OPINION/NEWS/ANALYSIS/SPECULATION by Mathew Carr
Sept. 2, 2021 — (LONDON) — The U.S. special climate envoy John Kerry is meeting this week with counterparts in Japan and China, as all three nations — crucial to make a success of the climate fight under the United Nations — struggle to make polluters pay.
The three nations, still effectively petro states 30 years after they agreed to save the climate as part of United Nations membership, are grappling with market (and non-market) incentives to help spur big emission cuts through 2030. In China, the most populous nation, it’s still unclear whether emissions will even peak before 2030.
The U.S., most to blame for the climate crisis and with a relatively small population vs China, still largely lets fossil fuel companies pay zero as they exploit non-existent or inadequate carbon pricing. The U.S. may even opt for mandatory Environmental, Social Governance (ESG) standards instead of traditional carbon pricing.
But the lack of any pricing at all across vast portions of the American economy is killing the climate for everyone on earth.
It’s probable Kerry will be seeking common ground with China, which has also delayed implementing carbon pricing — though China appears to be ahead of the U.S. even though its blame is lower and its population is much higher.
What is needed re carbon pricing follows below. First, a little context.
China said: At the invitation of the Chinese side, Special Envoy Kerry is visiting China from August 31 to September 3. During the visit, China’s Special Envoy for Climate Change Xie Zhenhua will hold talks with him in Tianjin and exchange views on issues including China-US climate change cooperation and COP26 of the UNFCCC.
NBC: Going back to John Kerry’s visit. I’m wondering if China thinks John Kerry’s visit has potential significance for China-US relations beyond climate change issues? In your view, what are the areas of relations that can benefit from direct dialogues like this?
Wang Wenbin: China and the US have differences on some issues. At the same time, we share common interests in a broad range of areas including climate change. The two sides should maintain dialogue and communication and conduct mutually-beneficial cooperation on the basis of mutual respect while properly managing differences through equal-footed consultation so as to bring the bilateral relations back to the track of stability and development.
See note 5 for China foreign ministry comments, note 8 for China Daily, note 6 for U.S. State Dept joint statement with Japan..
In China, my contacts indicate that managers of its fledgling carbon pricing markets are still not quite optimizing them to spur faster climate action and trading volume seems weak .
China officials are using auctions of allowances, for example, as a way to shift prices around short term, one person said. (Feedback my way please to email@example.com and I will ask questions of the three nations.)
Because China has not set a cap of total emissions, it will struggle to make carbon markets work. That’s because the idea should be that a country sets a total cap, which gradually reduces over time. That then becomes the supply limit in the market.
The level of demand provides the price tension.
The trick is to ensure high prices to incentivise a reduction in demand, but not too high to harm the companies or the economy more widely. Lower demand as emissions are cut then drives carbon prices lower and reduces the pain felt in the economy.
But remember, it’s only the dirty activities that get the higher prices. Clean economic activity is not subject to the carbon cost. That incentivizes the shift to clean from dirty.
Companies needing to emit more will buy in the market, boosting prices. Companies finding it easy to stay within the cap can sell spare allowances for profit. This in theory stokes the incentive to cut emissions.
China is apparently looking to add derivative products into its markets and allow outside investors/banks/funds.
Yet, China and Japan is right to be skeptical about the role of banks and hedge funds in these markets.
My first point on this is that all countries should preferably allow companies to make money by cutting emissions. This is the best way to allocate capital toward “green” behavior and away from “dirty”.
What guard rails to apply to the carbon profit is one of the biggest issues to solve during the next two months before and during the UN climate talks in Glasgow. Should there be floor prices and ceilings in these markets? If so, they risk limiting the financial incentives. Limiting the financial incentives cut the chance the world will reduce emissions by 50% by 2030, which scientists say is necessary
Should traders in the markets be subject to strict limits on their open trading positions?
Should profits from carbon trading be shared along the supply chain among all companies creating the “emissions reduction.” If so, how? See notes two and three.
Carbon pricing wont work if it is seen to make the rich richer or if it overly rewards the same people (the same shareholders and governments) who have caused the climate crisis. The revenue from carbon pricing needs to be returned to people who will struggle to pay for higher electricity costs or who will suffer inflationary pressure because of it. Commodity markets need better regulation, generally, in favor of global economic equality and in favor of tax payers who ultimately own the world’s resources. Given this context, the structure of carbon markets is extremely crucial.
Yet even more basically, China, like the U.S., needs to set a clearer, declining emission caps for the period to 2030 and immediately beyond.
I don’t believe it’s a coincidence that South Korea is showing climate leadership this week amid Kerry’s travels to Asia.
In the European Union (which does have a declining emissions cap), it’s not even clear that regulators have struck the right balance between letting people make money from climate action and preventing too much profiteering. There’s a risk EU prices could surge too high, benefitting a small group of investors/traders. The prices hit an intraday record on Sept. 1 and are rising today. See note one.
The structure of Japan’s so-far-limited carbon pricing is also problematic, with companies making emission cuts not being able to hang on to the profit from those cuts, according to one person familiar. Revenue is being funnelled toward solar panels, diluting the market incentives, apparently.
