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Improvement of China’s air pollution (sulphur dioxide and acid rain) control and countermeasures by introducing… You, Shijun 2010

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IMPROVEMENT OF CHINA’S AIR POLLUTION (SULPHUR DIOXIDE AND ACID RAIN) CONTROL AND COUNTERMEASURES BY INTRODUCING EMISSIONS TRADING SYSTEM by Shijun You B.Sc., Dalhousie University & Nova Scotia Agricultural College, 2007  A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF  MASTER OF SCIENCE  in The Faculty of Graduate Studies (Forestry)  THE UNIVERSITY OF BRITISH COLUMBIA (Vancouver) October 2010  © Shijun You, 2010  ABSTRACT  As human beings, we rely on the atmospheric environment as a valuable resource for our daily needs. Destruction of this environment is usually an irreversible process. Attempting to restore an already damaged atmospheric environment is much more costly than preventing atmospheric pollution in the first place. As has been the case with the industrialization of western countries, Asia‘s social and economic development has created an awareness of new problems of environmental pollution and ecological degradation. Data collected by the National Aeronautics and Space Administration (NASA) indicate that particulates transported in the air from East Asia to North America represent about 15% of the total particulate production in North America. China, as the largest developing country located in Asia, has experienced a dramatic increase in energy demands and pollutant emissions. This is partly because coal is the primary source of energy for China, something that is not expected to change in the foreseeable future. The country is not meeting its established objectives on air pollution abatement and the current administrative mechanisms are not providing adequate solutions for sulphur dioxide or acid rain problems. In response to this, the Chinese government is looking for more effective ways to balance economic growth and pollution control. One such mechanism for China could be an emissions trading program aimed at adjusting and improving air pollutant control mechanisms.  This research is primarily an exploration of introducing an emissions trading system, which has played a significant and effective role in sulphur dioxide and acid rain control in US, aiming at adjusting and improving the air pollutant control mechanism in China. In terms of the feasibility analysis, with the improvement of China‘s special market economy conditions, integrating market mechanisms with ―total amount control‖ to establish China‘s own emissions trading system, which is also known as ―cap & trade‖, is likely to contribute greatly to sulphur dioxide and acid rain control in China. A recommended design and implementation roadmap for China‘s emissions trading scheme has also been conducted in this research.  ii  TABLE OF CONTENTS ABSTRACT ................................................................................................................................................... ii TABLE OF CONTENTS .............................................................................................................................. iii LIST OF TABLES ........................................................................................................................................ iv LIST OF FIGURES .........................................................................................................................................v ACKNOWLEDGEMENTS........................................................................................................................... vi DEDICATION ............................................................................................................................................. vii 1 Introduction ............................................................................................................................................1 1.1 Introduction to China‘s atmospheric environment .......................................................................2 1.1.1 China‘s national profile ............................................................................................................2 1.1.1.1 Geographical profile..........................................................................................................2 1.1.1.2 Social profile - population ...............................................................................................2 1.1.1.3 Social profile - economy ...................................................................................................3 1.1.1.4 Energy profile ....................................................................................................................4 1.1.1.5 Environmental profile ........................................................................................................5 1.1.2 China‘s atmospheric environment ............................................................................................6 1.1.3 Sulphur dioxide and acid rain pollution in China ...................................................................11 1.1.3.1 Documented effects of acid rain and sulphur dioxide in China ........................................14 1.2 China‘s objectives for sulphur dioxide and acid rain control and its associated performance in recent decades ...........................................................................................................................................18 1.2.1 Overall trend of sulphur dioxide and acid rain pollution........................................................19 1.2.2 Future control of acid rain and sulphur dioxide pollution ......................................................20 1.3 Preventive strategies for China‘s sulfur dioxide and acid rain.....................................................21 1.3.1 Principles for sulphur dioxide and acid rain prevention .........................................................21 