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For Official Use CCNM/GF/SD/ENV200316 Organisation de Coopération et de Développement 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 d origine 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. INTRODUCTION54 1.1 SO2 Emission Trends .54 1.2 Acid rain and Environmental Impacts65 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 Charges87 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 China98 3.1.1 Compatibility of Emission Trading and the TEC Policy98 3.1.2 Flexible Approach to Meeting Management Requirements .98 3.2 Basic Conditions for Emission Trading98 3.2.1 Variation of Marginal SO2 Abatement Costs109 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-Year Plan Period 1996 – 2000, the Chinese State Environmental Protection Administration SEPA began to promote a policy of total emission control TEC. National SO2 TEC targets were established. SEPA then assigned individual TEC targets to provinces, autonomous regions, and municipalities. The regional governments subsequently assigned TEC targets to local governments and/or emission sources. 2.4 Levying SO2 Emission Charges 11. In order to promote SO2 abatement, SEPA piloted SO2 emission charges in 1992 in 2 provinces and 9 cities where acid rain was severe and SO2 emissions were high. The SO2 emission charges were extended to the entire area of the TCZs in 2000. 12. In 2002, the national SO2 emission charges generated RMB 1.15 billion U.S. 140 million. Much of the money is used to install pollution controls and for general environmental improvement. In addition to providing revenue for environmental protection agencies, the charges have played an effective role in encouraging emission sources to assess the economic implications of SO2 emissions, advancing the use of emission controls at new and existing sources, promoting SO2 pollution prevention, raising funds for pollution treatment, and, as a result of these incentives, controlling SO2 emissions and acid rain. 13. The current emission charge of RMB 0.2 per kilogram of SO2, however, is less than the average marginal abatement cost of SO2 . As a result, the charges are insufficient to effectively stimulate pollution abatement to the necessary levels. To correct this, the government is gradually adjusting and enhancing the rate of the SO2 emission charge. 2.5 Requiring Cities to Comply with National Ambient Standards for SO2 Concentrations 14. To speed up urban air quality improvements, SEPA promulgated requirements that all cities should meet air quality standards and emission standards for key pollutants by 2000. Under this policy, urban SO2 concentrations have improved significantly and more cities meet the air quality and emission standards. 2.6 Adjusting the Composition of the Power Sector 15. Beginning in 1997, the State Council and the State Economic and Trade Commission SETC started requiring power enterprises to shut down small generating units below 50 MW – units that are typically inefficient and emit significant pollution. By the end of 2000, small generating units with a total capacity of 10,000 MW were shut down. The resulting reduction in coal consumption and SO2 emissions was 10 million tonnes and 400,000 tonnes, respectively. By 2004, an additional 25,000 MW of small generating units will be shut down, including 14,000 MW from the State Power enterprise. 2.7 Encouraging Desulphurisation 16. Research into desulphurisation began in the 1970s in China. Experimental facilities were set up in the mid-1980s, but desulphurisation equipment was not installed on large capacity generating units until the 1990s. By the end of 2000, desulphurisation equipment was installed and operated on 5,000 MW of generating capacity in China, about 70 of the units with controlled units were operated by State Power. State Power is currently expanding its use of desulphurisation equipment and has a total of 10,000 MW of generating capacity with desulphurisation equipment in operation or under construction. CCNM/GF/SD/ENV200316 9 3. REQUIREMENTS AND EXISTING FOUNDATIONS FOR INTRODUCING EMISSION TRADING IN CHINA 3.1 Foundations for SO2 Emission Trading in China 17. The SO2 problem in China is characterised by the following 1 approximately 45 of total SO2 emissions are from high-stack sources in the power sector; 2 energy demand is growing rapidly and, as a result, coal consumption is expected to continue increasing; and 3 many areas in China are suffering from SO2 pollution and acid rain. There are many policies and measures in place to address the problem. There is, however, a need to explore additional mechanisms and management instruments to reduce emissions cost effectively without constraining economic growth. In addition to powerful