Getting wealthy countries to pay for Chinese carbon cutbacks

China will shortly become the largest carbon emitter on earth. It is difficult to understand how global emission targets can be met without involving China - and for that matter the grubby developing countries Indonesia and India. Currently China as a signatory to the Kyoto Protocol is not obliged to adopt carbon targets until after 2012.

The G8 countries last week supported a new global framework to reduce carbon emissions but the difficulty is to get China involved. The core issue is to attract the massive capital resource flow to China that will achieve this outcome.

Michael Molitor (AFR 13/6/07, subscription only) argues that we should rethink the idea of trying to persuade China to cap their carbon emissions. Their recent statement on climate change makes it clear they are not yet prepared to have a cap and they want much higher levels of energy consumption. Moreover, a cap in itself will not encourage an investmjent program to cut Chinese emissions when China is growing rapidly and has many competing demands on its scarce capital resources.

An alternative approach to efficiently reduce emissions is to put really stringent caps on OECD carbon emissions but to allow OECD-based firms to buy carbon credits from carbon abatement programs anywhere – and, in particular, in China – where incredibly inefficient electricity generation technologies provide the greatest pool of carbon abatement opportunities on earth and, indeed, the greatest investment opportunity of the 21st century.

The global carbon market rather than a cap would then drive dramatic and easy-to-achieve carbon reductions in China. If you wanted to give this program a kick start then a deal with the Chinese might be attempted which gave preferential investment status for foreign investment in return for a delay in the introduction of a cap from 2013 to 2018.

I’ve got to say that Molitor’s proposal has a an attractive sound to it. Perhaps it is more attractive than my earlier suggestion to force China to comply with a cap by levying savage export taxes on Chinese goods to compensate for the unpaid carbon costs the Chinese economy is imposing on the globe. The Molitor proposal relies on developed countries investing in carbon reductions where these can be most readily and cheaply delivered. I will think about it further – and welcome commentary and feedback.

My major concerns with this proposal are the incentive effects that might arise for the Chinese to create very high-carbon emitting technology to secure developed country investment. The basic arithmetic of the proposals also seems suspect - presumably the caps on developed country emissions would need to be very substantial. But it is an interesting suggestion that serves investigation.