Report on the meeting held at the French Embassy Cultural Center in New York on Sept 22, 2019

A high-level group of European and Chinese politicians, business leaders, academics and climate experts agreed at a conference on the sidelines of the U.N. Climate Action Summit on the need for a convergent, stable and rising carbon price between the EU and China to combat global warming.

The meeting convened by the Task Force on Carbon Pricing in Europe and the Green Growth Center of the International Finance Forum of China heard calls for the two major economic blocs to work together to introduce carbon pricing consistent with the Paris Agreement pledge to hold the rise in global temperatures to less than 2C.

The international context is favourable with the European Commission committed to introducing a European Green Deal to fight climate change within 100 days of taking office on November 1, and China poised to launch its first nationwide emissions trading system in the power sector on January 1, 2020. Both steps come against a rising backdrop of public concern over an accelerating climate emergency, highlighted by worldwide demonstrations and a mobilization of young people for climate action, especially in Europe. In this context, joint action by the world’s two biggest economic blocs would be a crucial signal to industry and other stakeholders.

“A predictable and rising price of carbon is the best signal to all economic agents to stop global warming,” former French Finance Minister Edmond Alphandery and the secretary-general of the IFF, Zhang Jizhong, wrote in a joint article in China’s official People’s Daily newspaper, reporting on the New York meeting.

The European Union introduced an emissions trading system for the power sector and manufacturing industry in 2005 but the price of carbon has remained volatile, falling from 30 euros to as low as 3 euros a tonne during the recession that followed the 2008 financial crisis and fluctuating this year between 25 and 30 euros a tonne. China launched the world’s largest carbon trading market in December 2017, testing it first with pilot schemes. Emissions trading in the power sector is due to go live nationwide from January 2020.

The two sides agreed to work towards a consensus price for carbon in China and the EU that would be high enough to create incentives to switch from heavily polluting fossil fuels to clean technology, eventually leading to carbon-free electricity.

“That is why it is important for the EU and China to look at a higher price for carbon. In the EU, there is an urgent need to stop volatility in the price of carbon. In China, it would be desirable to ensure carbon pricing fully plays its role in mitigating carbon emissions,” the joint article said.
“By doing so, it would send a strong message that the two main economic blocs are working hand in hand to avert the threat to life on this planet.”

The conference was supported at a senior level by the Chinese authorities. Wang Yi, a member of the standing committee of the National People’s Congress, stressed in a keynote address China’s commitment to implementing the Paris Agreement goals through multilateral action to transition from a carbon-based economy to a future decarbonized world. He said Beijing was working to promote renewable energy sources and gradually broaden its emissions trading system.

“Maybe we need an escalating carbon price. We may need a managed carbon price policy,” said Wang, who is also vice-president of the Institutes of Science and Development at the Chinese Academy of Sciences. He added that China would engage in global governance to achieve the Paris climate targets.

Reviewing the record of the European ETS system, Alain Quinet, deputy head of France’s rail network SNCF Reseau, said the EU had achieved its emissions reductions objectives so far and managed to decouple greenhouse gas emissions from GDP growth, less due to carbon pricing than to strong state subsidies for renewable energy sources. Indeed, renewables had produced excess capacity that had depressed CO2 prices until the EU recently acted to take carbon allowances off the market via a new Market Stability Reserve which came into force this year. “The decarbonisation of electricity supply has not really happened yet,” Quinet said.

To strengthen the ETS mechanism, he said an EU-wide floor price for carbon, already in place in the UK, would be useful, along with the inclusion of road transport and other sectors in the ETS, national carbon taxes and global cooperation.

Giving an international economic perspective, Kurt Van Dender of the OECD said policymakers should look at the “effective carbon rate”, combining the effects of existing energy and carbon taxes with the effects of emissions trading systems, to measure the incentives for decarbonisation. By that benchmark, “currently we are only one quarter of the way to an average price of 30 euros per tonne” even using a broad definition of carbon pricing, although the rate varied by country, with Switzerland and France having the lowest “carbon pricing gap”.

If the EU and China were to close their carbon pricing gap with a minimum price on all emissions from combustion, assuming a floor price of 20 euros a tonne in 2020, rising by 4 euros a year to 60 euros a tonne in 2035, Chinese emissions would fall by 22 percent below their baseline trajectory and EU emissions by 24 percent by 2035.

China would meet its emissions reduction target 10 years early and the EU could attain its 2035 targets. However, current progress is slow and falling well short of the price levels needed to incentivise deep emissions cuts, Van Dender said.

