Economic incentives are important to tackling China's serious environmental issues, according to British energy policy adviser Neil Hirst.

Carbon pricing, which involves putting a price on carbon emissions, is essential to the success of China's ecological endeavors, "because as long as you are offering free use of the atmosphere to dump CO2, it is very difficult to counteract that", says the senior policy fellow with the Grantham Institute for Climate Change and the Environment, Imperial College London.

Hirst, the lead author of The Reform of Global Energy Governance, a paper published by the Grantham Institute and Chatham House, is working with China's Energy Research Institute on a joint project on China and international energy governance.

China's export- and investment-driven economic model, which has delivered double-digit growth for decades, has taken its toll on the environment, as evidenced by the smog seen in many cities. However, the government has begun to realize the importance of maintaining a balance between economic growth and the environment.

At the Paris Climate Change Conference in December, China pledged to reduce carbon emissions per unit of GDP by 60 to 65 percent from the 2005 level, as well as raise the share of nonfossil fuels in its primary energy mix to about 20 percent by 2030.

Green development was also included in proposals for the country's 13th Five-Year Plan (2016-20) as one of five major themes, to promote harmony between man and nature.

Hirst finds the most exciting initiatives for China's green development are seven pilot carbon-trading programs, which were announced in 2011 as part of efforts to drive efficiency and cut carbon emissions across heavy industry, so as to improve air quality and reduce pollution.

"The pilots link with the sort of thing that is happening in Europe and the United States, which I believe can get some real dynamic into the process of China's green development," Hirst says.

Trading requires some form of cap on carbon emissions, and trading among different players enables the cap to be met, at least in theory. It is an efficient way to provide a wide range of economic incentives, he adds.

Although they are only pilot programs right now, Hirst is confident they will be included in the 13th Five-Year Plan, which will be discussed and finalized during the annual session of the National People's Congress, the legislature in March.

"The hope should be that eventually these trading programs will be able to trade internationally. Bit by bit, we could get into a situation where there is an international carbon price for trading between all international players."

As a result of sustainable development, the green sector is growing rapidly worldwide, and Hirst thinks China has big opportunities to be a major exporter of green technology.

"China is the world's largest manufacturer of photovoltaic modules and wind turbines. Also, the country is also a world leader in solar panels, which is possibly the world's fastest-growing source of energy."

He believes there is great potential in China's green growth, but it needs to be coupled with increased domestic consumption, to which lowering saving ratios could help to achieve.

"The Chinese saving ratios are very high, which means the domestic demand is relatively low and employment in the domestic demand is correspondently low. That would be fine as long as there is a huge emphasis on state investment in exports, manufacturing and infrastructure."

However, as that changes, Hirst says China needs more domestic demand to prop up the economy, hence the reduction of saving ratios. "Rebalancing the saving ratios is critical, so that the country does not suffer a serious employment problem."

In addition, due to its vast size, Hirst believes China's green development comes with great challenges. "Beijing has to persuade provincial governments that this (green development) is the way to go, and there have been already tensions with that."

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