If 2021 was not the year of the Covid-19 pandemic, it would be the year of climate change, in particular as wildfires rekindle across California, and floods bring death and disarray across the centre of Europe.
The past week provided important landmarks in the battle to cut global carbon dioxide emissions and slow the relentless rise in temperatures – landmarks that demonstrate the seriousness of political intent and the daunting challenges we face. They clarify in intimidating detail the practical changes required of us and provide a valuable stepping stone towards November’s crucially important COP26 climate change summit in Glasgow.
First, there was last Wednesday’s “Fit for 55” package of 13 measures, aimed at cutting carbon emissions in Europe by 55 per cent by 2030 from a baseline year of 1990 and to net zero by 2050. Most controversially, the package extends and strengthens carbon pricing to raise pressure on energy-intensive sectors and lays down the details of a carbon border adjustment mechanism (CBAM) that aims to prevent European companies being competitively penalised against companies operating from countries where carbon pricing measures are not yet in place.
As a Financial Times editorial summarised: “The task is monumental, but necessary.” The package demonstrates that the task of reducing carbon dioxide emissions requires a “transformation of our productive structure”, it warned. “The loudest business critics are those who have failed to prepare for the transition that must come.”
The second landmark, less widely reported but nevertheless significant, was the long-delayed launch on Friday of China’s emissions trading scheme (ETS) on the Shanghai Environment and Energy Exchange. A reported 4.1 million tonnes of carbon dioxide were traded with a closing price of 51.20 yuan (US$7.90) per tonne.
This was both awesome and a risible baby step. By comparison with the European Union’s long-established ETS, Chinese carbon prices at this level are likely to do little to reduce global emissions. Europe’s carbon price on Friday was around €59 (US$70) per tonne of carbon dioxide – several times higher – and even this has been dismissed as less than half the level needed to exert real pressure on companies’ carbon emissions.
But at the same time, China’s ETS will at launch cover more than 2,200 power plants, accounting for around 12 per cent of global carbon dioxide emissions. This makes the Shanghai exchange at launch the world’s largest carbon market, and it is a reminder of the indispensable role China must play if emissios reduction targets are to be met.
China accounts for more than a quarter of global carbon dioxide emissions – about double that of the US and almost four times that of the European Union. That two of the world’s three largest carbon dioxide emitters have in the past week taken steps to reduce emissions is significant, and it puts pressure on the Biden administration to follow through on its commitment in April to cut emissions by 50 per cent by 2030.
Many have been dismissive of China’s ETS, and not just because it has been delayed several times since its expected launch in 2017, built on the foundations of several pilot schemes created across the country.
Neither is it because of the unchallenging carbon price and the generous availability of free emissions credits. For now it also excludes iron and steel, cement, aluminium and the transport sector, which need to be included if the ETS is to generate the pressure needed.
China’s leaders remain coy on how or when these sectors will be included and how quickly it will tighten the supply of free credits. However, President Xi Jinping has shown serious intent by putting the scheme at the heart of the 14th five-year plan and his commitment to get China to net zero carbon by 2060. As Carbonbrief.org sympathetically observed: “Even the EU’s ETS took about 15 years to actually function.”
While China’s carbon trading scheme is significant, it was not surprising to see the EU’s “Fit for 55” package capture most media attention last week. Europe is clearly focused on leading the world in the fight against global warming – a focus sharpened by the severe flooding across Germany, France, the Netherlands and Belgium.
EU Commission President Ursula von der Leyen said: “Europe is the first continent with a comprehensive architecture to meet our climate goals. Our package aims to combine the reduction of emissions with measures to preserve nature and to put jobs and social balance at the heart of this transformation.”
The package includes a de facto plan to ban diesel and petrol cars from 2035 and, for the first time, includes shipping in its carbon trading scheme. It has also laid out plans to phase out the free carbon credits which have so far reduced pressure on polluters to rein in their emissions.
These proposals have already aroused a storm of protest from the European companies most affected. Willie Walsh, head of the global aviation trade group Iata, claimed it was “an own goal”. Guy Platten, head of the International Chamber of Shipping, attacked it as “a pure money grab”.
But the biggest storm around the carbon border adjustment mechanism that is intended to protect European polluters from unfair competition from companies based in countries not yet imposing carbon taxes is so-called carbon leakage.
Most experts accept the logic of needing the mechanism, but those same experts wring their hands over how the scheme can comply with the World Trade Organization’s fair trade rules. They say it is certain to be attacked as a disguised restriction on international trade. As the Financial Times’ Trade Secrets blog noted: “Economically solid in theory, legally and technically tricky in practice.”
As Frans Timmermans, the EU’s commissioner on green policy, said: “It’s going to be bloody hard to do … but just imagine for one second the cost of non-action.”
David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view