Chinese authorities are perfectly aware that they must focus their policy on cities. They seem to rely on the implementation of trading CO2 emissions permits to stimulate the firms to undertake the warranted endeavors.

But, I admit, that as the European experiment is clearly showing, the CO2 price is extremely volatile. It can move in a matter of months from 20 euros per ton to less than 5 euros, and it is currently falling sharply, giving the wrong signals to firms. There is at present an excess supply of emissions permits and the market does not play the role it was expected to play.

I think that a CO2 tax would be more preferable to put in place than CO2 emissions permits trading system. It could be applied to firms only and to coal fired power plants producing electricity.

This tax would be a strong incentive to replace coal fired power stations progressively over time with gas and/or renewable energy/nuclear.

If the proceeds of the tax were:

1. Used to foster research in the CCS technologies and CO2 storage,

2. And also as a bounty distributed to firms that invest in cleaner processes in order to help them in their effort to reduce pollution,

Then China could simultaneously obtain positive results on many fronts:

1. On the quality of life in the cities, on reduction of CO2 emissions for climate mitigation,

2. On new developments in Chinese technologies for clean energy,

And these targets could be attained without putting the competitiveness of the firms in jeopardy.

China is facing, without any doubt, a huge challenge.

In conclusion, the excellence of current industry is already taking the right turn, and that it has within its reach the necessary tools to succeed in achieving a better future.

The author is Director-General On-duty of IEEPA Consultative Council and Chairman of the Euro50 group. The views do not necessarily reflect those of chinadaily.com.cn.