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.
Environment,
Transport and Works Bureau
February 2003
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