1.3.2 Countermeasures and strategies for China‘s sulphur dioxide and acid rain prevention ..........21 2 International and domestic development of emissions trading ............................................................26 2.1 Basic principles of total emission control and emissions trading ...............................................26 2.2 International development and experience of emissions trading ................................................26 2.2.1 Basic introduction ....................................................................................................................27 2.2.2 Comparison between the ERC and the EA ..............................................................................28 2.3 Development of emissions trading in China...............................................................................31 2.3.1 General introduction ...............................................................................................................31 2.3.2 Development of emissions trading in China – case studies ....................................................33 2.4 Summary ....................................................................................................................................43 3 Introduction of emissions trading system to China‘s environmental administrative system................45 3.1 Evaluation of emissions trading system in terms of international experience and domestic pilot projects on emissions trading....................................................................................................................45 3.2 Design of an emissions trading system for China.......................................................................47 3.3 Potential issues with respect to the implementation of pilot projects on emissions trading in China ....................................................................................................................................................50 3.4 Recommended solutions for the problems and potential obstacles associated with the implementation of emissions trading in China .........................................................................................61 3.5 Observations on the constitution of China‘s emissions trading system ......................................69 3.5.1 Basic requirements/conditions for developing emissions trading in China .............................69 3.5.2 A two-level market for emissions trading................................................................................69 3.5.3 Government‘s roles and responsibilities in China‘s emissions trading, focusing on sulphur dioxide .................................................................................................................................................70 3.6 Feasibility analysis of implementing emissions trading in China............................................71 3.6.1 Structural pollution hasn‘t yet been essentially transformed ...................................................71 3.6.2 Feasibility analysis of establishing an emissions trading system in China ..............................71 3.6.3 Feasibility of establishing a sulphur dioxide emissions trading system in China ....................76 4 Dicussion and conclusion.....................................................................................................................79 References .....................................................................................................................................................83 iii  LIST OF TABLES Table 1 National ambient air quality standards for China...............................................................................7 Table 2 Comparison of air quality guidelines for selected countries ............................................................10 Table 3 Annual mean pH of rain in China in 2008 .......................................................................................12 Table 4 Frequency of acid rain episodes in 2008..........................................................................................12 Table 5 Forecast of total energy consumption and coal consumption. .........................................................13 Table 6 Forecast of SO2 emission in China. .................................................................................................14 Table 7 Primary progress of emissions trading practices in China since 2006. ............................................35 Table 8 SO2 monitoring data during 2000-2005 in Taiyuan. ........................................................................38 Table 9 Monitoring data of primary air pollutants in Taiyuan in 2006 .........................................................40 Table 10 Hypothetical case. ..........................................................................................................................74  iv  LIST OF FIGURES Figure 1 The annual change of sulphur dioxide emissions in the period 1997–2008 ...................................13 Figure 2 China‘s primary energy sources in 2008 ........................................................................................24 Figure 3 Level of concern about various environmental problems in Taiyuan.............................................41 Figure 4 Level of concern about various air pollutants in Taiyuan ..............................................................41 Figure 5 Respondents‘ opinions on air quality in Taiyuan ...........................................................................42 Figure 6 Frequency of observation of symptoms associated with sulphur dioxide.. ....................................42 Figure 7 Evaluation of government performance on Taiyuan‘s environmental protection according to survey respondence ...................................................................................................................................................43 Figure 8 A