MSN NEWS: ZhangZhongxiang--China's ambitious plan to limit carbon emissions, explained

　　Here in Washington, DC, you'll often hear conservatives argue that there's little point in the US acting on global warming, because China is the world's largest polluter and it will never do anything to rein in its carbon emissions.

　　But that talking point's looking increasingly silly. On Friday, Chinese President Xi Jinping announced that his country would enact a nationwide cap-and-trade system to limit carbon emissions, starting in 2017. The program would set caps on pollution from key industries, including electricity, iron, steel, chemicals, and paper-making, and allow companies to buy and sell pollution permits.

　　This is, potentially, a major step toward tackling climate change. It also shouldn't come as too much of a shock. Since 2011, China has been experimenting with smaller cap-and-trade programs in seven major cities around the country, including Shenzen, Beijing, and Shanghai. Despite some early problems, these pilot programs have showed promise, and the goal was always to scale them up.

　　Nor is it surprising that China is getting serious about emissions. After decades of rapid industrial growth fueled by coal, China has started investing heavily in renewable energy and cracking down on air pollution. Last November, as part of a joint climate agreement with the United States, the Chinese government pledged that the nation's CO2 emissions would slow their relentless growth and peak sometime around 2030.

　　So, yes, China has ambitious plans to tackle climate change. The harder question is whether those plans will actually work as advertised. It's not easy to curtail emissions in a country as massive and fossil-fuel dependent as China. So, as always, we have to check the fine print.

　　China's cap-and-trade is part of a bigger plan for peak emissions by 2030

　　Start with the big picture: there's simply no way to slow the pace of global warming without China. The country uses as much coal as the rest of the world combined, it's the largest emitter of CO2 by a wide margin, and its emissions have been growing at a stunning rate over the last three decades:

　　For years, China argued this was only fair. The country's emissions should be allowed to grow without restraint because the country was so large and so poor. The United States and Europe got to enjoy coal-fueled industrialization; now it was China's turn.

　　But that dynamic has shifted of late. China's per capita CO2 emissions are now on par with Europe's — so the idea that Beijing should be given a free pass on greenhouse gases no longer looks as compelling. What's more, the country has a horrific air pollution problem that is taking years off people's lives (literally) and sparking protests in cities. And the country's industry-centric growth model has started to hit diminishing returns. So the Chinese government has been looking at ways to make the transition to a lower-carbon economy.

　　Those efforts have been brewing for years, with the government making major investments in wind, solar, nuclear, and efficiency. But the plan went into high gear last November, when China pledged that its emissions would peak sometime around 2030, and possibly earlier. What's more, China vowed to increase the fraction of primary energy it gets from zero-emission sources, from 11 percent today to 20 percent by 2030.

　　This was the first time that China had ever set a date for its emissions to peak, and it led to a fair bit of renewed optimism around the ongoing global climate talks. True, China hasn't said at what level its emissions will peak (a crucial question mark), and the world's still not anywhere near on pace to avoid 2°C of warming. But this is a real break from the past. China's acting.

　　The catch is that China's climate goals won't be easy to hit — they'll require all sorts of major policy changes. Which brings us to this week's summit between Obama and Xi Jinping, where China announced a slew of concrete steps to help hit its emissions target:

　　China will promote green power dispatch, giving priority, in distribution and dispatching, to renewable power generation and fossil fuel power generation of higher efficiency and lower emission levels.

　　China also plans to start in 2017 its national emission trading system, covering key industry sectors such as iron and steel, power generation, chemicals, building materials, paper-making, and nonferrous metals.

　　China commits to promote low-carbon buildings and transportation, with the share of green buildings reaching 50% in newly built buildings in cities and towns by 2020 and the share of public transport in motorized travel reaching 30% in big- and medium-sized cities by 2020. It will finalize next-stage fuel efficiency standards for heavy-duty vehicles in 2016 and implement them in 2019.

　　Actions on HFCs continue to be supported and accelerated, including effectively controlling HFC-23 emissions by 2020.

　　It's that second one, cap-and-trade, that grabbed most people's attention.

　　China already has cap-and-trade pilot programs — but they haven't always gone smoothly

　　Most economists adore cap-and-trade as a policy for tackling climate change. The basic set-up is pretty simple: The government sets an overall ceiling on emissions by distributing a finite number of pollution permits. And, over time, the number of permits shrinks, which means less and less pollution.

　　Companies can then choose whether to cut their emissions or buy permits to pollute — whichever is cheaper. This effectively creates a price on carbon. It also means that whoever can cut emissions cheaply and easily is likely to go first. That's why cap-and-trade is considered far more cost-effective and market-friendly than traditional regulations that require all companies to cut by the same amount.

　　Back in 2009, President Obama proposed a cap-and-trade system for the United States as part of a comprehensive climate bill. But Republicans (and some Democrats) in the Senate killed the idea, and that was that. Instead, Obama's EPA has been resorting to more traditional regulations on carbon pollution.

　　China, however, has kept the cap-and-trade dream alive. (Yes, savor the irony...) Back in 2011, the government launched pilot programs in seven cities around the country — cities that accounted for 18 percent of the population. As this paper from the Paulson Institute explains, the details vary, but they all had the basic cap-and-trade flavor:

　　What China discovered, however, that cap-and-trade is a lot more complicated in practice than it is in theory. Some of these programs struggled to get up and running, either because companies didn't want to participate, or because enforcement was uneven, or because regulators struggled to measure the exact amount of pollution that was coming out of factories, power plants, and so on. (Cap-and-trade doesn't work if you can't measure pollution accurately to prevent cheating.)

　　The good news is that these cities mostly figured out how to make cap-and-trade work. As a 2015 paper by Tianjin University's ZhongXiang Zhang pointed out, regulators eventually got a handle on the biggest problems and companies began complying. "The first-year performance of the five pilots examined is generally good," he writes.

　　The bad news, Zhang noted, is that scaling cap-and-trade up nationwide is likely to be just as messy. Just for starters, China still isn't exactly a full-fledged free-market economy, which means carbon pricing doesn't work as elegantly as it does in economists' dreams. Electricity prices are often fixed, for instance, so if you put a carbon price on electric utilities, they won't necessarily pass that price on to electricity consumers.

　　Other potential problems? Well, there's local corruption (i.e., companies might persuade government officials to go easy on enforcement.) There's the risk that regulators might hand out too many permits, making the cap toothless (this is basically what happened to Europe's cap-and-trade system). There's the ever-present problem of measuring pollution from emitters (China's energy statistics are notoriously unreliable; no one can even agree on how much coal the country uses). In theory, these are are all solvable, but it won't be easy.

　　We also still don't know how many industries the national cap will cover or what the ceiling on emissions will be. Those things all make a big difference. For a good analysis of how China can roll out a successful system, this paper is a good place to start.