Advisory Council on the Environment

EMISSIONS TRADING

(ACE Paper 4/2003)
For information

Introduction

This paper briefs Members on the concept of emissions trading which is one of the tools being explored for achieving the air pollutant emission reduction targets that the HKSAR Government has agreed with the Guangdong Provincial Government. This paper sets out briefly -

how the concept of emissions trading works;
the experience of emissions trading in the United States;
the development of emissions trading in the Mainland, and
the current study we are conducting jointly with Guangdong on the feasibility of setting up an emissions trading pilot scheme in Hong Kong and Guangdong Province.

Background

2.As we briefed Members in April 2002 via ACE Paper 15/2002, the HKSAR Government has reached a consensus with the Guangdong Provincial Government to aim, on a best endeavour basis, to reduce by 2010 the regional emissions of sulphur dioxide (SO2), nitrogen oxides (NOx), respirable suspended particulates (RSP) and volatile organic compounds (VOC) by 40%, 20%, 55% and 55% respectively, using 1997 as the base year. The two Governments are working on a Regional Air Quality Management Plan having regard to the additional control measures recommended in the report of a joint study on regional air quality completed in early 2002.

3.The report of the joint study recognizes that motor vehicles and power plants are the major emission sources of RSP, SO2 and NOx in Hong Kong and that the bulk of VOC emissions come from printing operations and consumer products containing VOC. It acknowledges the effectiveness of the measures already in place and to which we are already committed, and that we cannot do much more to reduce emissions from motor vehicles. To achieve the emission reduction targets, the report recommends that we should reduce VOC emissions from sources such as printing operations and consumer products, including paints and aerosol sprays of various kinds, as well as reduce SO2, NOx and RSP emissions from power plants located in Hong Kong. For the Mainland part of the Pearl River Delta Region, the study report recommends that the Guangdong Provincial Government should reduce emissions from power plants through transmission of hydro-electricity from the west, using clean fuels and upgrading existing plants; reduce emissions from motor vehicles through tightening motor fuel and vehicle emission standards; and reduce emissions from industrial processes through requiring upgrading or installation of control equipment. The study report recommends emissions trading as a possible tool for exploration to reduce emissions from power plants.

Details

The Concept of Emissions Trading

4.Emissions trading is a market-based tool for reducing air pollutant emissions. Under an emissions trading system applied to the power industry, a power company that is able to reduce emissions to a level below the legal limit can obtain emissions reduction credits from the relevant authority. It can then sell the credits to another power company that emits more than what the law permits and needs the credits to offset its excessive emissions. In effect, the power company that buys the credits in the market pays for the emissions improvements the other power company is able to achieve. This system of emissions trading will work where one power company finds it cheaper to buy credits from another power company located within the same geographical area, commonly known as an "air shed", than to try to reduce the emissions by itself.

5.In the case of Hong Kong, the two power companies have over the years put huge investments into their power plants to reduce their emissions. The measures they have taken include installing gas desulphurisation systems and low nitrogen oxide burners on their power plants and switching to low-sulphur coal. We also require all new power plants to be built in Hong Kong to use gas, which is cleaner than coal. If the two power companies are to reduce their emissions further through doing more on their existing power plants, the costs would be very high and that would have a significant impact on electricity tariffs for consumers. In the case of Guangdong, most of the power plants are still relatively primitive in design. In order to comply with emission standards, reducing emissions through replacement and/or upgrading of their plants would be easier and economically more cost effective. In money terms, it would also be less costly. It will be a win-win situation if the power companies in Hong Kong could meet the emissions reduction requirements we will impose on them through buying credits from power companies in Guangdong.

Experience in the United States

6.There are three major forms of emissions trading systems in the United States, each serving different purposes and objectives -

"Open-market emissions trading" is voluntary in nature. A power company has the option of saving up the credits and using them in future, or selling them in the market. The system provides incentives for pollution sources to reduce their emissions to the minimum possible instead of merely meeting the legal requirements. However, as participation in the system is voluntary, we cannot use it to achieve specific emission reduction targets.
Under an "off-setting emissions trading system", the Authority caps the total emissions level of specified pollution sources within an air shed. It will permit the building of new pollution sources provided that the new source can offset the increase in emissions it will bring about by paying other established sources in the same air shed to reduce their emissions by the same amount of the increase.
A "Cap-and-trade" system involves the Authority setting an emissions cap as well as a timetable for lowering the cap. The Authority distributes the capped quantity to air pollution sources in the form of emission allowances or permits that the air pollution sources can trade in the market. It is designed to achieve specified emission reduction targets over a pre-determined time frame for a defined air shed. This system is the one most relevant to the consensus that the HKSAR Government has reached with the Guangdong Provincial Government to reduce, on a best endeavour basis, by 2010 the emissions of the four major pollutants in the ambient air by specific amounts.

7.The Acid Rain Programme of the United States is the most well known example of a cap-and-trade system. The Clean Air Act 1990 provided the legislative basis for setting up the market-based system designed to reduce sulphur dioxide emissions from power plants, for the purpose of controlling acid rain. The United States Government implemented the Programme in two phases. Phase I took effect in 1995 and Phase II in 2000. Starting from Phase I, 110 big coal-fired power plants in 21 Midwest, Appalachian, Southeastern and Northeastern states had to reduce sulphur dioxide emissions. Starting from Phase II, other smaller power plants had to follow suit.

8.When Phase II of the programme took effect in 2000, the total sulphur dioxide emissions had dropped to about 36% below the 1980 level. We should assess the results against the fact that, between 1980 and 2000, the total heat input required for the affected power plants increased by about 43%. Therefore, the results were very encouraging indeed. The official assessment of the cost effectiveness of the programme is not available yet. However, some academic researchers suggest that the programme has cut the sulphur dioxide control costs by half, up to US$2.5 billion per year.

Development in the Mainland

9.Since as early as 1986, the Mainland has implemented a number of small-scale pilot schemes on emissions trading mainly to reduce sulphur dioxide emissions for tackling the acid rain problem. In May 2002, the State Environmental Protection Administration announced that seven provinces and cities, viz. Shandong (??), Shanxi (??), Jiangsu (??), Henan (??), Shanghai (??), Tienjin (??) and Liuzhou (??), would implement sulphur dioxide emissions trading schemes. Two power companies in Jiangsu have recently signed an agreement on the first city-to-city sulphur dioxide emissions trading scheme.

Setting up a Pilot Scheme in the Pearl River Delta Region

10.The HKSAR Government has agreed with the Guangdong Provincial Government to study jointly the feasibility of setting up an emissions trading pilot scheme covering the power plants in Hong Kong and selected power plants in Guangdong by around 2006. Through the Hong Kong and Macao Affairs Office of the State Council, the State Environmental Protection Administration has expressed support for the introduction of the pilot scheme. We have set up an expert group comprising officials of the two Governments under the Hong Kong-Guangdong Joint Working Group on Sustainable Development and Environmental Protection to examine the relevant experiences in the Mainland and overseas, the steps and criteria required for introducing the pilot scheme as well as the technical requirements to ensure success. We will brief Members on the developments in due course.