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Strengthening cooperation to promote the development of the high range Blue Economy

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The “blue” industry, especially the high range one, is one of the main development areas for the economy also in the near future.

 China, which has always tried to strike a balance between maritime power and terrestrial equilibria in the Heartland, is the right place to think – for the first time – about a complete water geopolitics, as well as a real global industrial project.

The products that will be the axes of the new future technological revolution will increasingly come from the sea: energy, fast transport; rare metals, but also the most common ones; desalinated and processed water; DNA for study purposes and for medical applications, as well as oil and finally various traditional and non-traditional forms of food.

 If, from now on, we create a global market for the Blue Economy, we will have safe and peaceful world development. Otherwise, if we repeat the old land struggles on the new sea – possibly with the same violent acquisition logic – we will have such new wars that the experience of land clashes cannot even make us imagine.

The Earth is finite and limited. Now we have to work on the sea, but we have to do so all together peacefully and with win-win actions.

 It is estimated that the most environmental-friendly marine industry is currently worth 1.5 trillion US dollars and it is expected to be worth at least twice as much by the end of 2030.

Nowadays China dominates in all these blue economy areas. China’s fishing in foreign waters accounts for 44% of the world’s entire product and the same applies to ocean fishing, which accounts for 52% globally. This also holds true for China’s marine wind energy which accounts for 20% in the world. Also 50% of all the most active ports in the world are Chinese. Unfortunately, China also holds negative records such as 56% of all rivers polluted by plastics in the world.

Half of the world’s industrial fishing is Chinese. Hence, nowadays, China is already the world’s largest sea farmer.  It has already organised the exploitation of its largest marine area for deep-sea mining, thus focusing on a deep-sea area that is four times the size of Switzerland.

 Either you do good business with China in these areas or it is better staying at home.

 Therefore, it is necessary to think about a sea “Silk Road” and not only to reach the Mediterranean.

 A Silk Road to quickly change the whole paradigm of the world economy.

Hence, at the same time, it will also be necessary to reduce polluting emissions and possibly start the construction of many ocean parks, with a view to making the sea recover the products that are extracted from it.

 Fixed cycle of nature, stability of economic cycles.

 Among the companies in the various sectors of the Chinese Blue Economy, the collaboration with selected companies will be particularly useful both for the actual production of marine materials and for environmental protection. It should be recalled that the latter is a side of the Blue Economy coin. China does not think that environmental protection can be separated from the extraction of marine products.

 In Europe, the Blue Economy system is still in the development phase. Hence the figures are still quite small: in 2017, the turnover of the whole sector was 658 billion euros, with a gross profit equal to 74.3 billion euros and a number of employees amounting to 4 million throughout the EU-28.

 Within the European framework, the Blue Economy envisages the usual sectors of the Chinese one, albeit with a specific focus on underwater defence, which in China is calculated separately, in addition to putting all marine biotechnologies into a single category. The EU also envisages sea renewable energies as the greatest sector for future development.

 The traditional European demography is another factor to be considered: 45% (214 million) of the EU population lives on the coasts and the Northern ones always record a higher GDP than the Southern coasts.

 The successful European activities in the Blue Economy are still the traditional ones: tourism, spa and health services and some standard biotechnologies.

Obviously there are also maritime construction and repairs, but in specific areas of the European coasts – activities that now tend to be off the market.

Hence an EU Blue Economy linked to labour-intensive technologies, with insurmountable natural differences in the maximum use levels of the various areas.

 Never as in the case of the Blue Economy do large expanses and boundless areas count – all the dimensions that, as Hegel said, have always been lacking in the physical and geographical dimension of the Eurasian peninsula.

 The Jews called the Mediterranean “the Great Sea”, but this expression does not describe its physical dimensions, but only its historical and cultural ones.

Furthermore, coastal tourism in the EU is worth 54% of all “Blue” jobs and it is still growing, while the transport-related marine economy sectors are decreasing and the remaining maritime sectors are growing very slowly or are stable.