recommended emissions trading system for China. ...................................................................49 Figure 9 Emission tracking system. ..............................................................................................................67 Figure 10 Structure of the allowance tracking system. .................................................................................68  v  ACKNOWLEDGEMENTS  I sincerely express my tremendous appreciation to those who have encouraged, guided and supported me throughout my life and studies. To Dr. John Innes, thanks for your considerate and continued efforts to establish a social and studying relationship that is energized by curiosity and all things abstract. Thanks to Dr. Harry Nelson and Dr. Yongyuan Yin, your kind care and effort through my research and writing process. Thanks for your will to serve as my advisors for guiding me in different disciplines.  Thank you to Mr. Xiaorong Chen from the Wuhan University, and Ms. Wen from Fuzhou Environmental Protection Bureau for mentoring me and helping me get access to observation and monitoring data; to Dr. Guangyu Wang for thoughtful guidance and help during the past three years. I would not be where I am today without your great support and encouragement. Thank you to Dr. Susan Watts, Dr. Tom Sullivan, and Dr. Val Lemay for your kind advice in my course work and encouragement to explore science. Many thanks to Gayle Kosh, Dan Naidu, Erika Helmerson, as well as the Forest Resource Management staff Debbie McPherson, Marissa Relova, Heather Akai, Harry Verwoerd and David Aquino for making the details in my life a lot smoother. Thank you to all the members from the SFM group for your encouragement, support, comments and hours of sharing your knowledge and life experiences with me. Also thank you to Yanlong Guo, Huizi Gao, Ben Lai, Tao Jia, Xi Chen as well as everyone else that I met in UBC for all of your kind and great support during my daily life.  vi  DEDICATION  This thesis is whole-heartedly dedicated to my wife and parents.  Thanks for your dedications in raising and educating me.  Thank you for doing all you could to make my life full of opportunity.  vii  1. Introduction During this period of social and economic development, environmental pollution and ecological degradation have emerged in China, just as they did in western countries during the Industrial Revolution. Deterioration in the environment and continued growth in the demand for natural resources and in consumption will affect not only China but the rest of the world . Consequently, there is increasing concern about environmental protection and sustainable development in China, both within the country and beyond. Sulphur dioxide and acid rain are two common environmental problems; they mainly result from the combustion of fossil fuels and have been widely discussed over the past two decades. China, currently as the leading producer of sulphur dioxide in the world, is suffering from the tremendous impacts caused by excessive sulphur dioxide emission and its associated acidification. Since around 2000, increasing concern has been placed throughout the whole world on finding an effective way to balance China‘s rapid economic development, with an annual growth rate of approximately 8% 10%, and its worsening environmental quality. In terms of China‘s special framework of environmental protection, quite a few administrative instruments and countermeasures for pollution control and abatement, including both ―command-and-control mechanisms‖, e.g. emission rate limit and technology mandates, and ―incentive-based mechanisms‖, such as pollution levy (also known as emission charges), have been explored and practiced in China over the past two-three decades. It seems therefore that there are various policy options available for China‘s sulphur dioxide abatement and acid rain control in China. The emissions trading system, which is suggested as the most cost -effective approach to reduce considerable acidic deposition in China, is fully investigated in this thesis, including the following aspects: a) international and domestic development of the emissions trading system; b) advantages and positive effects of the emissions trading systems, in terms of the international experience and domestic pilot projects; c) potential issues and co nflicts associated with the implementation of emissions trading system in China; d) recommended solutions for the problems and potential obstacles associated with the implementation of emissions trading in China; e) feasibility analysis of implementing emissions trading in China; and f) observations on the design of China‘s emissions trading system.  1  1.1 Introduction to China’s atmospheric environment 1.1.1 China’s national profile 1.1.1.1 Geographical profile China, the world‘s third largest country, is a geographically complex land. The landforms of China‘s vast territories are extremely diverse, and include mountains, hills, plateaus, plains, basins, and deserts (Gobi). The country holds the largest and highest plateaus, most of the highest mountains, and the world‘s two longest rivers, the Yellow and Yangtze Rivers. Due to its various landforms and large land area, spanning tropical, sub-tropical, temperate and boreal zones, China contains a remarkable range of different ecosystems (Liu and Diamond, 20 05). Mountainous regions in China occupy around 66% of the total area. Only 16% of the territory has an altitude lower than 500 meters; the areas with an altitude higher than 1000 meters occupy 65% of China‘s total land area (Jia et al., 2007). The topography in China generally follows a trend ─ higher in the West and lower in the East. Mountains divide China into three main regions: a) a wet eastern monsoon region; b) the northwestern drought region ─ a large area of high -altitude grasslands; and c) the Qinghai-Tibet Plateau region. 