A Chinese perspective on JI

ZhongXiang Zhang outlines an economic rationale for the development of joint implementation projects with China. The author is a Research Fellow at the University of Groningen in The Netherlands. He is also a part-time Professor of Economics at the Chinese Academy of Social Sciences, PR China.

THE INCLUSION of joint implementation (JI) in the United Nations Framework Convention on Climate Change (UNFCCC) as a climate policy instrument is deemed a breakthrough for international cooperation on climate actions. It may provide a good opportunity for cooperation between the industrialized and developing countries. Whilst providing an economic rationale, I will also discuss, in this article, potential areas for joint implementation projects that may be in China's interest.

China's contribution to global carbon dioxide emissions, which is high already, is expected to grow significantly. Thus, advocates of controlling carbon dioxide emissions call for substantial efforts in China. However, the Chinese authorities have claimed that China cannot be expected to make a significant contribution to solving the carbon emission problem, by arguing that ignoring the industrialized countries' responsibility for the majority of global carbon dioxide emissions and simply asking for special action on China's part would seriously harm China's economic development and improvement of living standards. What then are the economic effects of possible future carbon limits for China? How can we let China be part of the solution, given the global characteristics of climate change and China's importance as a source of future carbon dioxide emissions in line with its rapid economic growth?

Using the newly-developed dynamic computable general equilibrium model of the Chinese economy, we have analyzed the implications of two scenarios under which China's carbon dioxide emissions in 2010 will be cut by 20 per cent and 30 per cent respectively, relative to the baseline. The two emission targets are less restrictive in that they are not compared with the level of emissions in a single base year, but with the baseline carbon dioxide emissions in 2010, the latter being 2.46 times greater than in 1990. The carbon tax required to achieve a 20 per cent cut in carbon dioxide emissions in 2010 relative to the baseline is estimated to be US$18 at 1987 prices, while the corresponding figure necessary to achieve a 30 per cent cut in carbon dioxide emissions in 2010 is estimated to be US$35 at 1987 prices. This means that a larger absolute cut in carbon dioxide emissions will require a higher carbon tax.

Even under the two less restrictive carbon emission scenarios, China's gross national product (GNP) drops by 1.5 per cent and 2.8 per cent respectively in 2010 relative to the baseline, indicating that the economic losses tend to rise more sharply as the degree of the emission reduction increases. Given the fact that studies surveyed by the Second Assessment Report of the Intergovernmental Panel on Climate Change estimate that the economic losses under very restrictive carbon limits (e.g. the stabilization or even 20 per cent below 1990 levels in 2010) are reported not to exceed 2 per cent of GNP for the OECD countries, our results also support the general finding from global studies that China would be one of the regions hardest hit by carbon limits. This, combined with the industrialized countries being responsible for the majority of global carbon dioxide emissions, explains the Chinese government stance on carbon abatement.

Table 1 shows the carbon tax levels across the countries and regions considered. It can be seen that there are significant differences in the carbon taxes required in order to achieve the same percentage of emission reductions relative to the baseline. This points to opportunities for joint implementation of abating carbon dioxide emissions. When properly designed, this mechanism will not only help China alleviate suffering from possible future carbon limits, but also act to lower the costs of undertaking carbon abatement in Annex I countries.

Joint implementation offers the potential for acting to lower the costs of abating greenhouse gas emissions in Annex I countries, provides opportunities for the active involvement of the private sector, and provides other positive environmental effects. How, then, should joint implementation be operated in order to achieve these potential benefits? This would at least be conditional upon the consensus on the following operational issues.

Joint implementation in a wider sense could cover more general cooperation between two or more countries on measures to abate emissions of greenhouse gases but this type of joint implementation has up to now been addressed to only a limited extent in the international climate change debate. For this reason, our discussion is based on the current dominant definition of joint implementation at the project level.

There are three possibilities of introducing joint implementation at the project level. First is a multilateral approach to joint implementation through an entity such as the Global Environment Facility. The major advantage is risk-sharing. On the other hand, the approach results in a preference for large-scale projects and reduces the diversity of joint implementation projects. Moreover, because project selection and approval cannot avoid the dangers of international bureaucracy and abuse of power, the approach would have serious drawbacks for both the efficiency and equity of the joint implementation market.