 The problem lies in the fact that the Blue Economy is a global project for transforming the production systems and lifestyles. It is not just a matter of hotels by the sea or deep-sea fishing.

For the EU – which is not a Blue competitor of China, but an area of possible integration of tasks and functions – the living resources of the sea still account for a mere 14% of all “Blue” jobs in the EU. It is, indeed, a very low percentage.

 The extraction of metals from the seabed is scarce in the EU. It accounts for 4% of employment in the whole Blue sector.

Clearly this also includes oil and gas. And both sectors are declining in terms of profit and investment.

There are 600 active offshore platforms in the EU.

 Shipyards account for 8% of employment in the sector, while the maritime product from seaweed processing is very low, with China already accounting for 46% of the world market and with only 6 EU projects currently active for aquatic biomass.

There are only 11 major desalination plants in the EU, mostly owned by large multi-sector companies.

Moreover, we should never neglect the coastal control of climate change, which can become a big global industry.

However, since the time of the report by the Club of Rome that, in 2009, invented the very concept of Blue Economy, his author, Pauli, has always stressed that the Blue Economy is part of the Green Economy – which is always a sustainable practice – and that it is based on new technologies.

 And here we revert immediately to China.

China has always been particularly interested in the Blue economy and in technological innovations, with the construction of marine areas of economic innovation. Just think about the Blue Economy Zone of the Shandong Peninsula, established in 2011, where, four years later, an integrated marine economic system began, which in 2020 is expected to become a great mechanism of ecological Blue economy with a high rate of innovative technology.

 In 2012, it was the turn of the Quingdao Blue Silicon Valley, a city for the new maritime scientific technologies.

Later China established other industrial areas for the protection of biodiversity and for new marine technologies, mainly in the Yangze River Delta.

 Since China’s 13th Five-Year Plan, the Blue Economy has been an ever-growing part of China’s GDP.

 Hence, from the Deep-Sea Dragon, a system for producing experimental deep-sea and surface platforms.

There are also the White Dragon’s explorations in the Arctic, albeit with a future research base in the Antarctica, and the Global Multidimensional Network for Ocean Observation, i.e. the network of stations that can be connected to all the scientific, climate, technological and energy observation stations that already operate in other parts of the two thirds of the Planet, namely those covered with water.

We should also recall the collection and processing of minerals extracted from the seabed.

In this case, the international regulations are already very detailed, but it is currently very hard to predict the aggregate effects, which are mutually reinforcing and with unpredictable percentages.

 Nor should we neglect the Great Lakes Observing System (GLOS), which is one of the 11 associations in the world that scientifically study the Integrated Ocean Observing System (IOOS).

It initially regards the Great Lakes region between the USA and Canada, but it is also much studied in China.

 And the network of Chinese marine sensors will certainly be connected to the large areas of global verification and study.

Hence the problem will increasingly be to control both internal and external waters at the same time.

With specific reference to the Chinese political practice, the 2018 great reform of the State Council, which placed sustainable development at the core of China’s planning, was decisive.

 Since then, there has been a Minister for Natural Resources responsible for all land and sea natural areas, as well as for the economic use of land and for the protection and rehabilitation of the most endangered areas or of the already polluted ones.

While in almost all Western countries these powers and responsibilities are divided between various Ministries and Administrations, in China the already efficient chain of command is in the hands of a single political body and of a single Minister. The maximum efficiency for a chain of command.

 Moreover, China is currently going through a particular phase: from the fast and traditional development to an even faster one, albeit characterized by high environmental, social, ecological and technological quality.

 A new “development way”, which does not imitate Western traditions, but places science and technology into a new vertical and fast political system.

 In the Taoist philosophical tradition, to which Mao Zedong essentially belonged, quality and quantity are not always separated in reality and can be analysed, but only through multiple analogies.

Said analogies never stop and cannot be logically separated.

Still today, this is the basis of the political and economic action of the Chinese Party and State.

 Not an ordinary imitation of capitalism, but new and free efficiency of a technical-scientific network that is directed with market criteria of mutual interest, completely open to controls.