1.1.1.2 Social profile – population China‘s population (mainland China), which had reached 1322 million by the end of 2008, accounts for around 20% of the world‘s total. Over the past half century, China‘s population has mor e than doubled, especially during the period of the planned economy. However, the population growth rate in China is currently declining, from 2–3% per year between the 1950s and 1980, to less than 1% per year (approximately 7-8 million per year) recently, largely as a result of the ―one child policy‖ (Jiang, et.al. 2007). Two new concerns have arisen over this slowdown in population growth. One is that China‘s population is likely to age at an undesirable rate, i.e. before China can achieve a sufficient level of development to be able to maintain a welfare system similar to those in many developed countries (Jiang et al. 2007). Secondly, the number of households in China tripled between 1985 and 2000. Smaller households generally involve higher resource consumption per capita. The potential impact on the environment and resources of this rapid increase in the number of households and the decreasing household size is considerable (Liu and Diamond, 2005). With progressive urbanization, the number of cities in China has risen to more than 660, 170 of which have more than one million residents. The urban population is reported to have grown seven-fold between 1952 and 2003, and has exceeded half a billion (Jiang et al., 2007).  2  1.1.1.3 Social profile – economy Under the direction of the central government, China‘s economy has gradually transitioned from a centrally planned system towards a market-based system since around 1980. China‘s GDP, since its adoption of reform and opening-up, has increased more than fourfold to approximately US$ 3,250,827 million in 2007, becoming the fourth largest economy in the world. However, the per capita GDP was only $2460, ranking the country 104 th in the world. In terms of the standards adopted by the World Bank in 2004, 130 million Chinese are living below the international poverty line of $1/per day — 16.8 % of the rural population and 0.27% of the urban population (Jiang et al., 2007). Clearly, China still has a lot of progress to make. China has become one of the leading producers of steel, cement, fertilizer, pesticides, and many commodities, and is one of the top consumers of agricultural products, commodities, fertilizer, and pesticides in the world. As a result of being both a large producer and consumer of industrial a nd agricultural products, various forms of environmental deterioration, including water pollution, air pollution, soil erosion and ecosystem degradation are inevitable. In addition, China is one of the top two importers of tropical rainforest timber. (Liu and Diamond, 2005). Over the past two decades, there has been a steady growth in the number of motor vehicles in China, with an annual increase rate of 10%–15%, mainly driven by the decision that facilitated economic development by the four ―pillar industries‖, one of which is vehicle production. China will likely become the world‘s third largest producer of motor vehicles by 2010, only exceeded by the USA and Japan. The rapid development of China has been widely recognized as one of the world‘s economic miracles. Drawing on tremendous foreign investment and technology, and promoted by unprecedented global competition, many of China‘s industrial sectors are catching up with the level of development of the western world. By replacing outdated facilities wi th leading-edge technologies, transferring partial heavy-industry to light industry or the service sectors, and other strategies, China has been improving its energy efficiency, and has become a model for other developing countries (Liu and Diamond, 2005). Another unique factor associated with China‘s economy is the extent of regional disparities, primarily resulting from differences in natural/geographic conditions. For example, in 2003, the GDP of Guangdong (a province in Southeastern China) was three t imes that of Hunan (a province in Central China), 10 times that of Guizhou (Southwestern China), and 35 times that of Qinghai (Northwestern China). In general, differences in China‘s regional economies are inversely proportionate to the differences in China‘s geography/topography — they are better in the East and worse in the West (Pedroni and Yao, 2006). In urban areas, the annual economic growth rate is much higher than in rural areas, and there are no signals so far that might indicate that these economi c disparities are being resolved, although statements from the government indicate that it is aware of 3  the problem. 1.1.1.4 Energy profile China is the world‘s third largest energy producer and second largest energy consumer. As a developing country, its economic growth relies strongly on energy demand and consumption, especially given its large population and weak economic foundation. During 2001–2005 (the Tenth Five Year Plan), China‘s energy consumption increased from 1.35 to 2.22 billion tonnes stand ard coal equivalent (SCE), rising 64.4%, while the GDP growth was around 66% in the corresponding period. However, China‘s per capita energy consumption is still only half of the world‘s average (Makibbin, 2006). Compared to developed countries, China‘s total energy intensity, i.e. energy efficiency of China‘s economy in industrial sectors is still much higher; roughly double that of western countries, caused by a series of heavy polluters, such as the production of coal, cement, pulp and paper, using outdated facilities without any forms of modern pollution control (Sinton et al., 1998). China is the leading producer and consumer of coal in the world. According to the cens us and predictions undertaken by State geological and mineral departments, China‘s potential mineral-based reserve is 4001.7 billion tons SCE, most of which consists of coal reserves. Of the traditional forms of energy, coal reserves account for more than 70%, and water resources, oil and natural gas account for the other 20–30% (Jiang et al., 2007). As a result, in