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China is testing out cap-and-trade — but will it actually work?

It will be impossible for the world to get a grip on climate change unless China, which produces one-fourth of the world's carbon-dioxide pollution, can rein in its emissions. So it's worth keeping an eye on China's efforts there.

The latest news: China is getting ready to test out cap-and-trade systems to constrain carbon-dioxide emissions in seven different cities. By the end of 2013, the pilot programs will cover about 7 percent of the country's pollution. Jane Qiu provides more detail in Nature:

On 18 June, the country will launch an emissions-trading scheme in the southern city of Shenzhen, marking its first attempt to cut emissions using market mechanisms.
Under the scheme, more than 630 industrial and construction companies will be given quotas for how much carbon dioxide they can emit. Companies that pollute more than they are allowed will have to buy credits from cleaner counterparts that reduce emissions below their quota — thereby creating a price for the greenhouse gas.
Another six such cap-and-trade schemes will be rolled out by the end of the year in the cities of Beijing, Tianjin, Shanghai and Chongqing, and the provinces of Guangdong and Hubei. The trial will cover 864 million tonnes of carbon dioxide by 2015 — around 7% of China’s total emissions and about the total amount emitted by Germany each year, according to a report by the London-based analyst firm Bloomberg New Energy Finance.

If these pilot programs prove effective, China then hope to roll out a nationwide system by 2016. The stated goal, at least for now, is a program that will require China's overall carbon emissions to peak by 2020. But that's only if things go according to plan.

So what's the hitch? Qiu reports on a couple of big hurdles facing China's regulators. Measuring and verifying emissions in such a large, sprawling country will be tricky. It's not at all clear whether companies will be fined or punished for violating the cap. And other experts have doubts that a cap-and-trade system will actually curb emissions so long as the price of electricity in China is heavily controlled and regulated by the state.

But there might be an even bigger structural problem. A new study in the Proceedings of the National Academies of Science points out that the wealthy coastal provinces in China are now "outsourcing" a big chunk of their carbon pollution to the poorer inland provinces.

Okay, so why does any of this matter? Because, the authors of the PNAS study note, different provinces have different targets for carbon-dioxide emissions. But if wealthier provinces can simply shift around some of their pollution to the poorer provinces, the targets could conceivably be met without any real progress being made.

"[T]he more ambitious targets set for the coastal provinces may lead to additional outsourcing and carbon leakage," the researchers caution, "if such provinces respond by importing even more products from less developed provinces where climate policy is less demanding."

This concern has often been raised whenever discussion about cap-and-trade comes up within the United States. What if, critics say, the cement and steel industries respond by moving to China, where the pollution rules are less stringent? But as it turns out, China may have to deal with the same issue internally.

Further reading:

--Congress hates carbon pricing. The rest of the world doesn't.

--For more on the difficulty of measuring carbon pollution in China, note that some researchers have suggested that the country might be hiding an entire Japan's worth of emissions.