Why Has China Not Embraced a Global Cap-and-Trade Regime?

Abstract

Although many economic studies suggest that China would reap significant benefits from participating in a global cap-and-trade regime, China has consistently refused to participate in international negotiations on this issue. Understanding China's underlying concerns is a key to explaining why China has not embraced an international greenhouse gas emissions trading scheme. This is explored as a potential basis for including China in future negotiations and schemes. This issue is considered from the following perspectives that impact upon China: (a) fairness: how do developing countries perceive emissions caps? (b) why have China and India been sceptical about international emissions trading? (c) what would China's political perceptions be of an inflow of CDM investment in comparison with the exports of emissions permits to the USA? (d) what are the implications of 'lock in' to an emissions cap, particularly when no rules and principles exist for setting emissions targets for post-2012? (e) the complex question of establishing future emissions caps for developing countries.

To our knowledge, this is the first paper to analyse why China has not embraced an international greenhouse gas emissions trading scheme, thus pointing out efforts/directions towards getting the country into such a scheme. Thus, the paper is of significant policy relevance.

Keywords: cap-and-trade regime, clean development mechanism, international climate negotiations, Kyoto Protocol, China, India

JEL Classification: Q28, Q25, Q48