recent decades, coal combustion has accounted for approximately 75% of total energy consumption in China, and is expected to remain as the primary source of energy for the foreseeable future. Although the State government has done much to optimize China‘s energy structure, the focus on coal production means that sulphur dioxide pollution and acid rain are prevalent (Liu and Diamond, 2005). China‘s coal consumption reached 2.14 billion tonnes in 2005, accounting for approximately 70% of its total energy consumption. ―Soot type‖ pollution, predominantly consisting of particulates, is therefore one of the characteristics of air pollution in China. It is estimated that 70% of soot emissions, 90% of sulphur dioxide emissions, 67% of nitrogen oxide emissions and 70% carbon dioxide emissions are created by coal combustion (Zhou et al., 2007). The sulphur dioxide and nitrogen oxide emissions from coal-fired power generation plants have been widely accepted as the primary reason for the formation of acidic precipitation (Chen and Xu, 2009; Makibbin, 2006). Carbon dioxide emissions rose from 0.67 to 0.88 billion tonnes between 1990 and 2000 in China, and reached 6.2 billion tonnes in 2006, overtaking the USA to become the World‘s largest carbon dioxide emitter and accounting for roughly one fifth of global emissions (Wang and Watson, 2007). Per capita emissions in China are however still significantly lower than in the developed world, being only 20% of per capita emissions in the USA. The dominant coal exploitation technology in China is well excavation – underground mining, 4  widely distributed over 1000 counties. Subsidence caused by coal mining has affect ed an area in excess of 400,000 ha., and the area is increasing by 20,000 ha. annually. The annual volume of mine drainage discharge and coalbed methane, the presence of which in underground coal mining is extremely hazardous, is 2.2 billion m3 and over 7.0 billion m3 respectively. Coal transportation, which is one of the origins of atmospheric coal dust, produces approximately 20 million tonnes of soot (Huang et al., 2003). Over 80% of coal consumption in China is attributable to power generation boilers , industrial boilers, industrial kilns, and civil stoves and furnaces. Energy consumption per unit of industrial value in China is 3–4 times the average level of developed countries, and double the developing world‘s average, resulting in widespread energy waste (Sinton et al., 1998). Other than large-scale and newly-built power generation plants, most coal-fired power plants are without desulphurization facilities and leading-edge dust removal systems, and still adopt very inefficient pollutant disposal methods. During combustion, impurities contained in coal are released into the atmosphere together with soot emissions. The most deleterious of these impurities are heavy metals and organic pollutants such as polycyclic aromatic hydrocarbons (PAHs). PAHs pro duced from the incomplete combustion of coal or oil can have a strong carcinogenic action (Liu et al., 2008). The alteration of outdated combusting boilers and introduction of up-to-date techniques is overdue, particularly in cities, which are often heavily polluted by sulphur dioxide. The most significant impact of the electrical power industry on the environment is caused by air pollutant emissions, but other types of environmental problems are also created by power generation, including solid waste and n oise. These are not considered further here. 1.1.1.5 Environmental profile Severe environmental problems and a rapid increase in the demand for natural resources have accompanied economic growth in contemporary China. The progressive environmental degrad ation that is projected is expected to hamper social and economic development in the near future (Jiang et al., 2007). Protecting and improving the environment is the only way to ensure sustainable development for both China and the rest of the world. China‘s large population and undesirable natural conditions are placing enormous pressure on the environment, including high population densities (half of China‘s population occupies 13% of China‘s land), a relatively small arable land area, scarcity of wate r resources, and ecological deterioration. Nearly two thirds of Chinese cities exceed an acceptable level of air quality as defined by the World Health Organization (WHO) standards for suspended particulates, sulphur dioxide, and nitrogen oxides, and some are defined as heavily polluted, with their pollution levels being amongst the highest in the world (Liu and Diamond, 2005). Water pollution and water shortages are problems that have recurred in China for some time. China is one of the thirteen countries with the lowest per capita water resources in the world. Within the country, the disparity of water resource distribution has resulted in annual drought crises in the north and flood crises in the south. The over -exploitation 5  of underground aquifers and poor management of industrial waste emissions have triggered a series of problems, such as the decline of water tables and depletion of aquifers. In addition to the above problems, other environmental concerns include air and water pollution, solid waste pol lution, ocean pollution, soil erosion and fertility decline, deforestation, desertification, biodiversity loss, all of which threaten China‘s sustainable development (Beyer 2006). As a result of the increasing environmental pressures, thousands of people have been forced to re-locate, and serious health problems are widespread. 