For Official Use CCNM/GF/SD/ENV200316 Organisation de Coopration et de Dveloppement Economiques Organisation for Economic Co-operation and Development 14-Mar-2003 ___________________________________________________________________________________________English, French CENTRE FOR CO-OPERATION WITH NON-MEMBERS ENVIRONMENT DIRECTORATE OECD Global Forum on Sustainable Development OECD GLOBAL FORUM ON SUSTAINABLE DEVELOPMENT EMISSIONS TRADING CONCERTED ACTION ON TRADEABLE EMISSIONS PERMITS CATEP COUNTRY FORUM IMPLEMENTING SO2 EMISSION TRADING IN CHINA DOCUMENT 16 17-18 March 2003 This paper was prepared by Jintian Yang CAO Dong, GE Chazhong, GAO Shuting – Chinese Academy for Environmental Planning and Jeremy Schreifels U.S. Environmental Protection Agency for the OECD Global Forum on Sustainable Development Emissions Trading and Concerted Action on Tradable Emissions Permits CATEP Country Forum held on 17-18 March 2003 at OECD Headquarters in Paris. The ideas expressed in the paper are those of the authors and do not necessarily represent views of the OECD or its Member countries. Contact person Mr. Stephen Bygrave, ENV/GSP [Tel 33-1 45 24 14 86; Email stephen.bygraveoecd.org] JT00140913 Document complet disponible sur OLIS dans son at dorigine Complete document available on OLIS in its original at CCNM/GF/SD/ENV200316For Official UseEnglish, FrenchCCNM/GF/SD/ENV200316 2 TABLE OF CONTENTS CUTIVE SUMMARY .................................................................................................................43 1. INTRODUCTION....................................................................................................................54 1.1 SO2 Emission Trends .................................................................................................................54 1.2 Acid rain and Environmental Impacts..........................................................................................65 2. SO2 EMISSION CONTROL POLICIES.....................................................................................76 2.1 Identifying Critical Control Zones ..............................................................................................76 2.2 Limiting the Extraction and Use of High Sulphur Coal.................................................................76 2.3 Promoting SO2 Total Emission Control.......................................................................................87 2.4 Levying SO2 Emission Charges..................................................................................................87 2.5 Requiring Cities to Comply with National Ambient Standards for SO2 Concentrations ..................87 2.6 Adjusting the Composition of the Power Sector ...........................................................................87 2.7 Encouraging Desulphurisation ...................................................................................................87 3. REQUIREMENTS AND EXISTING FOUNDATIONS FOR INTRODUCING EMISSION TRADING IN CHINA ........................................................................................................................98 3.1 Foundations for SO2 Emission Trading in China..........................................................................98 3.1.1 Compatibility of Emission Trading and the TEC Policy..........................................................98 3.1.2 Flexible Approach to Meeting Management Requirements .....................................................98 3.2 Basic Conditions for Emission Trading........................................................................................98 3.2.1 Variation of Marginal SO2 Abatement Costs........................................................................109 3.2.2 Regional Problem...............................................................................................................109 3.2.3 Emission Measurement.......................................................................................................109 3.2.4 Legal Basis ...................................................................................................................... 1110 3.2.5 Administrative Institutions ................................................................................................ 1110 4. EMISSION TRADING PILOTS............................................................................................ 1110 4.1 Progress in Piloting Emission Trading in China ....................................................................... 1211 4.2 Case Studies of Emission Trading ........................................................................................... 1211 4.2.1 SO2 Emission Trading in Jiangsu Province........................................................................ 1211 4.2.2 SO2 Emission Trading in Taiyuan City .............................................................................. 1312 5. OPPORTUNITIES AND OBSTACLES TO IMPLEMENTING EMISSION TRADING IN CHINA14 5.1 Feasibility of National Implementation .......................................................................................14 5.2 Issues and Barriers ................................................................................................................ 1514 5.2.1 Legal Authority............................................................................................................... 1514 5.2.2 Uni Allocation ............................................................................................. 1514 5.2.3 Monitoring and Verification.................................................................................................15 5.2.4 Coordination with Other Policy Instruments...................................................................... 1615 6. RECOMMENDATIONS FOR NATIONWIDE SO2 EMISSION TRADING............................ 1615 6.1 National SO2 TEC Targets ..................................................................................................... 1615 CCNM/GF/SD/ENV200316 3 6.1.1 The Power Sector SO2 TEC Target.................................................................................... 1716 6.2. Implementing the TEC .......................................................................................................... 1716 6.2.1 Power Sector................................................................................................................... 1817 6.2.2 Two Control Zones ......................................................................................................... 1817 6.3 Implementation Phases.......................................................................................................... 1918 7. CONCLUSIONS AND SUGGESTIONS............................................................................... 1918 7.1 Conclusions ........................................................................................................................... 1918 7.1 Suggestions ...............................................................................................................................19 REFERENCES............................................................................................................................... 