University Professor Dale Jorgenson from the Harvard Kennedy School (left) and China Project Executive Director Chris Nielsen speak about the possibility of China enacting a carbon tax to fight climate change.

Jon Chase/Harvard Staff Photographer

Science & Tech

Tackling carbon emissions in China

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Beijing symposium explores imposing usage tax to augment planned emissions-trading system

With China working to enact an emissions trading system next year to cut carbon dioxide emissions from its heavy industries, climate experts from Harvard and that country gathered in Beijing last month to talk about how to regulate emissions from the rest of its massive economy and discuss whether a carbon tax might fit the bill.

The symposium, headed on the Harvard side by economist Dale Jorgenson, the Samuel W. Morris University Professor, and by Harvard China Project Executive Director Chris Nielsen, looked at China’s planned national emissions trading system, at carbon taxes generally, at British Columbia’s successful implementation of such a tax, and at the prospects for a carbon tax that could augment the emissions trading system.

While carbon emissions trading and a carbon tax both seek to reduce greenhouse gas emissions by putting a price on them, they work differently. Emissions trading systems issue permits for organizations to release a certain amount of carbon. If the emitters innovate and figure out how to release less carbon, they can then sell the resultant permits to less-innovative companies, providing an incentive to those entities that cut emissions. A tax is more straightforward, levying a certain amount per ton of carbon emitted and sending the revenue to the government instead of to the trading system’s permit holders. The incentive to cut carbon, in that case, would be to reduce taxes.

The symposium was sponsored by the Harvard China Project, the Energy Foundation China, the Innovative Green Development Program, and the recently established Harvard Global Institute, which aims to promote University work on knotty interdisciplinary issues, in this case climate change, energy security, and sustainable development in China.

Jorgenson and Nielsen sat down with the Gazette to talk about China’s efforts to fight climate change, carbon taxes, and how the giant nation’s programs fit into the global effort to fight warming.

GAZETTE: Can you briefly describe the event and why it was important?

NIELSEN: With our Chinese collaborators, we in the Harvard China Project have been working for a number of years on the pricing of carbon in China, with a particular focus on carbon taxes. China has, in the last year, made a commitment to move from pilot carbon-trading programs in seven different jurisdictions to a national carbon-trading plan. There are a lot of questions about how easy it is going to be to move toward national emissions trading, and we’re interested to see how the policy is debated and what are the perceptions.

JORGENSON: This carbon-trading program will cover less than half of the total carbon emissions in China. So one of the issues that came up again and again in this symposium was what do we do about the other half? It turned out there was a wide range of opinion. We presented our views in terms of carbon taxes, but there were certainly other ideas, and we learned a lot from listening to the debate.

NIELSEN: One thing that seemed clear is that the understanding of the value of carbon pricing is pretty widespread in China. That wasn’t necessarily true five years ago or 10 years ago. China has relied on a lot of other policy mechanisms to promote renewable energy and so forth. But the idea of pricing carbon does seem to have sunk in very broadly. Some of that is informed by the commitment on emissions trading. But I think one of the things that came out of our symposium is that there is a very, very active discussion going on in China now about the prospect for using carbon taxes to complement the emission-trading scheme.

GAZETTE: Can you address the magnitude of the other 50 percent of emissions, the emissions that the carbon tax might be a solution for? Since China emits such a big chunk of global carbon, is it possible to deal with climate change from a global standpoint if something isn’t done to curb that other 50 percent?

JORGENSON: The short answer is no. I also think that would encourage a lot of other countries participating in an international agreement, like the one that was proposed in Paris, to reconsider their approach and see if they could avoid imposing a regime that covered 100 percent of their own emissions. The point is that everybody in an international agreement like this is going to have to try to approximate 100 percent. That may not be feasible in the next 15, 20 years, but that’s got to be the goal.

GAZETTE: What kinds of industries are in this 50 percent range? Are we talking about auto emissions? Talking about cement manufacture?

JORGENSON: The 50 percent left out of the emissions-trading system?

GAZETTE: Yes, the 50 percent left out.