1.1.2 China’s atmospheric environment The debate between the atmospheric environment and development has been running for a long time. Issues include the utilization of fossil fuels, the greenhouse effect, climate change, acidic precipitation, and the destruction of the ozone layer, all of which could potentially restrict social and economic development. The atmospheric environment is a valuable resource that humans depend on for their health and well-being. Its destruction is an irreversible process; restoring the atmospheric environment is much more costly than preventing atmospheric pollution. China‘s air pollution is dominated by the typical ―soot‖ type, with suspended particul ates (SP)/inhalable particles, SO2 , and NO x as the primary pollutants. Regional air quality appears to have been stable in recent years, whereas urban air pollution, particularly in large cities, has been deteriorating (Zhou, 2003). Although China‘s energy structure indicates that improvements to air and environmental quality will be both difficult and costly, they are essential if the goals of sustainable development are to be achieved. Energy consumption and industrial pollution are still the major cont ributors to China‘s air quality problems. In metropolitan areas, pollution caused by domestic coal consumption has been mitigated through changes in fuel use – energy and gas supplies have been centralized, with steam and hot water in many areas being provided through pipe networks. At the same time as pollution from coal has been reduced in cities, environmental problems associated with automobile exhausts have progressively emerged. Private car ownership in China is estimated to be increasing at the world ‘s fastest rate and will reach over 100 million by 2020. In cities such as Beijing and Guangzhou, over 80% of carbon monoxide and 40% nitrogen oxide is produced from automobile emissions (Zhang et al., 2008). Photochemical smog has recently been recorded i n several metropolitan areas, and is primarily associated with automobile emissions (Zhang et al., 2008). Automobile emissions are much more difficult to control than large point sources, and urban air pollution is transforming from being dominated by soot to being of mixed origin. The regional distribution of air pollution in China shows marked variation. The air quality in urban areas and surrounding areas is generally much worse than in rural areas. Air quality varies amongst individual cities for a number of reasons, including energy sources, industrial structure, civil infrastructure, geographic and meteorological factors. In general, air pollution is more severe in 6  northern and western China; most coastal cities have relatively good air quality. The White Paper on Environmental Protection, issued by the Chinese central government in 2006, indicated that the proportion of cities with air quality reaching Grade II of the state standard increased from 28% in 1998 to 58% in 2006; cities with air quality lower than Grade III decreased from 43.5% in 1998 to 9% in 2006. The grades are based on three primary indicators: TSP, SO 2 , and NO x (IOSC-PRC, 2006) (Table 1). Although the total amount of emissions continues to increase, the rate of growth appears to be slowing. Table 1. National ambient air quality standards for China (IOSC-PRC, 2006). Pollutant Grade I  Grade II  Grade III  1 hour average  150  500  700  24 hour average  50  150  250  Annual average  20  60  100  1 hour average  120  120  240  24 hour average  80  80  120  Annual average  40  40  80  24 hour average  50  150  250  Annual average  40  100  150  concentration SO2 (µg/m3)  NO2 (µg/m3)  PM10 (µg/m3)  Sulphur dioxide. Annual sulphur dioxide emissions have fluctuated over the past decade, but have steadily increased between 2000 and 2006. The proportion of sulphur dioxide emissions from the industrial sector grew from 76% to 85% between 1998 and 2006. Cities that are heavily polluted by sulphur dioxide are mainly located in areas producing coal with a high sulphur content 7  (southwestern China) and in areas with coal as the main energy source, such as Shangxi, Hebei, Shandong, Liaoning, Henan, Inner Mongolia, Xinjiang, Hubei, Gansu, and Jiangsu (MEPPRC, 2009). Total Suspended Particles (TSP). Smoke emissions have remained relatively constant since 2000, at approximately 10–10.5 million tonnes annually. Industrial emissions accounted for approximately 80% of the total smoke emissions. Industrial dust emissions declined from 10 million tonnes to 7 million tonnes between 2003 and 2007. One of the distinctive features of these types of emissions in China is that Township and Village Enterprises (TVEs), which contribute more than half of the smoke and dust emissions, are the primary producers of TSPs. In recent years, greater attention has been paid to fine particulates, PM10 and PM2.5, as these are inhalable and have a direct impact on human health. Nitrogen oxides. Air pollution induced by nitrogen oxides in China has been decl ining. In 2006 and 2007, all of the cities being monitored achieved  Grade II of the state standard for nitrogen oxides  emissions, and 87% achieved Grade I. Metropolitan areas, such as Beijing, Guangzhou, Shenzhen, Lanzhou, and Urumchi, tend to have greater nitrogen oxide concentrations than rural areas and smaller cities. Acid rain. Approximately 40% of China‘s land area is affected by acid rain, resulted from the typical ―soot‖ type air pollution. Of the approximately 500 cities/counties being monitored throughout the country, 50–55% were affected by acid rain (acid rain was observed more than once per year) between 2005 and 2008. The proportion of cities with an average annual precipitation pH lower than 5.6 decreased from 53% to 39% between 1998 and 2008, respectively (MEPPRC, 2009). Regions heavily impacted by acid rain are mostly located in southern China, including Sichuan, Yunnan, Zhejiang, Jiangxi, Hunan, Fujian, Chongqing, the Yangtze Delta, and the Zhujiang Delta. Economic losses, public health problems, and social unrest associated with air pollution have emerged as obstacles to China‘s social and economic development. The morbidity associated with respiratory diseases induced by air pollution in China is very high (Jiang, et al., 2007). The soc ial and economic burden associated with chronic respiratory diseases, including emphysema and chronic tracheitis, is more than double that of developing countries (Aunan et