Hence development based on technology but, above all, on the protection of the environment and therefore of human and animal life, as well as of the life of the elements – and all at the same time.

Once again, the Taoist tradition.

Obviously the protection from pollution is central to the Chinese Blue Economy project. Just think about the project for the ecologization of the Bohai Sea, started in November 2018 –  a three-year plan that will lead to the stable cleaning of 73% of all the Bohai Sea coasts.

 Rapidity, efficiency and no operational difference between environmental recovery activities and actions to make income from the sea.

 In essence, China’s Blue System is divided into two sectors, albeit always interconnected: development of innovative scientific and technological products related to the sea economy, and later, during and after the process, the integrated protection of the environment.

 Again to compare China with the European Blue Economy policies, it should be recalled that the EU seas host about 48,000 different species, while the Chinese seas cover an area of approximately 6 million square kilometres, ranging from tropical to temperate climate and up to the Great Cold climate areas.

 There are as many as 32,000 kilometres of Chinese coastline, with 22,629 species belonging to 46 phyla.

 Data not comparable with those of the Mediterranean, but certainly able to permit, from the very beginning, large economies of scale.

In the EU the per capita yearly consumption of fish is 24 kilos, compared to 41 kilos in China.

  It should be reiterated that China has already reached the highest levels of ocean fishing, both in terms of volumes and technologies, outside and inside its territorial waters. Moreover, technologies and economic returns can be useful to everyone.

Worldwide, the actions known as Our Ocean, started by Secretary of State Kerry in 2014, have led in the West only to 36 marine actions to the tune of 550 million euros, and to other commitments, albeit not yet funded, resulting from the 2018 Bali Conference.

Only 64 million euros were allocated for the Mediterranean, and 37.5 million for the South African and Indian Ocean coasts.

Obviously this is positive, but it should be recalled that Chinese investment is already much higher and not only due to the very large size of China’s Blue Area.

Last year the Chinese ocean GDP grew by 6.7%, thus reaching 9.3% of China’s total GDP. In 2018, 17.2 billion yuan were invested in the production of offshore renewable energy.

Excellent data, but this is just the beginning.

An additional 5.5% has been recorded for Chinese maritime transport, while the average yield of traditional fishing is slightly declining. Maritime tourism has already grown by 8.3% in China.

 An excellent rate, not even comparable with the rate in the EU, where tourism is one of the fastest growing sector in the Euro-Mediterranean Blue Economy.

Furthermore, while – without any particular use of advanced technology -the Blue Economy in the EU is still largely a possibility, in China it is already a well-established reality.

 As the philosopher and sinologist Jullien would say, possibility and reality are the same image, albeit seen in two different ways, but not necessarily at two different moments.

Currently tourism accounts for 61% of jobs in the EU Blue Economy. As we can see, it is an old business with a low average return.

The EU aquaculture is still a small sector compared to China’s huge size and technology, even in proportion to the population, but all the sustainable ocean exploitation programmes in Europe are postponed to an indefinite future and are at risk of funding.

  Renewable marine energies will reach 10% of European consumption in 2050-a percentage which already pales into insignificance compared to the Chinese ones.

Apart from bureaucratic and administrative efficiency, with the Chinese Blue Economy we are already on another planet. The Chinese scientists are already thinking about a Blue Economy divided into three major areas: the resolution of water scarcity;the search for deep waters and the cleaning of surface waters.

 They are also thinking about technological innovation, which is scarcely pursued in the EU. China has already developed 100 projects, for 10 years, with 100 million new jobs. All these projects have already begun.

 Finally, in China there will be an integrated marine economy between research and the balanced exploitation of resources.

In particular, the development sectors that China currently likes are deep-sea aquaculture with the use of cages; ocean satellite communication, which is optimal; marine biomedicine; desalination with advanced technologies; the search for minerals in the seabed; offshore oil exploration; research into marine antiseptic and medical materials; the production of renewable energies at sea.

 It is in these areas that China’s greatest ten-year effort will develop.

 The management of the Chinese sea is based on a simple concept: the ecological absorption capacity of the seas.

