The La Follette School of Public Affairs MIPA Workshop Project

1. Market-Based Instruments with Chinese Characteristics: The Feasibility of Cap-and-Trade Implementation to Reduce SO2 Emissions in China and the Role of the EPAJune 20, 2007 The La Follette School of Public Affairs MIPA Workshop Project Aditya Chandraghatgi * Brandon Lamson * Leah Larson-Rabin Raul Leon * William Lipske * Allison Quatrini * Marta Skwarczek

2. Project Motivation • China and the U.S.: Can markets deliver ecological results? • Policy Report for Jeff Smoller, President of the Multi-State Working Group • June 15, 2006 Trilateral Agreement between the EPA, ADB and SEPA

3. Why SO2 for Cap-and-Trade? • China has the world’s highest sulfur dioxide emissions. • SO2 emissions in China are mostly generated from burning coal for electricity production. • SO2 causes severe health problems and environmental damage.

4. Problem Statement Chinese leaders face the challenge of controlling SO2 emissions without derailing economic growth.

5. Analytical Approach • Assess the feasibility of implementing cap-and-trade mechanisms in China • Evaluate feasibility in the current Chinese context based on three categories of criteria: political/regulatory, administrative, and economic • Identify the changes necessary for a successful cap-and-trade mechanisms and the potential role of the EPA

6. Political will Why it matters Economic development vs. environmental protection Political control Nomenklatura and Green GDP Directional flow of political power Regulatory clarity Accountability and predictability A role for social pressure Where governments cannot or will not act NGOs/GONGOs as extension of the State The Fire-Alarm System Political/Regulatory Feasibility

7. Political/Regulatory Feasibility

8. Administrative Feasibility • A relationship exists between institutional capacity and compliance in emission control • Capacity and commitment necessary for environmental policy to be effective • Administrative challenges: accurate measurement of emissions, monitoring of emission sources, and enforcement of policy present

9. Provincial Capacity Li, Wanxin. “A Survey of Institutional Capacity of Local EPBs in China.” Paper presented at 2005 Urban China Research Network Annual Conference: Chinese Cities in Transition, 2 May 2005, in Shanghai, China.

10. Administrative Feasibility

11. Economic Feasibility • Focused on Guangdong, a single high capacity province • Selected power and cement industries • Both industries are large emitters of SO2

12. Economic Feasibility

13. The EPA’s Role in Cap-and-Trade Implementation in China

14. Summary of Findings • Cap-and-trade would not be successful in China under current conditions. • Significant changes would be necessary; it is unlikely that they will be implemented in the near future. • The EPA has little power to induce change in China to make cap-and-trade successful.

15. Final Recommendation and Conclusion • The EPA should focus on helping SEPA strengthen existing environmental command-and-control regulation. • A strong command-and-control foundation supports progression towards market-based instruments, and will provide immediate results in SO2 reduction.

16. Question & Answer Session http://www.lafollette.wisc.edu/publications/workshops/2007/china.pdf