Can Carbon Trading \u26 Carbon Tax be Applied Simultaneously in China?

There is a growing debate between two competing climate change policy instruments – ‘cap and trade’ and ‘carbon tax’. Until now, both of them have worked well in different jurisdictions in order to reduce GHGs emissions. For those countries just consider to apply either of the two approaches like China, it is more convinced to recognize the advantages and disadvantages of the two approaches before making the choice. The cap-and-trade system has been implemented by the European Union since 2005. The performance of EU cap-and-trade system shows many advantages. For instance, it can predict a clear environmental outcome by setting ‘cap’; it can also provide incentive for technological innovation and involve several types of stakeholders through democratic negotiation process. However, complicated design of the cap-and-trade system, the prevention of the transaction cheating and inaccurate estimation of the emissions level can cause the risks in the emissions trading market. It might seem that ‘carbon tax’ is a simpler approach comparing to ‘cap and trade’. The implementation of carbon tax is easy. Neither the specific legislation nor transaction market is required. Nevertheless, unlike the cap-and-trade system, no concrete emissions reduction target can be defined by ‘carbon tax’. Thus proponents of the cap-and-trade system support that its performance is more effective in achieving certain GHGs emissions reduction target, which is the main aim of applying market-based approaches. Back to Chinese context, in November 2011, central government has notified the carbon trading pilots will start in the five cities including Beijing, Tianjin, Shanghai, Chongqin shengzhen and the provinces of Hubei and Guangdong, while carbon tax still stays at the research level. By introducing Chinese tax system, the disadvantages and the risk of only applying carbon tax will be featured out. The possible conclusion is neither cap-and-trade system nor carbon tax would be the one-size-fits-all approach in China; however, it is preferable to focus on the implementation of cap-and-trade system now. The article consists of three parts. The first part will introduce the research question, research methodology and explain ‘cap-and-trade system’ and ‘carbon tax’. In the second part, the advantages and disadvantages of the cap-and-trade system and carbon tax will be analyzed by setting a counter-argument. In the final part, whether either of the two approaches can become one-size-fits all solution will be answered