Authorities work on SO2 trade system

By Sun Xiaohua (China Daily) Updated: 2006-09-14 06:46

The State Environment Protection Administration (SEPA) and Ministry of Finance (MOF) are working together to start a cap-and-trade system to curb China's world-leading emissions of sulphur dioxide (SO2).

The country emitted 25.49 million tons last year, twice the capacity its environment can purify, SEPA figures indicate. And for the first half of this year, emissions have totalled 12.65 million tons, 4.2 per cent higher than in the same period of 2005.

Many Chinese factories installed "scrubbing" systems, which use either sodium hydroxide or sodium carbonate, to neutralize the effects of the SO2 in their facilities. But a report from the National Development and Reform Commission (NDRC) showed that 60 per cent of the scrubbers are no longer operating because, lacking financial incentives and supervision from the State, plant officials turned them off.

"It indicates that to curb the increase of SO2 emissions, simply depending on installing scrubbers is far from enough," said Zhang Jianyu, programme manager in the Beijing office of Environmental Defence, a US-based organization that has been promoting emissions permit trading in China for years.

"The plants need an economic incentive to run their sulphur-neutralizing equipment. Supervision cannot reach every corner, where SO2 releases take place 24 hours a day."

That is where the cap-and-trade system comes in. In general, a "cap" is first established to reduce emissions to a lower level. The emissions allowed under the new cap are then divided into individual permits each for a certain number of units that are issued to the plants.

Companies are free to buy and sell the permits to continue operating in the manner most profitable to them. Those that are able to reduce emissions at a lower cost may then sell their remaining permits to companies whose emission reduction costs are higher.

The fixed cap guarantees a better environmental outcome, and the cap-and-trade system gives companies the flexibility to achieve their emissions targets in the most affordable way.

The State Council issued a document at the end of last year calling for strengthening environmental protection using this system.

But controversy has arisen over whether the plants should have to pay the State for their allowance quotas.

Wang Jinnan, vice-president of the Chinese Academy for Environmental Planning, revealed at a seminar held in Hong Kong at the end of last month that the proposed charge for the emissions quotas (which would be tradable) was 630 yuan (US$79) per ton, according to a report in the South China Morning Post in Hong Kong.

"Electric power companies support actively the cap-and-trade mechanism, but they strongly oppose the charge on emission allowance," said Wang Zhixuan, director of the Environment Protection and Resource Conservation Department of the China Electricity Council.

"Charging an emission allowance quota is improper. The emissions allowance quota is different from the real emissions amount. Why are the plants required to pay for the quota?"

China's six largest electric power companies are discharging more than half of the total SO2 being emitted by the power sector.

Zhang, who is also a research fellow at Tsinghua University, also criticized the charge.

"The whole idea behind cap-and-trade is spending the least money to achieve as much pollution reduction as possible," Zhang said. "But charging the allowance will take the economic benefits away from companies who accumulate them through more efficient environmental management, which will discourage companies from supporting it and fail to help reach the political consensus."

"And charging companies for allowance allocation will transform their assets into liabilities, which will not make them look good on their financial statements."

Discussions on the matter are continuing between SEPA and the Finance Ministry, and the NDRC is expected to release the policy with final decision in a few weeks.

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