to capture a portion of that value for consumers, the RGGI designers decided to sell or auction 100 percent of the program allowances to generators. The RGGI then states invest, or “recycle,” this revenue in programs that (1) directly benefit consumers (protection for vulnerable customers), (2) reduce energy bills through end-use energy efficiency, and (3) further reduce CO2 emissions through increased renewable energy generation. These investments have also stabilized the region’s electricity rates while states outside the region have raised them.
China could take the next step during phase two of its carbon trading program by auctioning allowances that are now given away for free. The next phase should also consider how complementary energy policies like renewable energy development and energy efficiency can be implemented to increase emissions reductions and make them more cost-effective.
Capture Synergy Between Energy and Environmental Policies
When planning for the RGGI initiative began at the end of 2002, northeastern states had a 35‑year history of cooperation on environmental issues. The participation of energy regulators in the RGGI working group brought new and important perspectives about how environmental policies might constrain or help emerging electricity markets following industry restructuring efforts in the late 1990s and early 2000s. These perspectives helped lead to the decisions to auction all RGGI allowances and to use sound environmental policies to reveal how energy efficiency and renewable energy investments could accelerate the projected CO2 reductions and achieve them at lower costs. The good working relationships that developed between environmental and energy regulators paved the way for future collaboration on several issues, including implementation of energy efficiency programs, electricity grid procedures for diesel generators, and air quality control measures. And, the positive RGGI experience encouraged regulators to include more economic sectors in their efforts to reduce greenhouse gas emissions, leading to the announced regional CO2 reduction program for the transportation sector.
The first annual assessment of China’s carbon trading program, performed in 2018, brought together individuals from several agencies, including the Ministry of Ecology and Environment (MEE) and National Development and Reform Commission (NRDC), as well as international experts. These forums should be held regularly. Many measures that reduce greenhouse gases also improve air quality. Future forums could also discuss how to synchronize measures to reduce all air pollutants. The reorganization of MEE has streamlined coordination of environmental policy, by moving staff who were previously assigned to NDRC’s climate change group. Post-2020, the next phase of China’s carbon trading system would benefit from analysis of how the addition of transport sector emissions could accelerate the adoption of clean energy vehicles and ensure that continued progress toward electricity markets also helps to improve air quality.
Follow Proven Best Practices
The gilets jaunes and Washington events paused progress on reducing greenhouse gas emissions. France agreed to delay the scheduled fuel taxes while Washington is now considering legislation that would adopt much of the program that was included in the November 2018 referendum. These jurisdictions, and others that are considering actions to reduce emissions, would be well-advised to also include the best practices from RGGI in their programs.
RGGI’s success derives from several excellent components that can be adapted to China’s carbon trading program as decision-makers develop a phase two and consider expansion to other economic sectors. China’s central planning model does not necessarily mean that one size fits all. China’s economic diversity and geographic breadth allow for the trial of innovative concepts at a smaller scale, such as a large city or province, first. Then, lessons from a pilot can be integrated as the program is scaled up or expanded to other sectors.