2120 CCNM/GF/SD/ENV200316 4 CUTIVE SUMMARY Over the past 10 years, the Chinese State Environmental Protection Administration SEPA has actively investigated the potential to use emission trading to reduce sulphur dioxide SO2 emissions from electricity generators and industrial sources. In 1999, SEPA partnered with the U.S. Environmental Protection Agency U.S. EPA to cooperate on a study to assess the feasibility of implementing SO2 emission trading in China. SEPA has also pursued emission trading pilot projects in several cities and provinces. The authors, using ination from the feasibility study and pilot projects, introduce the circumstances necessary for SO2 emission trading in China, outline the experience to date, and analyse implementation opportunities and barriers in China. The contents of the paper are 1 SO2 emission control policies in China; 2 institutional requirements and the basis for introducing SO2 emission trading in China; 3 case studies of emission trading in China; 4 opportunities and barriers to implementing emission trading in China; 5 recommendations to transition from pilot projects to a nationwide SO2 emission trading program; and 6 conclusions and suggestions. CCNM/GF/SD/ENV200316 5 1. INTRODUCTION 1. Acid rain and sulphur dioxide SO2 pollution in China are very severe – ambient concentrations in some regions are several times higher than air quality standards – and have significant impacts on human health, ecosystems, and cultural resources. The toll on human health and the economy from air pollution is estimated to cost as much as 2 of GDP annually Xie, 1998. As a result, since 1995 the Chinese government has placed great importance on controlling acid rain and SO2 pollution. In order to accomplish this, the government has identified key geographic areas where the problem is particularly severe and adopted a series of policies and measures to abate SO 2 emissions. Emission trading is one of the instruments the government is investigating. This paper analyses the opportunities and barriers to implementing SO2 emission trading in China considering current institutional and legal conditions. 1.1 SO2 Emission Trends 2. Coal is the principal energy source in China; it is used to meet approximately 69 of China’s total primary energy demand IEA, 2002. Due to a dramatic increase in China’s coal consumption over the last two decades from rapid industrialisation and population growth, SO2 emissions have increased and created serious environmental and human health problems. According to Chinese government statistics, SO2 emissions in China were 19.95 million tonnes in 2000; of which, 85 were from direct coal combustion Yang et al., 2002. The largest consumer of industrial coal is the Chinese power sector. As a result, the power sector is a major source of SO2 emissions, leading to acid rain and acid deposition across China. These high-stack sources emit 8.9 million tonnes of SO2 annually, 45 of total emissions. 3. Government data show that total SO2 emissions in China increased between 1980 and 1995 to 23.7 million tonnes. Since a series of SO2 control measures were implemented in 1995, SO2 emissions have declined each year with a small increase in 2000. Figure 1 illustrates the annual SO2 emissions trend in China during the 1990s. CCNM/GF/SD/ENV200316 6 Figure 1 Historic SO2 Emissions in China 05101520251990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000Emissions million tons00.020.040.060.080.10.12Concentrationmg/m3Power sector SO2 emission National SO2 emission SO2 concentrationSource China Environment Yearbook, 1990 to 2001 4. Emission projections through 2010 show a steady increase in energy demand in China. Much of this demand will continue to be met through coal combustion. By 2010, total annual coal consumption will reach 1.44 billion tonnes and SO2 emissions are estimated to be 26.3 million tonnes Yang et al., 2002. Therefore, the task of bringing SO2 emissions under control is crucial though challenging. 1.2 Acid rain and Environmental Impacts 5. SO2 emissions and the resulting acid rain have serious impacts on human health, visibility, agriculture, forestry, architecture, and cultural resources. From the 1980s to the mid-1990s, the area affected by acid rain increased by more than 1 million km2. Currently, approximately 30 of China experiences precipitation with annual average pH values below 5.6 Yang et al., 2002. The distribution of areas affected by acid rain is shown in Figure 2. Figure 2 Distribution of Acid Rain in 1980s and 1990s 6. While overall emissions are still high, China’s total SO2 emissions have decreased since 1995. As a result, the number of cities meeting the SO2 concentration standards has increased. But the problem of acid rain has not diminished and the area affected by acid rain and the degree of acidification have not CCNM/GF/SD/ENV200316 7 been effectively controlled. Precipitation monitoring data from 530 cities in 2002 showed that 48.9 of the cities suffer from acid rain, 171 cities or 32 have average annual pH values from precipitation below 4.5, and the number of cities with average annual pH values from precipitation below 4.5 is increasing Qu, 2003. The main reasons are 1 although total SO2 emissions have decreased, high stack sources that transport emissions over long distances and contribute to acid rain are responsible for an increasing percentage of emissions ; 2 SO2 emissions from the power sector, which is composed of primarily high-stack sources increased; and 3 there was an increase in emissions of nitrogen oxides NOx – another acid rain precursor. 2. SO2 EMISSION CONTROL POLICIES 7. In an effort to control SO2 emissions and lessen the effects of acid rain, China has adopted a series of control policies and measures since 1995. 2.1 Identifying Critical Control Zones 8. Based on areas affected by acid rain and high SO2 concentrations in 1998, the government identified key acid rain control and SO2 pollution control zones known as the “Two Control Zones” TCZs. The first zone, the Acid Rain Control Zone, consists of areas with average annual pH values for precipitation less than or equal to 4.5, sulphate deposition greater than the critical load, and high SO2 emissions. The second zone, the SO2 Pollution Control Zone, consists of areas with annual average ambient SO2 concentrations exceeding Class II standards, daily average concentrations exceeding Class III standards, and high SO2 emissions. The TCZs are key areas for controlling acid rain and SO2 emissions in China and receive priority for investment and management to control emissions. 2.2 Limiting the Extraction and Use of High Sulphur Coal 9. In 1998, China instituted policies to restrict the extraction of high sulphur coal and limit its use in the TCZs. Most cities now use low sulphur coal and have adjusted their energy structures to decrease urban SO2 concentrations. The State Council explicitly requested in a national industrial policy that local governments shut down small, high-sulphur coalmines. Because of this policy, the sulphur content of coal combusted by the power sector has decreased every year see Table 1 for average sulphur content values from coal combusted by the power sector. Table 1 Average Sulphur Content of Coal Combusted in the Chinese Power Sector 1990 1991 1995 1999 2000 Change 1.20 1.17 1.09 1.05 1.00 17 Source YANG, 2002. CCNM/GF/SD/ENV200316 8 2.3 Promoting SO2 Total Emission Control 10. In the Ninth Five-Ye