Emission trading: will it work for PRC ’ s SO2 emission and acid rain control? ZHANG, Shiqiu College of Environmental Sciences Peking University Beijing

contents Challenges facing China’s Environmental Protection Weakness of Existing Environmental Management and Policy Context regarding SO2 emission Conditions Constrains and obstacles Priorities: power generating sector Key issues need to be addressed

Challenges Facing Environmental Protection in China Huge damages caused by environmental pollution Declines of the environmental policy effects: policy design and enforcement –hard to address trans-boundary environmental problems balance GROWTH AND ENVIRONMENT Shortage of environmental investment, and its inefficient utilization Undeveloped environmental industry

Changes of policy focus for solving the environmental problems From concentration based control to mass based control: total emission control From local to regional From short term to long term concern From command control to market based instruments

Chinese and regional Context Reduction responsibility increasing over time, i.e TEC (CAP) is decreasing Public awareness of environmental problems and demand for environmental protection are increasing Costs will increase over time unless flexible policies are used

Context for SO2 emission and acid rain Improvement of local SO2 pollution, while trans-boundary acid rain problem is worse Reasons for large emission of SO2 –Energy structure –Industrial structure –Higher growth rate Regional feature of SO2 emission –Two control zones accounts for over 50%,59% in 2000 Sector feature of SO2 emission –As the largest consumer of coal, power sector consumes over 40% of coal –Reduction of SO2 emission in China, however, increase for power sector, about 44% in 1999 Structure of power generation units and power generation efficiency is the key factor

raw coal production and consumption by power generation in China

SO2 emission in China (10,000tons)

Structure of power generation units capacity in China, 1998 （ over 6000kw)

Coal consumption by China’s coal fired power sector, (g/kWh ）

Conditions for introducing emission trading Total Emission Control set the cap, which the emission allowance become scarced resources: the market creation Promotion and establishment of market economy, policy target group are sensitive to economic incentives Reduction cost vary among technologies and enterprises Legal basis, regulatory system and supporting policies has been/is developing –Environmental protection law;Air pollution prevention and control law; Emission permit system Data and information basis –The emission registration and environmental statistical has been implemented many years; monitoring and academic studies Experiences generated from pilot studies –SEPA issued document for launching SO2 emission trading pilot studies in 7 provinces (cities) in April 2002, and others

Emission trading experiences 10 trades happened (in city of Pingdingshan, Benxi, Kaiyuan, Guiyang, Nantong, Taiyuan, Liuzhou, Tianjin, Baotou) Types of trade –Offset between stationary sources and plain sources –Offset between stationary sources: including inter- enterprises, and among enterprises –Trade between stationary sources: including inter- enterprises, and among enterprises

Emission trading experiences Most are offset, few for trading The trade or offset usually is just one time test Limitation at space level, only in a city, can not address trans-boundary issues Strong administrative intervention Lack of clear and well defined trade rules Similar to “credit” trading High sources replace low sources may transfer pollution which has regional impacts Most of the price are not defined by trade process, or has no price signals involved

Constrains, obstacles and risks The market economic system is not well developed Supporting of the monitoring data and capacity Environmental responsibility and property rights are not clear defined Conflicts may existed among existing policies management cost and enforcement cost might be might be higher reduce the respected efficiency Provincial and local based management system hard to address the trans-boundary pollution Lack of understanding of the environmental performance and behavior, and market strategy of enterprises

Priorities for emission trading in China: focusing on trans-boundary issues: power generating sector Local air quality improved, however the acid rain problems still worse in China Biggest contributor to the SO2 emission and acid rain Continue growth of this sector, and increase of the emission High stacks with trans-boundary effects Number of the sources can create sound scale of market for emission trading Varity of reduction cost Reform of this sector Management at enterprise level

Some key issues need to be solved Issues related to market creation: how large of the market, how competitive, the order of the market operation Baseline determination –1995 or 2000 is in question –regarding the consistency of the policy signals, impacts on the compliance behavior of target groups –Equity issue also involves Initial Allocation of allowance Balance the ambient environmental quality and total emission target Allowance trade among the provinces: reconciling the local based, sector based management, and regional management Reconciling with the existing policies, especially pollution levy, three synchronization, EIA Monitoring and enforcement Policy and supporting policy design with the feature of providing incentive to enterprises to join the trade