al., 2004). Exposure to reported pollutant concentrations of sulphur dioxide and particulates could trigger respiratory failures or death in sensitive individuals. The impact of automobile exhaust is receiving increasing attention as China‘s transportation networks develop. Vehicle exhausts directly affect human health. Problems posed by acid rain are an additional threat to health, and potentially could impair the immune system, respiration, affect crop production, and induce disease and pest infestations. Last but not least, the social unrest resulting from mass migration and resettlement is projected to influence patterns and rates of development. Ineffective environmental protection and restoration, together with imbalanced economic and social 8  development, are leading to overcrowding in urban areas and further environmental pressure. It is useful to compare the Chinese air quality guidelines with those developed elsewhere. WHO has established a worldwide standard (last updated in 2005) that provides air quality guidelines aimed at protecting public health. Most countries have developed their own guidelines and standards, and these contribute to national environmental policies. In Table 2, a range of air quality standards are presented. For several types of pollution, the WHO standards are much higher than those for China, with for example the 24-hour mean sulphur dioxide being 20 µg/m3 and 150 µg/m3 for WHO and China, respectively. The Chinese standard is however quite similar to that of the European Union (EU). The 24-hour PM 10 standard is however much lower in China than the EU or WHO standards (150 µg/m3 as opposed to 50 µg/m3 ), but is the same as the standard adopted in the USA.  9  Table 2. Comparison of air quality guidelines for selected countries WHO (µg/m3 ) Pollutant  Sulphur  China (mg/m3 )  EU (µg/m3 )  USA  Guideline  Averaging  Guideline  Averaging  Guideline  Averaging  Guideline  Averaging  Guideline  Averaging  concentration  period  concentration  period  concentration  period  concentration  period  concentration  period  500  10  350  1 hour  0.50 (500µg/m3 )  1 hour  350  1 hour  125  24 hour  0.15 (150µg/m3 )  24 hours  24 hour  125  24 hours  Annual  50  Annual  200  1 hour  Annual  40  Annual  24 hour  50  24 hour  40  Annual  dioxide (SO 2 )  UK (µg/m3 )  minutes 20  24 hours  0.14ppm 3  (370µg/m ) 3  0.06 (60µg/m )  Annual  0.03ppm 3  (78.5µg/m ) Nitrogen  200  1 hour  200  1 hour  1 hour  3  dioxide (NO 2 )  0.10 (100 µg/m )  40  annual  40  Annual  0.04 (40µg/m3 )  Annual  0.053 ppm 3  (100 µg/m ) PM 10  3  50  24 hour  50  24 hours  0.15 (150µg/m )  24 hour  20  annual  40  Annual  0.10 (100µg/m3 )  Annual  150µg/m3  10  China is also a contributor to trans-boundary air pollution (STCTAPNA, 2008). The smog, soot, and other pollutants emanating from China have been documented in North America: the annual amount of particulates transported from East Asia to North America is equivalent to approximately 15% of the combined annual production of particulates in the USA and Canada (NASA, 2008). Since 2000, trans-boundary efforts in pollution abatement and environmental improvement have aimed at more countries in Asia, particularly South Asia, because of the discovery of ―Asian Smog‖ (also known as the ―Asian Brown Cloud‖) – a thick and dense layer of brownish haze that has enveloped South Asia for prolonged periods. It is thought that the potential consequences of this three-kilometer-thick blanket of pollution include the triggering of hundreds of thousands of deaths, and potential threats to the global environment (UNEP and C4, 2002). With China‘s rapid economic growth, many countries in South Asia have followed China‘s footsteps – industrialization through the development of their own manufacturing capability. One of the inevitable phenomena associated with this is the substantial increase in pollutant emissions. Asian smog, as a significant example of pollution, covers the entire Indian subcontinent, and may be associated with abnormal climatic conditions in the region, such as flooding in Bangladesh, Nepal and northeastern India (UNEP and C4, 2002). Analyses have indicated that the smog contributes to regional acid precipitation, resulting in agricultural problems, including a 10% decline in India‘s rice yield in winter (UNEP and C4, 2002). There is also evidence that the smog, which contains suspended particulates, soot, ash, and other pollutants, has extended towards East and South East Asia, and has the potential to extend beyond Asia, to Europe and America. Although the regional and global impacts of the smog are predicted to increase over the next 30 years, it is still possible to limit its effects if immediate actions are taken and there is more effective regional/international cooperation. 1.1.3 Sulphur dioxide and acid rain pollution in China Air pollution, the most significant and noticeable environmental problem in China, is of global concern. China is one of the world‘s largest consumers of coal, and its consumption is increasing rapidly. Between 1980 and 2006, coal consumption increased from 0.6 billion tonnes to 2.58 billion tonnes, and SO2 emissions reached 25.89 million tonnes in 2006 (MEPPRC, 2007). The official statistics indicate that coal with a very high sulphur content (i.e. with a sulphur content greater than 3%) accounts for only 6.4% of the total volume of coal burnt in the country. However, the SO2 emissions created by coal with a high sulphur content mostly occur in southwest a nd central China, and account for more than 20% of the total SO2 emissions nationally (Wang et al., 2003). Chemical analyses of precipitation from various locations in China indicate that the ratio of sulphate to nitrate is approximately 13–14:1. This is very different to Europe, the USA and Japan, where the proportion of nitrate is much higher, and indicates that SO 2 emissions are the main cause of acidic 11  deposition in China (Wang et al., 2003). While Europe and North America are