There’s also this, again from Carbon Pulse:
The opportunity for better climate policy is Asia is both crucial and there for the taking. There’s been talk of a linked carbon market that includes China, Japan and South Korea. The wider group of nations ASEAN might also play a role.
To boost the chance of a G20 deal on climate action and carbon pricing, Asia is crucial. First, the geopolitical situation between Asian nations and the U.S. needs to improve, and quickly. See note four and this.
For readout of China Daily story Sept. 2 (see also note 8 for link):
Improved China-US ties needed for climate change cooperation: Chinese FM
BEIJING – Chinese State Councilor and Foreign Minister Wang Yi on Wednesday met with the US Special Presidential Envoy for Climate John Kerry via video link upon invitation, urging the US side to work with China and take active steps to bring ties back on track.
China-US cooperation on climate change serves interests of both sides and the world, and enjoys broad development prospect, but such cooperation cannot sustain without an improved bilateral relationship, Wang said.
For China and the United States, as two major countries in the world, cooperation is the only right choice and the keen expectation of the international community, Wang told Kerry, who is in Tianjin for the China-US negotiations on climate change.
Wang said the two countries had carried out fruitful dialogue and cooperation bilaterally and on major international and regional issues including climate change, delivering tangible benefits to the two countries and two peoples.
The past achievements indicated that the two countries should respect each other and seek common ground while shelving differences so as to reach win-win results, he said.
However, major strategic miscalculation by the United States has resulted in the sudden deterioration of bilateral relations in recent years, Wang said, adding the ball now is in the US court.
He urged the US side to stop viewing China as a threat and rival, cease containing and suppressing China all over the world, and take concrete steps to improve ties.
Wang also said the United States should conduct coordination and cooperation on bilateral, regional and global levels, in accordance with the principle of mutual respect and equality for win-win results.
Wang pointed out that the US side had described climate change cooperation as an “oasis” of China-US relationship. However, if the oasis is all surrounded by deserts, then sooner or later the “oasis” will be desertified.
Kerry said since US-China cooperation is of vital importance for responding to the pressing challenge of climate change, the United States is willing to work with China to enhance dialogue, jointly improve ambitions, demonstrate leadership, and set an example for meeting the Paris Agreement goals.
This will also create opportunities for addressing difficulties facing US-China relations, Kerry said.
(Adds China links, joint US/Japan statement. More to come)
U.S.-Japan Joint Statement
AUGUST 31, 2021
On the occasion of Special Presidential Envoy for Climate John Kerry’s visit to Japan, Japan and the United States issued the following statement:
The United States and Japan, alarmed by the recent Intergovernmental Panel on Climate Change report and other indicators of the growing need for accelerating and deepening emission reductions, are committed to making the 2020s the decisive decade for climate action, and to ensuring their collaborative efforts on the climate crisis a pillar of the U.S.-Japan bilateral partnership.
The two countries are working together and with others to ensure that the 26th UN Climate Change Conference of the Parties (COP26) in Glasgow sends a clear signal that Parties to the Paris Agreement are determined to make the necessary efforts to keep a 1.5 degree Celsius limit on warming within reach.
Both countries have already announced ambitious 2030 Nationally Determined Contributions (NDCs)/targets consistent with the efforts to limit global temperature increase to 1.5 degrees Celsius, as well as 2050 net zero goals. In order to achieve their respective ambitious 2030 targets/NDCs, both countries are strongly committed to mobilizing all available policies and resources, and enhancing innovative technologies. Both countries will work together to pursue similar objectives to keep 1.5 degrees Celsius within reach globally.
Recognizing the leaders’ announcement of the U.S.-Japan Climate Partnership on Ambition, Decarbonization, and Clean Energy, and acknowledging the long history of U.S.-Japan cooperation in technology, the two sides intend to further cooperate to:
- Hold a dialogue on domestic implementation of the Paris Agreement, focusing on the planning and policies necessary to achieve the 2030 targets/NDCs and 2050 net zero goals;
- Enhance cooperation on innovation, including in such areas as renewable energy, energy storage (such as batteries and long-duration energy storage technologies), smart grid, energy efficiency, low carbon hydrogen, Carbon Capture, Utilization and Storage/Carbon Recycling, industrial decarbonization, and advanced nuclear power, as well as support the Agriculture Innovation Mission for Climate (AIM for Climate);
- Work assiduously and expeditiously to end new direct government support for unabated international coal-fired power generation by the end of 2021, as G7 countries confirmed to do at the Carbis Bay summit, and work together to design pathways towards a net zero emissions future with developing countries;
- Advance collaboration to catalyze subnational action globally, including through diplomatic, technical, and development efforts to support additional ambition and implementation by subnational governments;
- Take appropriate steps, building on their respective climate finance commitments, to work towards meeting the $100 billion annual joint mobilization goal as soon as possible, leveraging private sector capacity as well as public finance, and working jointly to align international financing flows with climate resilient development and the global achievement of net zero greenhouse gas emissions no later than 2050, with deep emission reductions in the 2020s;
- Coordinate closely on our diplomatic efforts so that all major economies take bold actions in the 2020s to keep a 1.5 degree Celsius limit on warming within reach, including through the Major Economies Forum and the G20.
7. China says its carbon market is running smoothly. See this from earlier this month: http://english.mee.gov.cn/News_service/media_news/202108/t20210819_858347.shtml