Protection is based on the criterion of sustainable development, not on the circular economy with a zero return rate. Everything is designed to reduce environmental waste.

Moreover, sustainable development between land and sea -which is another specific issue for China – will be the development and not just the preservation and conservation of coasts.

 The primary concept for doing all these things together is Harmony, a Confucian criterion that relates Man to his Environment.

Hence coordinated development between economy and society.

This is the same deep criterion of the “Silk Road”: a harmonious, global and strategic project that works only with market rules and is connected to a win-win logic, which ensures benefits to everybody.

 According to the latest data available, in China the companies related to the Blue Economy have grown at a pace ranging from 14% to 4%.

 For the time being, the regions directly concerned are the following: Zhejang, which is responsible for implementing the “Maritime Strategy of the East Sea” and focuses on ports and island economies.

 Then there are Guangdong, which hosts the companies operating in the integrated management of the maritime economy; Fujian, where cooperation through the straits is pursued; Shandong, which develops the “Blue Economy Zone of the Peninsula” to create a primary gateway to North East Asia, and finally Tianjin, where high-level maritime technology is put into practice.

As early as 2001, 14.46 million people have already been employed in the Chinese Blue Economy, with a one million increase every year.

The cooperation with Western companies is already in place both at financial level, so as to share cutting-edge technologies, and for the participatory development of regions and companies.

Furthermore, the Chinese Smart Ocean programme also envisages a network of sensors on the coasts, at sea, in flight and in the space.

 All this is designed to build a complete real-time monitoring system of all China’s seas and rivers –  a network that should connect to the equivalent systems in other parts of the globe.

 A turtle strategy that, according to Chinese tradition, epitomizes the North and the Waters, but is also invulnerable, due to its powerful shell.

Advisory Board Co-chair Honoris Causa Professor Giancarlo Elia Valori is an eminent Italian economist and businessman. He holds prestigious academic distinctions and national orders. Mr. Valori has lectured on international affairs and economics at the world’s leading universities such as Peking University, the Hebrew University of Jerusalem and the Yeshiva University in New York. He currently chairs “International World Group”, he is also the honorary president of Huawei Italy, economic adviser to the Chinese giant HNA Group. In 1992 he was appointed Officier de la Légion d’Honneur de la République Francaise, with this motivation: “A man who can see across borders to understand the world” and in 2002 he received the title “Honorable” of the Académie des Sciences de l’Institut de France. “

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Reforms Key to Romania’s Resilient Recovery

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Over the past decade, Romania has achieved a remarkable track record of high economic growth, sustained poverty reduction, and rising household incomes. An EU member since 2007, the country’s economic growth was one of the highest in the EU during the period 2010-2020.

Like the rest of the world, however, Romania has been profoundly impacted by the COVID-19 pandemic. In 2020, the economy contracted by 3.9 percent and the unemployment rate reached 5.5 percent in July before dropping slightly to 5.3 percent in December. Trade and services decreased by 4.7 percent, while sectors such as tourism and hospitality were severely affected. Hard won gains in poverty reduction were temporarily reversed and social and economic inequality increased.

The Romanian government acted swiftly in response to the crisis, providing a fiscal stimulus of 4.4 percent of GDP in 2020 to help keep the economy moving. Economic activity was also supported by a resilient private sector. Today, Romania’s economy is showing good signs of recovery and is projected to grow at around 7 percent in 2021, making it one of the few EU economies expected to reach pre-pandemic growth levels this year. This is very promising.

Yet the road ahead remains highly uncertain, and Romania faces several important challenges.

The pandemic has exposed the vulnerability of Romania’s institutions to adverse shocks, exacerbated existing fiscal pressures, and widened gaps in healthcare, education, employment, and social protection.

Poverty increased significantly among the population in 2020, especially among vulnerable communities such as the Roma, and remains elevated in 2021 due to the triple-hit of the ongoing pandemic, poor agricultural yields, and declining remittance incomes.

