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Napoleon, carbon pricing and the cost of uncertainty in Canada

What would a $30/ton price on carbon in 2016 mean for Canada’s fossil fuel exports, and for the national economy? The answer: serious changes. 

Napoleon, carbon pricing and the cost of uncertainty in Canada
Former Chinese state media newscaster Chai Jing's reviews China’s pollution problems. Screen shot form documentary "Under the Dome."

Napoleon warned us: “China is a sleeping giant. Let her sleep, for when she wakes she will move the world.” Recent events suggest that Napoleon may well have been referring to China’s role in global climate change policy and carbon pricing.

Last week Li Hejun, the founder of Chinese solar power group Hanergy, made it to the top of Forbes’ China rich list. Alongside other Chinese renewable energy companies, Li Hejun’s rising star indicates the extent to which the Chinese economy is already pivoting towards a low carbon future.

The need to maintain economic competitiveness combined with public outrage at environmental degradation points to a comprehensive climate policy that will drastically reduce the energy intensity of the economy.

In the same week that Hanergy topped the stock charts, “Under the Dome,” a documentary on the hazards of air pollution, racked up more than 100 million views and counting on Chinese social media networks.

The loss of economic productivity due to air pollution-related health problems costs the economy many billions of dollars each year. With the government obliged to act, it is already putting a price on carbon and will be ramping up efforts to curb CO2 emissions across the national energy system.

The Chinese carbon pricing system is still under development, with pilot emissions trading systems in place in five major cities and two provinces. Given the tendency for government policy to translate into rapid action across Chinese industry, we can expect a rapid roll-out of similar carbon pricing efforts at the national level to begin in 2016.

Chinese economic planners are well aware that we live in a highly competitive, innovative global economy, where first movers get great advantages. This first mover’s advantage applies to new products, innovative policy, and competitive market regulations like carbon pricing.

Why does a decision to price carbon taken in Beijing matter to Canada?

China is now one of the global market makers for energy. On its own, the country accounts for 22 per cent of global energy use every day, and its energy consumption is expected to rise by 70 per cent over the next 20 years. How China prices carbon will have an impact on its trade partners — including Canada, a major fossil fuel exporter.

Policy experts have already outlined how China could build the 13th Five Year Plan (2016-2020) around the International Energy Agency’s (IEA) two-degree warming carbon budget — a budget that states how much carbon can be burned while still ensuring a prosperous human society, and the environmental services necessary for economic growth.

Chinese industrial changes in line with a two-degree carbon budget, combined with the phase-in of a modest US$30/ton price on carbon across the energy sector, would have ripple effects around the world. Once China prices carbon at home, it would likely apply carbon import tariffs to ensure that all players were responding to the same market pricing signals.

If China structures their national carbon tax as a carbon-added tax, carbon exporters like oil companies in unregulated countries like Canada would have to produce a receipt demonstrating that an equivalent carbon tax had been paid, or pay the difference, in order to sell their products into the Chinese market.

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