Second, joint implementation deals are through agreements between two governments.

Third, joint implementation deals are carried out by the private sector. Given the limited amount of public funds available, this approach is considered particularly important in order to obtain the necessary investments in joint implementation projects. Moreover, the approach can keep transaction costs to a minimum. In addition to the private sector involvement, non-governmental organizations should be given the opportunity to participate in joint implementation projects, but their activities should focus on capacity building, monitoring and certification rather than pursuing joint implementation projects per se.

According to the UNFCCC, the official criteria for joint implementation will be laid down by the Conference of the Parties. We think that the essential criteria should include the following, at least from the developing countries' point of view.

First, joint implementation projects should be compatible with development priorities of the host countries. It is not enough that joint implementation projects be not harmful because harmless projects that are unrelated to development priorities divert limited resources away from priority activities and thus involve high opportunity costs for the host countries. They should bring about, in clear terms, real, measurable and long-term environmental benefits that would not have occurred in the absence of such projects. To this end, the prior acceptance, approval or endorsement by the national governments involved is deemed important, although this would add to approval costs.

Second, funding for joint implementation projects should be additional to current official development assistance of Annex II countries. They should not come from traditional development budgets packaged under a new name. In order to make sure that any resources for joint implementation are additional, the Annex II countries should at least allocate a certain percentage of their GNP to official development assistance (ODA). If such an agreed on threshold cannot be established, it is very important to keep the funds used for joint implementation projects clearly distinguishable from those of the existing ODA.

Third, priorities should be given to joint implementation projects for limiting emissions over projects for enhancing carbon sinks. While the investor countries regard abated global greenhouse gas emissions as the most important benefits from joint implementation projects, a large number of host (developing) countries regard local environmental problems as their own environmental priorities. Sinks projects have a favourable climate effect, but do not contribute to the reductions of local pollutants. Moreover, the achievement of the UNFCCC's ultimate objective of stabilizing greenhouse gas concentrations in the atmosphere requires strenghtened obligations for Annex I countries to limit their own emissions and/or reliance on joint implementation projects for limiting emissions.

Fourth, guidelines should be established for the reporting of the performance of joint implementation projects with respect to methodologies for calculating project baselines and actual emissions and for monitoring, verification and audit. Such standardized reporting would reduce transaction costs and help to foster the development of projects.

The extent to which non-Annex I countries would work together with Annex I countries in establishing joint implementation projects would depend on the Annex I commitments to be made at the Third Conference of the Parties to the UNFCCC, scheduled to be held in Kyoto in December 1997. We think that such commitments should include the following:

Annex I countries should strengthen their present commitments under the UNFCCC with respect to greenhouse gas emission targets and timetables, and transfers of financial resources, technology and expertise; and,

Annex I countries should provide adequate domestic incentives to encourage their private sector participation in joint implementation projects.

According to the UNFCCC, Annex I countries only pay the incremental costs incurred by the host countries in developing joint implementation deals, which are incremental to what the host countries otherwise would have done. This underlines the need to establish the baseline. By establishing the national baseline, we can reduce the danger of the so-called double counting, the free-rider effects and the leakage effects; then we could also measure emission reductions resulting from joint implementation projects and ensure correct crediting between the parties concerned. However, for the developing countries, establishing their future national baselines is not a simple matter, because of no observable characteristics, conceptual problems, great uncertainties, and strategic behaviours regarding the baseline.

Even if we cannot achieve the first-best solution, the baselines at project level at least have to be developed in order to suffice for joint implementation arrangements. This, combined with great uncertainties associated with the measurement of the actual emission reduction of a given joint implementation project itself, underlines the need for the verification of the greenhouse gas emission reduction in order to ensure correct crediting. Since both investor party and the host party have an incentive for exaggerating the emission reduction, it is particularly desirable that the verification is carried out by an objective third party.

Verification is only responsible for deciding whether to accept the calculated greenhouse gas emission reduction or not. For a given joint implementation project, the extent of verification requirements depends on its characteristics and duration. It is desirable to establish a standardized verification method for each category of joint implementation projects and to make use of the existing, suitable institutional apparatus as much as possible.