Frontline workers, low-skilled and temporary workers, the self-employed, women, youth, and small businesses have all been disproportionately impacted by the crisis, including through lost salaries, jobs, and opportunities.

The pandemic has also highlighted deep-rooted inequalities. Jobs in the informal sector and critical income via remittances from abroad have been severely limited for communities that depend on them most, especially the Roma, the country’s most vulnerable group.

How can Romania address these challenges and ensure a green, resilient, and inclusive recovery for all?

Reforms in several key areas can pave the way forward.

First, tax policy and administration require further progress. If Romania is to spend more on pensions, education, or health, it must boost revenue collection. Currently, Romania collects less than 27 percent of GDP in budget revenue, which is the second lowest share in the EU. Measures to increase revenues and efficiency could include improving tax revenue collection, including through digitalization of tax administration and removal of tax exemptions, for example.

Second, public expenditure priorities require adjustment. With the third lowest public spending per GDP among EU countries, Romania already has limited space to cut expenditures, but could focus on making them more efficient, while addressing pressures stemming from its large public sector wage bill. Public employment and wages, for instance, would benefit from a review of wage structures and linking pay with performance.

Third, ensuring sustainability of the country’s pension fund is a high priority. The deficit of the pension fund is currently around 2 percent of GDP, which is subsidized from the state budget. The fund would therefore benefit from closer examination of the pension indexation formula, the number of years of contribution, and the role of special pensions.

Fourth is reform and restructuring of State-Owned Enterprises, which play a significant role in Romania’s economy. SOEs account for about 4.5 percent of employment and are dominant in vital sectors such as transport and energy. Immediate steps could include improving corporate governance of SOEs and careful analysis of the selection and reward of SOE executives and non-executive bodies, which must be done objectively to ensure that management acts in the best interest of companies.

Finally, enhancing social protection must be central to the government’s efforts to boost effectiveness of the public sector and deliver better services for citizens. Better targeted social assistance will be more effective in reaching and supporting vulnerable households and individuals. Strategic investments in infrastructure, people’s skills development, and public services can also help close the large gaps that exist across regions.

None of this will be possible without sustained commitment and dedicated resources. Fortunately, Romania will be able to access significant EU funds through its National Recovery and Resilience Plan, which will enable greater investment in large and important sectors such as transportation, infrastructure to support greater deployment of renewable energy, education, and healthcare.

Achieving a resilient post-pandemic recovery will also mean advancing in critical areas like green transition and digital transformation – major new opportunities to generate substantial returns on investment for Romania’s economy.

I recently returned from my first official trip to Romania where I met with country and government leaders, civil society representatives, academia, and members of the local community. We discussed a wide range of topics including reforms, fiscal consolidation, social inclusion, renewably energy, and disaster risk management. I was highly impressed by their determination to see Romania emerge even stronger from the pandemic. I believe it is possible. To this end, I reiterated the World Bank’s continued support to all Romanians for a safe, bright, and prosperous future.

First appeared in Romanian language in Digi24.ro, via World Bank

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US Economic Turmoil: The Paradox of Recovery and Inflation

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The US economy has been a rollercoaster since the pandemic cinched the world last year. As lockdowns turned into routine and the buzz of a bustling life came to a sudden halt, a problem manifested itself to the US regime. The problem of sustaining economic activity while simultaneously fighting the virus. It was the intent of ‘The American Rescue Plan’ to provide aid to the US citizens, expand healthcare, and help buoy the population as the recession was all but imminent. Now as the global economy starts to rebound in apparent post-pandemic reality, the US regime faces a dilemma. Either tighten the screws on the overheating economy and risk putting an early break on recovery or let the economy expand and face a prospect of unrelenting inflation for years to follow.