Importantly, Van Dender said that competition risks from countries with lower environmental standards were small and could be mitigated by other tax policies. In the long run, carbon pricing was a pro-competitiveness strategy because it prepared companies for future competitiveness.

His analysis was echoed by Gerard Mestrallet, honorary president of French energy giant Engie, who presented a report of the Carbon Pricing Leadership Coalition of industrialists which concluded that the risk of so-called “carbon leakage” or offshoring of production to avoid emissions controls was overblown.

“There is little evidence to date that carbon pricing has resulted in the relocation of production of goods and services or investment in these products to other countries,” the report said. Mestrallet said business wanted a predictably rising carbon price to accelerate the transition to low-carbon technologies. Some European industrialists were wrongly citing Chinese competition as an excuse for dragging their feet, he noted.

From a Chinese perspective, the key challenges of introducing an ETS system are political - making economic operators accept an annual emissions cap - and technical - since China does not yet have a fully competitive electricity market, said Zhang Xiliang, director of the Institute of Energy, Environment and Economy at Tsinghua University. Hence emissions trading will be phased in over five years, starting with the power sector in 2020 and extending to eight other industrial sectors by 2025.

He suggested Beijing and Brussels could cooperation and share information on market design, cost management, tracking and integrity of the market, and companion policies to promote clean-tech investment, including through China’s Green Belt and Road Initiative.

Edmond Alphandery explained the political obstacles to putting in place a carbon price in Europe, including a wide variety of national energy mixes, industrial structures and public opinions. Big industrial lobbies remained opposed to a minimum carbon price because they feared losing global competitiveness. Distributional effects were highly politically sensitive, as France’s “Gilets Jaunes” protests had shown. Yet a predictable price of carbon was a vital economic signal to drive the shift to lower emitting activities, and Europe was losing this beneficial effect because of the volatile market price.

Among encouraging signs, he noted that the EU’s ETS reform had introduced the market stability reserve as an efficient tool to stabilise carbon markets, and that public opinion was shifting fast towards consciousness of the need for more radical measures to fight climate change and save the planet, as evidenced in this year’s European Parliament elections. The shift was sharpest in Germany, where the government announced a major green transition programme on Sept 20, including creating a domestic ETS for transport and construction with a price target - albeit low - for carbon.

Alphandery underlined how European and Chinese commitment to a convergent carbon price could be mutually reinforcing politically.

Thierry Deau, founding partner and CEO of Meridiam, an asset management company, said investors were keen to put their funds in clean tech investments but he was currently unable to place some 4 to 5 billion euros in client funds because in the absence of a stable carbon price, he did not know where to allocate the money. There was a need for greater transparency and predictability in energy costs and taxation to permit major investments in sectors such as electric mobility.

Some businesses have got ahead of the policymakers by applying an internal floor price for carbon above market levels in their investment planning to reach their corporate emissions reduction targets. Olaf Schulze, director of Energy Management Investments and Technical Solutions at German giant food wholesaler METRO AG, said his company had introduced an internal price of 25 euros a tonne in 2016 to drive investments in energy efficiency notably in cooling equipment. This year it is increasing the internal carbon price to 50 euros a tonne, roughly double the current ETS price, to accelerate transformation and steer investments based on this notional CO2 price. The aim is to reduce METRO’s carbon footprint by 60 percent between 2011 and 2030.

Zhang Jianyu, vice president of the China programme of the Environmental Defence Fund, said it was encouraging that business was taking the carbon price into account in its activity and investment planning. He noted that the mere fact of preparing for the launch of China’s ETS system had already begun to drive innovation. “Once we have a carbon price, we will see lots more innovation.” China’s carbon market would initially be vulnerable, requiring patience. The EU could help China by linking over time to a global carbon market, he said.

Finally, U.S. lawyer Stuart Caplan, said that despite the Trump administration’s withdrawal from the Paris agreement, the United States was making progress in decreasing carbon emissions due to state-level regulation and moves toward carbon pricing. The U.S. had experienced a major shift from coal to natural gas, especially shale gas, and a major increase in wind power.

The New York EU-China meeting was the second in a series, after a first encounter in Paris in May 13-14 which won the backing of French Constitutional Court President Laurent Fabius, who chaired the 2016 Paris climate conference. The aim is to follow up with a major conference in Beijing next spring to take the initiative forward.

Paul Taylor