The success of joint implementation premises an effective understanding of local (host country) development aspirations and the use of joint implementation to push ahead with efforts to achieve these aspirations. This underlines the need to make due consideration of local objectives and local conditions in designing joint implementation projects in order to enhance their possibility of success.

Until now, the Chinese government has not approved any projects, and joint implementation discussions have mainly remained confined to a very small circle of policy makers who are closely involved in climate change issues. Thus, at this stage, it is very difficult to say what the government preference is.

Considering that the Chinese government is more concerned with local pollutants, such as sulphur dioxide, nitrogen oxides and particulates from coal burning, and regards them as its own environmental priorities, however, we do not expect that the Chinese government priority to sink-enhancing joint implementation projects. This at least indicates a preference for those joint implementation projects that reduce greenhouse gas emissions through increased energy efficiency and fuel switch. Joint implementation projects of this type not only have a favourable climate effect, but also contribute to the reductions of local pollutants and thus to solving local environmental problems.

It is the secondary benefits that may provide incentives for China to cooperate on joint implementation projects. Specifically, then, what are the potential areas for joint implementation projects that may be in China's interest? We think they could include those aimed at: a) improving the efficiency of energy use; b) pushing efficient use of coal; and, c) speeding up the development of hydro-power and nuclear power.

Energy conservation is of vital importance to China, not only because it saves depletable energy resources and reduces pressure on transportation and environmental pollution, but mainly because severe shortages in energy supply have been inhibiting its economic development. It is estimated that China's energy demand in the year 2000 will be of the order of 1400 to 1700 million tons of coal equivalent (tce), even if energy conservation is taken into account, whereas the domestic supply will be likely only to meet 1400 million tce. Thus, if China's development plan is to materialize, the gap has to be filled through increased efforts directed at energy conservation and enhanced energy efficiency.

Indeed, the Chinese government has been placing great emphasis on energy conservation in the past decade. Great progress in decoupling its GNP growth from energy consumption has been made, with an annual growth of 8.97 per cent for the former but 5.06 per cent for the latter during the period 1980-90. This achievement corresponds to an annual saving rate of 3.6 per cent, higher than the planned target of 3 per cent. While China has enjoyed such a great success in energy use per unit of GNP is still among the highest in the world. This is because of an unusually large share of energy-intensive industrial production in the economy, a large share of energy-intensive manufacturing in China's industry, a high proportion of coal consumption, and undervaluation of China's GNP. Considering that direct cross-country comparison of energy use per unit of output value can provide only a rough picture of relative energy intensities in selected countries, comparing in physical terms the energy use of the major energy-intensive industries and devices in China with those of other countries clearly indicates that the energy efficiency in China is also at the low end (see Table 2).

Over the past few years, coal has accounted for more than 75 per cent of China's primary energy consumption. This coal-dominant structure is not expected to change in the foreseeable future. Given this prospect and the serious environmental pollution arising from inefficient coal use, China's efforts to combat air pollution must be directed at a much more efficient use of coal. The policy measures that have been and will continue to be implemented include the following.

Increasing the proportion of raw coal washed — energy efficiency studies show that power plant efficiency is decreased by 0.2 per cent for each percentage increase in ash content. Given average ash reductions of 5-7 per cent attributed to washing for steam coal and even higher reductions for coking coal, the overall efficiency savings could be substantial.
Popularizing domestic use of coal briquette — coal stoves using coal briquette can reduce coal consumption by 20-30 per cent, carbon monoxide emissions by 70-80 per cent, and sulphur dioxide emissions by 40-50 per cent if sulphur-fixing additives are added to the briquette.
Substitution of direct burning of coal by electricity through development of large-size, high-temperature and high-pressure efficient coal-fired power plants.
Expanding district heating systems and developing co-generation.
Increased penetration of town gas into urban households — town gas from coal gasification plants is one of the only long-term options for displacing direct coal burning in China's residential sector.
Development and diffusion of environmentally sound coal technologies — given China's huge coal reserves that are 12.7 times its proven recoverable oil and natural gas reserves combined, the development of clean coal technologies, such as circulating fluidized bed combustion boilers, coal-water slurry, and coal gasification combined cycle, must be part of China's long-term energy strategy.