The Consumer Price Index, the core measure of inflation, has been off the radar over the past few months. The CPI remained largely over the 4% mark in the second quarter, clocking a colossal figure of 5.4% last month. While the inflation is deemed transitionary, heated by supply bottlenecks coinciding with swelling demand, the pandemic-related causes only explain a partial reality of the blooming clout of prices. Bloomberg data shows that transitory factors pushing the prices haywire account for hotel fares, airline costs, and rentals. Industries facing an offshoot surge in prices include the automobile industry and the Real estate market. However, the main factors driving the prices are shortages of core raw materials like computer chips and timber (essential to the efficient supply functions of the respective industries). Despite accounting for the temporal effect of certain factors, however, the inflation seems hardly controlled; perverse to the position opined by Fed Chair Jerome Powell.

The Fed already insinuated earlier that the economy recovered sooner than originally expected, making it worthwhile to ponder over pulling the plug on the doveish leverage that allowed the economy to persevere through the pandemic. The main cause was the rampant inflation – way off the 2% targetted inflation level. However, the alluded remarks were deftly handled to avoid a panic in an already fragile road to recovery. The economic figures shed some light on the true nature of the US economy which baffled the Fed. The consumer expectations, as per Bloomberg’s data, show that prices are to inflate further by 4.8% over the course of the following 12 months. Moreover, the data shows that the investor sentiment gauged from the bond market rally is also up to 2.5% expected inflation over the corresponding period. Furthermore, a survey from the National Federation of Independent Business (NFIB) suggested that net 47 companies have raised their average prices since May by seven percentage points; the largest surge in four decades. It is all too much to overwhelm any reader that the data shows the economy is reeling with inflation – and the Fed is not clear whether it is transitionary or would outlast the pandemic itself.

Economists, however, have shown faith in the tools and nerves of the Federal Reserve. Even the IMF commended the Fed’s response and tactical strategies implemented to trestle the battered economy. However, much averse to the celebration of a win over the pandemic, the fight is still not through the trough. As the Delta variant continues to amass cases in the United States, the championed vaccinations are being questioned. While it is explicable that the surge is almost distinctly in the unvaccinated or low-vaccinated states, the threat is all that is enough to drive fear and speculation throughout the country. The effects are showing as, despite a lucrative economic rebound, over 9 million positions lay vacant for employment. The prices are billowing yet the growth is stagnating as supply is still lukewarm and people are still wary of returning to work. The job market casts a recession-like scenario while the demand is strong which in turn is driving the wages into the competitive territory. This wage-price spiral would fuel inflation, presumably for years as embedded expectations of employees would be hard to nudge lower. Remember prices and wages are always sticky downwards!

Now the paradox stands. As Congress is allegedly embarking on signing a $4 trillion economic plan, presented by president Joe Bidden, the matters are to turn all the more complex and difficult to follow. While the infrastructure bill would not be a hard press on short-term inflation, the iteration of tax credits and social spending programs would most likely fuel the inflation further. It is true that if the virus resurges, there won’t be any other option to keep the economy afloat. However, a bustling inflationary environment would eventually push the Fed to put the brakes on by either raising the interest rates or by gradually ceasing its Asset Purchase Program. Both the tools, however, would risk a premature contraction which could pull the United States into an economic spiral quite similar to that of the deflating Japanese economy. It is, therefore, a tough stance to take whether a whiff of stagflation today is merely provisional or are these some insidious early signs to be heeded in a deliberate fashion and rectified immediately.

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Carbon Market Could Drive Climate Action

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Authors: Martin Raiser, Sebastian Eckardt, Giovanni Ruta*

Trading commenced on China’s national emissions trading system (ETS) on Friday. With a trading volume of about 4 billion tons of carbon dioxide or roughly 12 percent of the total global CO2 emissions, the ETS is now the world’s largest carbon market.

While the traded emission volume is large, the first trading day opened, as expected, with a relatively modest price of 48 yuan ($7.4) per ton of CO2. Though this is higher than the global average, which is about $2 per ton, it is much lower than carbon prices in the European Union market where the cost per ton of CO2 recently exceeded $50.

Large volume but low price

The ETS has the potential to play an important role in achieving, and accelerating China’s long-term climate goals — of peaking emissions before 2030 and achieving carbon neutrality before 2060. Under the plan, about 2,200 of China’s largest coal and gas-fired power plants have been allocated free emission rights based on their historical emissions, power output and carbon intensity.

