Emissions trading with Chinese characteristics

What is a communist country doing using market mechanisms to control pollution? David Biello reports on China’s efforts to solve its sulphur dioxide problem

Benxi,Taiyuan and Nantong are not the first places that spring to mind when foreigners think of China. For those interested in emissions trading, however, they should be. Each of them is host to a pilot programme for curbing emissions of sulphur dioxide (SO₂). Lessons learned from these pilot schemes are now being applied to regional programmes with a national SO₂ market a possibility.

Air pollution in China has reached epic proportions across much of the country. According to the US Environmental Protection Agency (EPA), China emitted nearly 20 million tons of SO₂ in 2000 and acid rain affects 70% of its southern cities.

 

Shanghai - on the road to emissions trading

Estimates from the Chinese Research Academy of Environmental Sciences put the total economic loss from SO₂ pollution at 110 billion yuan ($13.3 billion) in 1995, nearly 2% of China’s gross national product that year.

As a result, the Chinese government – at national, provincial and local levels – has put a high priority on curbing SO₂ emissions. In September 1996, the central government approved the National Plan of Total Emission Control for Major Pollutants (TEC) in the Ninth Five-Year Plan. And in the Tenth Five-Year Plan, it set the TEC target at 10% below 2000 emission levels for the entire nation and 20% below 2000 levels in two zones with particular acid rain problems. One of these zones covers sources in the northeast and east of the country and the other covers southern areas. The three cities for emissions trading pilot schemes are all in the 20% zones. Benxi and Taiyuan are in the industrial northeast while Nantong is near Shanghai on the east coast.

These caps on SO₂ emissions will have to be met by the end of the Tenth Five-Year Plan in 2005. Provincial and municipal authorities will be held responsible for seeing goals are met.

“In effect, the Chinese did the hard thing first,” says Dan Dudek, a senior economist with New York-based think tank Environmental Defense (ED).“They set a target and capped the pollutants. Now they have to figure out implementation strategies.”

Dudek and his ED colleagues have been helping local officials in Benxi and Nantong for the past six years. On 23 September last year they facilitated the very first SO₂ trade in China between a light industrial company in Nantong and a local power plant. In that trade, the manufacturer bought a three-year stream of emissions reductions in order to enable it to expand its operations while complying with the municipal law on SO₂ output.“Essentially, these initial transactions are hand-built Rolls Royces involving a lot of learning,” notes Dudek.

In Benxi, ED has worked with local officials to develop and implement ‘cap-and-trade’ legislation. This legislation aims to control emissions from state-owned iron and steel works as well as cement and district heating plants to comply with the national TEC programme.

These pilot schemes are intended to demonstrate the benefits of emissions trading in reducing SO₂ pollution at least cost, but they also show how this approach to emissions reductions could be introduced in China.“What kind of institutional arrangements and policies[are needed], what needs to be done legislatively or in regulations to develop emissions trading with Chinese characteristics?” asks Dudek.“A cut-and-paste of the US programme isn’t going to fly.”

But momentum is building beyond these two demonstration projects, he notes. In March the ED pilot was expanded to include the provinces of Shandong, Shanxi, Jiangsu and Henan as well as the cities of Shanghai, Tianjin and Liuzhou, which collectively are responsible for one-third of China’s SO₂ emissions.

The goal is to determine what kind of rules need to be set up to create local markets and build in enough similarities to allow for a national allowance trading regime. “If you want people to hit a target five years out and you want a market, then you need interim goals to determine what is tradable,” Dudek says. “The hope is that we would have a functioning system next year within these regions.”

At the same time, another US think tank, Resources for the Future (RFF), has been working with the Asian Development Bank and the EPA to set up an emissions trading scheme in Taiyuan. The World Bank has labelled this city one of the dirtiest in the world and its residents suffer from an annual average SO₂ concentration of 200 µg/m3, more than twice the US EPA’s standard of 80 µg/m3.

RFF has helped local and provincial officials devise a draft regulation to combat this pollution crisis. “The regulation will be adopted sometime this month and an actual trading system set up beginning early next year,” says Richard Morgenstern, a senior fellow at RFF.

The scheme will cover the 26 largest sources of SO₂ in the city, including steel mills, coke plants and energy utilities, which represent 50% of Taiyuan’s total emissions, according to Morgenstern. Each of these companies face significantly different compliance costs, a fact that should encourage trading.

Both RFF’s and ED’s projects represent a shift in China from simply limiting emissions out of individual smokestacks to measuring the total amount emitted by an entire industrial facility. This has presented its own problems. “The major challenge has been the development of monitoring and accounting systems,” says Morgenstern.

Unlike SO₂ sources in the US, most Chinese sources do not have continuous emissions monitors (CEMs) installed in their stacks, although some of the newest plants do use this technology. Without CEMs, monitors are forced to rely on manual measurements of the sulphur content of the coal being burned, combined with information on equipment in use at the plant to come up with the likely total emissions.

Nevertheless, emissions trading represents a significant and cost-effective leap forward for Chinese pollution control, says Stephanie Benkovic Grumet, a senior analyst at the EPA.

“SO₂ is the flagship,” says ED’s Dudek.“It is the most severe problem from a Chinese perspective with damage to cultural artefacts, agriculture and human health.”

“Our approach has been to develop effective implementation tools for China,” Dudek continues.“We are assembling the banquet and there will be plenty for [others] to eat.”