While Australia has been forced to put emissions trading plans on ice until 2012 and the US struggles to achieve the 60 votes necessary to pass any kind of progressive energy policy (that may or may not include the creation of a carbon market), China it seems is quietly moving forward with plans to introduce its own internal market in emissions reductions.

According to an article in China Daily this week, the next five-year plan beginning in 2011 could contain an emissions trading policy to help create a broad based stimulus for lower carbon investment. Until now China has focused on more command and control policies designed to shut down the least efficient of its industrial plant and to spur development of specific renewable technologies. This article states that China has realised that there are limits to how effective such policies can be and that a broader, outcomes based approach would be less costly and more efficient.

This is welcome news. As ever the devil will be in the detail, with China developing at such a pace arriving at any kind of cap that doesn’t create hugely inflated volumes in emissions rights will be a big challenge. But the report hints that on at least one detail they may have already learned a valuable lesson from the European ETS experiment: it makes sense to start with a limited number of participants and that should be those in the power sector. If we’d done that in Europe we’d have created a much less cumbersome and much more ambitious scheme. The UK Government is consulting at the moment on the hugely complex rules for handing out free permits to heavy industry according to benchmarks. Anyone contemplating introducing a trading scheme would do well to read this document and take note that starting with 100% auctioning from the outset is by far and away the easiest option and that can be introduced from the start in the power sector.

Part of the reason China’s per capita emissions are catching up with the West – recent figures suggest they already match those of France – is because the carbon intensity of their electricity system is so high. According to the website CARMA, China’s emissions per MWh generated are over 850 kg – much higher than the US’s (600kg) or UK’s (550 kg) where old coal is less dominant. A well-designed carbon market which meets targets for achieving a lower carbon intensity, even while overall demand grows, could stimulate investment in efficiency upgrades and fuel switching to lower carbon fuel sources such as gas and energy from waste. It will also help to make renewables, nuclear and carbon capture storage more cost competitive.

If this report is true, and let’s hope it is, then by 2012 the dominant players in the carbon market may well be Europe and China. If Europe can implement some important changes and China gets the design right it could mark the beginning of a genuinely impressive market for delivering global emissions reductions. One that the US should pay close attention to since it may find that as well as being reliant on imports of expensive fossil fuels it will also be reliant on importing all the technologies it needs to wean itself of them.