Facilities that cut emissions quickly will be able to sell excess allowances for a profit, while those that exceed their initial allowance will have to pay to purchase additional emission rights or pay a fine. Putting a price tag on CO2 emissions will promote investment in low-carbon technologies and equipment, while carbon trading will ensure emissions are first cut where it is least costly, minimizing abatement costs. This sounds plain and simple, but it will take time for the market to develop and meaningfully contribute to emission reductions.
The initial phase of market development is focused on building credible emissions disclosure and verification systems — the basic infrastructure of any functioning carbon market — encouraging facilities to accurately monitor and report their emissions rather than constraining them. Consequently, allocations given to power companies have been relatively generous, and are tied to power output rather than being set at absolute levels.

Also, the requirements of each individual facility to obtain additional emission rights are capped at 20 percent above the initial allowance and fines for non-compliance are relatively low. This means carbon prices initially are likely to remain relatively low, mitigating the immediate financial impact on power producers and giving them time to adjust.

For carbon trading to develop into a significant policy tool, total emissions and individual allowances will need to tighten over time. Estimates by Tsinghua University suggest that carbon prices will need to be raised to $300-$350 per ton by 2060 to achieve carbon neutrality. And our research at the World Bank suggest a broadly applied carbon price of $50 could help reduce China’s CO2 emissions by almost 25 percent compared with business as usual over the coming decade, while also significantly contributing to reduced air pollution.

Communicating a predictable path for annual emission cap reductions will allow power producers to factor future carbon price increases into their investment decisions today. In addition, experience from the longest-established EU market shows that there are benefits to smoothing out cyclical fluctuations in demand.

For example, carbon emissions naturally decline during periods of lower economic activity. In order to prevent this from affecting carbon prices, the EU introduced a stability reserve mechanism in 2019 to reduce the surplus of allowances and stabilize prices in the market.

Besides, to facilitate the energy transition away from coal, allowances would eventually need to be set at an absolute, mass-based level, which is applied uniformly to all types of power plants — as is done in the EU and other carbon markets.

The current carbon-intensity based allocation mechanism encourages improving efficiency in existing coal power plants and is intended to safeguard reliable energy supply, but it creates few incentives for power producers to divest away from coal.

The effectiveness of the ETS in creating appropriate price incentives would be further enhanced if combined with deeper structural reforms in power markets to allow competitive renewable energy to gain market share.

As the market develops, carbon pricing should become an economy-wide instrument. The power sector accounts for about 30 percent of carbon emissions, but to meet China’s climate goals, mitigation actions are needed in all sectors of the economy. Indeed, the authorities plan to expand the ETS to petro-chemicals, steel and other heavy industries over time.

In other carbon intensive sectors, such as transport, agriculture and construction, emissions trading will be technically challenging because monitoring and verification of emissions is difficult. Faced with similar challenges, several EU member states have introduced complementary carbon taxes applied to sectors not covered by an ETS. Such carbon excise taxes are a relatively simple and efficient instrument, charged in proportion to the carbon content of fuel and a set carbon price.

Finally, while free allowances are still given to some sectors in the EU and other more mature national carbon markets, the majority of initial annual emission rights are auctioned off. This not only ensures consistent market-based price signals, but generates public revenue that can be recycled back into the economy to subsidize abatement costs, offset negative social impacts or rebalance the tax mix by cutting taxes on labor, general consumption or profits.

So far, China’s carbon reduction efforts have relied largely on regulations and administrative targets. Friday’s launch of the national ETS has laid the foundation for a more market-based policy approach. If deployed effectively, China’s carbon market will create powerful incentives to stimulate investment and innovation, accelerate the retirement of less-efficient coal-fired plants, drive down the cost of emission reduction, while generating resources to finance the transition to a low-carbon economy.

(Martin Raiser is the World Bank country director for China, Sebastian Eckardt is the World Bank’s lead economist for China, and Giovanni Ruta is a lead environmental economist of the World Bank.)

(first published on China Daily via World Bank)

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