HK emissions trading scheme “too small and diverse”

Hong Kong’s proposed emissions trading scheme with South China is too small and diverse to form a useful liquid market says Hong Kong’s Business Environment Council (BEC) senior advisor Dr Thomas Tang. He instead calls for a China-wide SO2 trading scheme – and a new government measurement programme may provide the essential kick-start such a scheme requires.

This month Hong Kong and Guangdong have endorsed a long-awaited emissions trading scheme between Hong Kong and south China’s Pearl River Delta (PRD). The scheme will be voluntary, says Secretary for the Environment, Transport & Works Dr Sarah Liao, and, when all necessary procedures are completed, she says interested thermal power plants will be allowed to start identifying their partners.

But a utility business insider says the pilot scheme between 61 power plants across Hong Kong and the PRD is doomed from the start.

Dr Thomas Tang leads a group tackling PRD air pollution with business-led initiatives for Hong Kong’s Business Environment Council (BEC), an environmental lobby group whose members include HSBC and Hong Kong’s two electric utilities Hongkong Electric (HEC) and CLP Group.

The first pitfall the pilot scheme will face, says Tang, is the breadth of the proposed emissions market in Hong Kong. The pilot trading scheme will enable power producers in Hong Kong and the PRD to trade not one, but four of the main pollutant “commodities”: SO2, NOx, particulates and CO2. “The [government] should just concentrate on one thing,” says Tang. While SO2 and CO2 trading schemes in US and Europe have formed robust markets, Tang says NOx and particulate trading will be difficult in the region due to the complexities and expense of accurately measuring these pollutants.

Furthermore, the size of the market will be small. “The US SO2 cap-and-trade scheme trades millions of tonnes,” says Tang. “But in Hong Kong, we’re talking about thousands of tonnes, it’s nowhere near the scale required [for a liquid market]. The government knows this and is trying to ignore the fact,” claims Tang.

The government – in the form of the Environmental Protection Department (EPD), its environmental executive office – would not comment on specifics of the scheme and could not respond to Thomas Tang’s comments. But EPD deputy director Roy Tang says his department’s job “is to make this thing fly.”

The scheme is the brainchild of Dr Sarah Liao, whose first official visit to Beijing upon her appointment as environment secretary in 2002 was to seek permission for Hong Kong to join a mainland emissions trading scheme.

Four months later permission was granted, and according to the BEC’s Tang this is when “Hong Kong painted itself into a corner. Beijing has approved it, so [Hong Kong] must come up with something by the end of this year. But it has not thought it through,” he says.

Tang criticises the government for not seeking stronger input from the industry. Its approach, he says, has been very different to the US government’s development of the SO2 market. While that scheme was driven by industry, the Hong Kong government is preferring a more prescriptive approach, which Tang says is another nail in the emissions trading coffin. “Bureaucrats simply will not be able to get this going – it needs industry experts. In the US, industry and the government were working together, but in Hong Kong, the utilities and the government don’t trust each other.”

So while the government cannot discuss the specifics of the Pilot Scheme, how does it respond to criticism of a deadlock with the utilities?

The EPD’s Tang is absolutely unrepentant and says it’s time to get tough with the polluters. “For years [the duopoly] enjoyed high returns and they did not do enough [by themselves] to cut their emissions. We couldn’t induce them with a carrot. So now its time for the stick.”

The “stick” is the proposed new Scheme of Control, a complicated document which dictates the returns a utility can make on its assets. While the previous Scheme of Control regulations offered a flat-rate across all types of asset – the two Hong Kong utilities enjoyed 13.5% on all assets – when it expires in 2008 the government plans to slash returns from environmental-reduction equipment to around 7%. Still a competitive incentive, says Roy Tang, yet a long way from the 13.5% return guaranteed on renewable energy.

The problem is, the utilities don’t want renewable energy. HEC says its flagship Lamma Winds project has been “intermittent, unpredictable and uncontrollable, with low capacity and high cost.” Further adoption of renewable energy in Hong Kong would “likely face many barriers including geographical constraints and higher costs compared with conventional energy sources,” the utility said.

It is Hobson’s choice for the utilities then; fit further environmental reduction equipment at a rate of return far lower than they previously enjoyed, or suffer what the EPD calls “considerable “economic disincentive” for breaching its emissions targets.

And this is where emissions trading comes in. Recognising that investment in electricity companies and a reliable power supply is important for “the modern metropolis of Hong Kong,” the EPD’s Tang says the government has a duty to help the utilities meet their emissions targets. Emissions trading isn’t the carrot, it’s the grease on the donkey’s cart wheels. Without it, says Roy Tang, CLP will struggle to meet its 2010 targets.

CLP would not comment on this, although last year CLP Holdings CEO Andrew Brandler said in a statement last year the 2010 targets were “extremely challenging” and that its proposed $8 billion LNG terminal in Hong Kong was a key initiative to enable it to meet those targets. Roy Tang suggests this may be possible if CLP front-loaded its existing supplies from the Yacheng gas field in Hainan, but he believes the utility will also need to buy emissions credits. CLP would not comment.

Talking to the EPD, one realises the motivation for the Pilot Scheme development in Hong Kong is neither financial nor academic – as Roy Tang sweeps his arm across the smoggy harbour view from the 43rd floor of Wanchai’s Revenue Tower on Hong Kong Island, he says the smog will not go away until the PRD is cleaned up.

For this reason, Hong Kong is concentrating its efforts on the smaller regional scheme with Guangdong and has resisted the development of an oft-mooted national Chinese or pan-Asian emissions hub. Hong Kong’s air would not directly benefit from a national Chinese emissions trading scheme; nor would it benefit from being a trading hub between Chinese clean development mechanism (CDM) carbon credits, for example, and European and Japanese buyers, as has also been mooted. Most Clean Development Mechanism projects, for example, concentrate on renewable power, coal mine methane capture or HFC-23 reduction, and investment by Hong Kong in CDM credits does not make sense from an air quality point of view since the PRD power plants causing the pollution appear to be low on the global CDM priority list.

One of the biggest drawbacks to a national Chinese scheme has been the difficulty of data measurement and verification in a consistent manner across China. But in October, Beijing called for all local government to prepare for what may well be the largest environmental audit ever undertaken. In 2008, the State Council will collect “all the needed data at industrial, agricultural and residential pollution sources,” and in doing so “will lay a foundation for the country to substantially reduce emissions in the long run, through not only administrative regulation, but market mechanisms as well.”

The Chinese government says this survey will come too late to help it achieve its latest environmental plan, laid out in the 11th Five Year Plan period (2006-2010), but says the project will have long-term significance. “Only with timely and accurate emissions data can the environmental agency effectively monitor major pollutants and seek solutions.”

The announcement from the government shows a giant step in the formation of a nationwide emissions market. China’s State Environmental Protection Administration (SEPA) has already indicated it wants to introduce a cap-and-trade system, similar to the US SO2 trading scheme – it hopes such a scheme will offer an incentive to Chinese factories and power producers to turn on the 60% of SO2 scrubbers turned off because of lack of financial incentives or environmental supervision.

Meanwhile in Hong Kong the deputy director of the EPD ponders the future of emissions trading in his city. “I hope it is not just a bubble,” he says, shaking his head. “Wall Street can make a bubble out of anything. Why doesn’t Shanghai [become the China hub]? They’ve got all the sources up there plus the investment banks, the infrastructure.” A good idea – but it doesn’t sound like the warmest welcome to any would-be emissions exchange to Hong Kong.

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