JORGENSON: It’s easier to talk about the 50 percent that’s left in. These industries are, by and large, heavy industries. Cement would be a very good example — electric utilities, steel production, metals, and that kind of thing. Think of big plants, heavy industries and plants that can be monitored by government officials. For the rest of the economy [not covered in the emissions trading system], you’re talking about everything else. You’re talking about trade, you’re talking about transportation, you’re talking about services. The problems of administering a pricing system for a diffuse sector like services or trade is really of a totally different order of magnitude from walking into a plant and asking how much coal they’ve consumed.

GAZETTE: And that’s why a carbon tax might be …

JORGENSON: That’s why a carbon tax might be an efficient way to approach this. Again, the idea is that if the carbon tax is administered as part of a tax system, then the collection would be in the hands of the tax authority, which already interacts with all these firms, even the smallest of them, through the existing tax system.

NIELSEN: In principle, you enact the carbon tax upstream, so it’s on energy. It could even be on the mining level, so it’s highly upstream, and that is a huge administrative advantage. In China’s case, they would have to compromise a little, given that they will have emissions trading in some industries. They’d have to work the pricing further downstream. You don’t want to put a tax on coal and have to differentiate the coal that’s consumed by these heavy industries from the coal that’s consumed in other industries. It gets a little messy, but it’s important to figure out how to actually make economy-wide carbon pricing manageable.

JORGENSON: At the end of the first day, we talked about what we called a hybrid system, and this involves combining carbon trading with some kind of tax policy. The details for the trading system are pretty well worked out because they’ve already had several years of experience with these seven experimental programs. The principles that underlie a carbon tax are a lot less familiar. The powerful planning authorities are a lot less familiar with this idea. They haven’t thought about what would be involved in rolling this out. And they don’t have immediate plans to do that either. They’re focusing on trading systems.

GAZETTE: Is the government committed to filling this gap in carbon emissions left by the planned trading system? And the question now is how?

JORGENSON: Well, there hasn’t been a government decision one way or another. Our big surprise was that we didn’t expect there would be such an active discussion of what the gaps are and how you would fill them.

NIELSEN: The symposium facilitated the discussion not only between us and these Chinese [scholars and officials], but among them. There was a lot of debate, and it was very, very interesting to see that, which was encouraged by the closed-door nature of the meeting.

JORGENSON: We did also bring some things to the table. We did this study about carbon pricing and carbon taxes in particular, which integrates other kinds of taxes, specifically a resource tax, which was reformed and simplified last year [in China]. We also brought in a group from British Columbia, which has a lot of experience implementing a carbon tax — they’ve had one since 2008. A lot of what they had to say was news. This is not something that has been implemented in a practical way in China. These people brought a practical dimension to the conversation: Here’s how you actually do this, here’s why it works, here’s where the advantages are in thinking about it in these terms.

GAZETTE: How has British Columbia’s experience been?

JORGENSON: It’s a source of great enthusiasm. The Canadians are very proud of what they’ve been able to accomplish. When the system first went in, one important selling point was that it yields revenue, and this revenue can be used to reduce other taxes, and it has been in British Columbia. That has made this into a very popular program. From the economic point of view, this has the great advantage that you can target the revenue in a way that enables you to minimize the economic impact.

We emphasized that point, which came through very clearly in that discussion. This is not something that figured very prominently in the Chinese debate. They don’t think in terms of trading off carbon prices and carbon taxes against other [economic] instruments to minimize the economic cost of trying to achieve climate goals. That brought a new element, from our perspective, and I think they really appreciated that.

GAZETTE: Chris, what was your most interesting or surprising takeaway from the meeting?

NIELSEN: I was particularly impressed to see how active the debate is — though a little bit under the radar — about the prospects of using a carbon tax to supplement emissions trading. We had people from different viewpoints in our symposium; we had people who were very much involved, very much invested in the trading scheme, and even they were anticipating that at some point you might need a carbon tax to cover some industries.

JORGENSON: They were thinking of ways to extend the plan to cover a wider range of industries. In other words, the 2017 [emissions-trading] plan covers eight industries, 18 sub-industries. You could ask: Why can’t you plan this more broadly? Why can’t you use this for other kinds of economic activity? But that debate goes directly to the fact that schemes like this don’t yield revenue. As a consequence, you don’t have an economic instrument for minimizing the negative economic impact of imposing a tax. That’s a key idea.