China's hydro-power potential is estimated to be the largest in the world, and its economically exploitable capacity totals 378 GW. By the end of 1990, however, the total capacity installed of hydro-power plants was only 9.5 per cent of the exploitable potential. Given China's abundant hydro-power resources, their underdevelopment and their importance as an alternative to coal use for electricity generation, this current situation means that considerable efforts need to be devoted to speeding up hydro-power exploitation in some river sections with favourable exploitation conditions. As for nuclear power, two power stations have been commissioned based on the most matured commercial pressurized-water reactors. This marks the start of the development of nuclear power in China.

Hydro-power and nuclear power have so far provided the only proven methods with enormous potential for large-scale generation of electricity without a parallel production of carbon dioxide emissions. In the short to medium term (before 2010), however, China has little alternative but to rely on coal for power generation because long lead times and high capital costs pose difficulties for the expansion of both hydro-power and nuclear power to meet the projected rapidly-increasing electricity demand.

China is abundant in renewables. This abundance, combined with energy shortages in China as a whole and in the rural areas in particular, suggests that attention should be paid to the development of renewables to supplement conventional energy resources in the long-term energy plan. However, renewable energy plants, such as wind and PV plants, are still too costly in comparison with conventional coal and hydroelectric plants. Technically, they have yet to prove their feasibility for large-scale electricity production. Given the severe shortages of capital resources in China and the limitations of these renewable technologies themselves, renewables are expected to only play a limited role in the short to medium term (before 2010), although total generating capacity of renewables is expected to be expanded at a faster pace than those of coal-fired power.

The industrialized countries are currently responsible for the majority of global greenhouse gas emissions, and must bear the major burden of the emission abatement. Thus, if the North is really serious about tackling global warming by joint implementation, they can find great opportunities for joint implementation projects in a variety of the areas that are in China's interest. This would not only act to lower their costs of undertaking carbon abatement and meet part of their own greenhouse gas emission targets, but would provide an opportunity to develop local capacity for energy efficiency services. Such an undertaking would also enable the introduction of more advanced energy efficiency and pollution control technologies to China, thus contributing to the reduction of local pollutants and to a more sustainable development of the Chinese economy.

It is the secondary benefits that may provide some incentives for China to cooperate with the industrialized countries on joint implementation projects. Moreover, given the breadth of the subject and its close linkage with national sovereignty, the global political agenda, national development priorities, access to advanced technologies and development assistance, we think that a wide and successful implementation will be conditional upon consensus on a variety of operational issues. These could include transaction costs, the form of joint implementation, criteria for joint implementation, the establishment of baselines against which the effects of joint implementation projects can be measured, and the verification of emission reductions of joint implementation projects.

The Chinese government has ratified the UNFCCC and China's Agenda 21. This at least indicates the Chinese government's genuine concern about the potential impacts of climate change on China and its willingness to take all possible measures to limit the growth of its own per capita greenhouse gas emissions.

At present, the Chinese government has not approved any joint implementation projects, and joint implementation remains virtually unknown to the majority of social and economic sectors in China as in most developing countries. It is, therefore, unrealistic to expect that joint implementation projects with China work as smoothly and fast as the industrialized countries wish. This underlines the need for a phase of joint implementation capacity building in China in order to make joint implementation gain ground and provide mutual benefits to all the parties involved. Moreover, the extent of China's cooperation on joint implementation will to some extent depend on the certainties about climate change. This in turn underlines the need for the scientific community to continue its efforts to clarify the scientific basis for climate change problem in order to lower the uncertainties about its magnitude, timing and regional patterns.

Further information

ZhongXiang Zhang, Department of Economics and Public Finance, University of Groningen, Westerhaven 16A, 9718 AW Groningen, The Netherlands. Fax: 31-50-3637101. Email: z.x.zhang@rechten. rug.nl.

This article summarizes the findings of the report "Joint Implementation as a Cost-Effective Climate Policy Measure: A Chinese Perspective" by ZhongXiang Zhang. The report was prepared for the Dutch Ministry of Housing, Spatial Planning and the Environment. Contact the author at the address above regarding availability.