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China's vital emissions trading scheme

System set to become the world's single most important climate mitigation policy

| China
A coal-burning power station in Beijing: the emissions trading system could help China to achieve carbon neutrality sooner than the target year of 2060.   © Reuters

Kevin Rudd is president and CEO of the Asia Society and a former Prime Minister of Australia. Alistair Ritchie is director of Asia-Pacific Sustainability at the Asia Society Policy Institute.

Achieving net-zero emissions by midcentury is required to prevent dangerous global warming and meet the goals of the Paris Agreement. It is also a must-have goal of major economies if they are to avoid the environmental and economic risks of insufficient climate action.

The technologies to get to carbon neutrality are already known. The cost of doing so continues to fall. The U.K. Committee on Climate Change estimates annual net zero resource costs at one to two percent of GDP in 2050. The committee chief executive, Chris Stark, declared last November that "Overall, the cost is surprisingly low -- it is cheaper than even we thought last year when we made our assessments." Recent EU forecasts claim that net-zero can be achieved by 2050 while still generating cumulative economic growth of around 50% over that period.

United Nations Secretary-General Antonio Guterres sounded a note of caution recently, however, that "all commitments to net zero must be underpinned by clear and credible plans to achieve them. Words are not enough."

Emissions trading systems are exactly the type of policy instruments that give countries the means of achieving these goals in a cost-effective way. Its official start last month may have been quiet, but China's national greenhouse gas emissions trading system may become the single most important climate mitigation policy in the world.

It aims to reduce emissions from China's most polluting sectors -- power and industry -- and to do so cost-effectively, providing funds for the technological transformation of the sectors and protecting industrial competitiveness. With the right policy settings, the emissions trading system could also help set China on a path to achieve its national vision of carbon neutrality sooner than the target year of 2060.

Beyond the planned rollout of the emissions trading system from power to industrial sectors, there will nonetheless need to be a strengthening of the design of the scheme. This includes an absolute cap on carbon emissions aligned with China's national mid and long-term targets. These targets will also need to be strengthened over time. There will also need to be an early introduction of the auctioning of carbon permits to strengthen the system's carbon price signal and to raise the funds necessary to support investments in decarbonization technology. Strengthening the ETS in these ways will also help bring China's short-term ambition in carbon mitigation into line with Xi Jinping's long-term vision of carbon neutrality.

It will also need to be coupled with commitments by China to achieving peak emissions by 2025, to cap carbon dioxide emissions at 10 billion tons and non-carbon dioxide emissions at two billion tons by 2025 as well, and to limit total coal power capacity at 1,150 gigawatts by the same year. These may seem arduous to some observers. They are, however, doable. More importantly, they are essential if China is to have a realistic trajectory toward carbon neutrality by midcentury. Otherwise, the adjustment curve simply becomes too steep.

Importantly, the development of China's ETS in recent years has also had a significant impact on the approach of many of its regional counterparts to reducing their own emissions.

South Korea and Japan have recently committed to net-zero emission goals by 2050. South Korea has recognized that its pioneering emissions trading system, now with over six years of successful experience, can play a key role in achieving its national goal. Work is also underway this year on how its ETS settings can be adjusted to achieve this, consistent with more ambitious national 2030 reduction targets.

Japan has realized that it urgently needs to put in place a similar type of policy to help achieve its own net-zero goal. Both the Ministry of Environment and Ministry of Energy, Trade and Industry are working on carbon pricing measures following instructions from Prime Minister Yoshihide Suga to draw up a proposal.

Perhaps the most impressive recent embrace of the potential of emissions trading systems is in South East Asia. Indonesia, forecast to be the world's fourth-largest economy by 2050, is now on a fast track to implement a national emissions trading system by 2024, starting with a pilot emissions trading system this year for the power sector. Vietnam is likewise progressing, with relevant legislation for an emissions trading system approved last November and entering into force by 2022.

An activist carrying black balloons representing CO2 emission demonstrates in Nusa Dua, Bali island: Indonesia is on a fast track to implement a national emissions trading system by 2024.   © Reuters

Other Association of Southeast Asian Nation countries such as Thailand and the Philippines are preparing similar systems. Singapore, currently with a carbon tax, is keeping a close eye on these developments in Asia as it would have a keen interest in a regional carbon market.

What this means is that the major ASEAN economies are putting in place the right types of policies necessary to achieve net-zero emissions in a cost-effective way. Their potential for economic growth is widely recognized. However, realizing this growth in a sustainable fashion will require careful management of environmental and economic risks. Therefore coupling these national emissions trading systems with net-zero carbon goals by 2050 will be equally critical, although these countries are currently lagging other world regions in making these commitments.

Now is the time, before this November's crucial UN summit in Glasgow, for ASEAN economies to also commit to net zero emissions by 2050 and set themselves on the right path for sustainable long-term growth. Such goals will be achievable for the region if backed up by effective mitigation policies, including emissions trading systems. The launch of China's ETS provides another impetus for them to act.

This would leave Australia as the major regional odd man out. Canberra's continued recalcitrance on midcentury carbon neutrality is unacceptable. Just as its refusal to embrace a carbon pricing regime to give any such target a real chance of success.

Asia can now become the global hub of greenhouse gas emissions trading systems. And with sufficient political will, it can now power the way forward for the world to achieve a net-zero emissions future for us all.

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