GAZETTE: In this case, a carbon tax clearly would?

JORGENSON: It clearly would, and the British Columbia tax clearly does.

NIELSEN: The British Columbia experience is about as close to a textbook carbon tax as has been enacted anywhere in the world. It’s a significant tax. It’s basically economy-wide. It’s revenue-neutral. They used the revenue to cushion some of the impacts, including on the Native American communities in northern British Columbia who use a lot of energy. And it’s relatively popular, which is unusual for a tax.

JORGENSON: Remember, the Australians had one, and they repealed it. They had implemented a detailed carbon tax, and it was repealed when there was a change of government.

NIELSEN: This was enacted by a right-of-center premier in British Columbia with support of the business community, which is also very interesting. The business community in B.C., I think, recognized that something had to be done about carbon, and they were looking for a very efficient approach. So they were actually supportive of this policy over the alternatives that British Columbia might have considered.

GAZETTE: China seems to have come a long way in a relatively short amount of time on these issues. It wasn’t that long ago that China’s abundance of cheap coal and commitment to economic development made people pessimistic about the chances they’d do anything meaningful on climate. How would you assess China’s progress?

JORGENSON: It’s occurring in the setting of a big change in how this is being dealt with on the international level, by the U.N., and by the Framework Convention on Climate Change.

Remember, this whole thing started in the Kyoto Protocol, where countries like China and India were left out of the binding emission commitments. And that continued all the way through Copenhagen, almost until the preparations for Paris. The big change that took place then, internationally, is that every country will take on its individually determined burden [to cut emissions] to make a contribution to dealing with this global problem.

China has played a very important role and has become more and more visible. In 2014, there was this epic meeting between the two presidents, Xi Jinping and Barack Obama, in which they declared that they were both going to play a role in development of international climate policy. And subsequently they laid out a bilateral approach to Paris itself: What should people do in preparation for Paris? How should you think about this?

NIELSEN: I can almost time the domestic environmental policy evolution in China. This gets very dry, but in the 11th five-year plan — 2006 to 2010 — you saw the commitment to controlling sulfur dioxide emissions embraced by the highest levels of the government. They suddenly got very serious about it. They made enormous progress, and it was hard. It involved a lot of investment in power plants across China, as well as early retirement of a lot of inefficient power plants. From there, pressured by the international developments on carbon, these things start to align and China starts to get serious on carbon, too.

It’s also important to recognize that, on the renewable energy side, they’re seeking to make gains in a new industry. I don’t know if that’s the wisest way to go about it, but they went all-in on wind power, from almost nonexistent wind power to the world’s largest installed capacity of wind power in about six or seven years. It’s kind of amazing.

JORGENSON: This has raised very important practical problems. Using wind power effectively has meant dealing with the problem of intermittency. A very important objective in their current program for electric utility reform has been to convert that into some kind of a market-based scheme that will integrate renewables more satisfactorily.

GAZETTE: You mentioned that one sense that you got out of the meeting is that everyone in China seems to agree that pricing carbon in one way or another is important and you have to figure out the best way to do it. Does that …

NIELSEN: It’s the expert community that we’re really talking about.

GAZETTE: Maybe that caveat answers the question, but does that understanding put them ahead of us in the U.S.? It seems that here, at least on the political level, there’s not agreement that pricing carbon is important, unless you’re in California.

NIELSEN: I think the expert communities in the U.S. are actually quite cognizant of the value of carbon taxes. But the debate in the U.S. about carbon pricing — not just taxes, because many people in the U.S. are promoting carbon trading — is influenced by the political process, which has been completely paralyzed at the federal level. A lot of these market mechanisms, market-based approaches to carbon control, are products of Republican thinking, but things have gotten so polarized and paralyzed it can’t move.

JORGENSON: The short answer is China is moving ahead much more rapidly. They are committed, they have a thoroughly worked-out rationale, which involves the priority of market-based approaches. You can’t say that characterizes U.S. policy.