recognized as important areas that have been affected by acidic deposition (or acid rain, as it is more popularly known), the third largest region affected by acidic deposition is now recognized to be north-east Asia, including the mainland of China, Taiwan, the Korean Peninsula, and Japan (Feng, 2000). Today, acid rain is frequently recorded in all parts of China, although there are currently five primary regions that are affected: the southwest, centred on the Sichuan Basin, central China, centred on Changsha, south China, cent red on Guangdong, East China, centred on Shanghai, and north China, centred on Qinddao. The latest (2009) communiquéon the environmental status of China issued by Ministry of Environmental Protection indicates that the provinces, autonomous regions and municipal cities most polluted by sulphur dioxide include: Shanxi, Inner Mongolia, Guizhou, Hebei, Hunan, Sichuan, and Shandong (MEPPRC, 2009). It is in these areas that the greatest reductions in emissions are required. Of the 477 cities/counties that were examined, 252 had suffered from acidic deposition episodes at least once, 164 have an acid-rain frequency greater than 25%, i.e. 25% of precipitation is acidic, and 55 have an acid-rain frequency greater than 75%. Compared to 2005, the proportion of cities affected by acid rain was 1.5% more in 2008, and the proportion of cities polluted by acid rain with a pH<5.0 rose appreciably, but the proportion of cities experiencing rain with a pH<4.5 slightly declined in 2008 (Tables 3 and 4) (MEPPRC, 2009). Table 3. Annual mean pH of rain in China in 2008 (MEPPRC, 2009) Range of annual mean of pH  <4.5  4.5-5.0  5.0-5.6  5.6-7.0  ≥7.0  No. of cities  42  73  69  205  88  Proportion (%)  8.8  15.3  14.5  43  18.4  Table 4. Frequency of acid rain episodes in 2008 (MEPPRC, 2009) Frequency of acid rain (%)  0  0-25%  25%-50%  50%-75%  ≥75%  No. of cities  225  88  57  52  55  Proportion (%)  47.2  18.4  11.9  10.9  11.5  According to the annual reports issued by the Ministry of Environmental Protection, annual SO2 emissions declined between 1997 and 1999, but rose from 1999 to 2006 (Figure 1). The decline of SO 2 emissions is attributable to the policy ―control areas of acid rain and sulphur dioxide pollution‖ instituted by Ministry of Environmental Protection in 1998, and which str ictly controls SO2 emissions from the power and coal industries in designated regions. However, since 1999, the rise of energy consumption, aimed at resolving power supply shortages, has driven up SO 2 emissions 12  Sulphur dioxide emission (million tonne)  (Wang et al., 2007).  26 25 24 23 22 21 20 19 18 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Year  Figure 1. The annual change of sulphur dioxide emissions in the period 1997–2008 (MEPPRC 1998 – 2009). In recent decades, coal combustion has accounted for more than 75% of total energy consumption in China, and is expected to remain as the primary source of energy for the fo reseeable future. The Ministry of Environmental Protection has forecasted that overall energy consumption will reach 3.34 billion tonnes equivalent of coal by 2020, of which 1.81 billion tonnes will come from coal (Table 5) (China Net, 2006). The sulphur content of coal is relatively high in China. With currently available techniques, the elimination rate of SO 2 is 30–50%, which is comparatively low. As a result, SO 2 emissions will rise progressively (Table 6) (Wang, 1994; Wang et al., 1995). Table 5. Forecast of total energy consumption and coal consumption (unit: billion tones equivalent of coal) (Wang, 1994; Wang et al., 1995). Year  Total Energy  Rate of increase  Consumption  Coal  Rate of increase  Consumption  2010  2.55  3.2  1.56  2.9  2020  3.34  2.8  1.81  2.4  13  Table 6. Forecast of SO 2 emissions in China (unit: thousand tonnes) (Wang, 1994; Wang et al., 1995). Year  Emission  2010  27670  2020  31780  Acidic deposition has been increasing in China in recent years, both in terms of the area affected and the degree of acidity. The formation and development of acid rain is closely correlated with economic development and rising energy consumption. Coal consumption to meet the demand for energy is predicted to increase for the foreseeable future (Ding et al., 1997 ). Accordingly, emissions of acidic substances (primarily SO 2 and NO x) are likely to increase. Suspended particulates, which because of their dominantly alkaline nature have tended to neutralize acid rain, are currently declining as a result of the implementation of environmental protection policies (Wang et al., 2007). This will have the undesirable effect of increasing the acidity of rainfall in many areas. To sum up, according to the long-term observations of acid rain in China and predictions of future trends in the emissions of precursors, the area impacted by acid rain is forecast to increase, as is the acidity of rain within it. The affected region is likely to extend towards the northwest, as the emissions of SO2 and NO x continuously rise. Meanwhile, the decline of suspended particulates will complicate control measures (Wang et al., 2007). Acid rain is therefore predicted to become increasingly important in China, in marked contrast to many other parts of the world. If immediate action is not taken, air pollution and environmental acidification will accelerate, placing greater pressure on an environment that is already strained by over -exploitation. 1.1.3.1 Documented effects of acid rain and sulphur dioxide in China 1.1.3.1.1 Effects on aquatic ecosystems. Acid rain can damage the structure and function of ecosystems through direct impacts and by soil and water acidification. In water polluted by acid rain, bicarbonate is replaced by sulphate, with the HCO 3 - concentration declining as the SO 4 2- concentration increases. H+ contained in acidified water directly influences and accelerates the weathering of rocks, increasing the dissolution and accumulation of heavy metals in water (Zhang and Zhang, 2001). Impacts of acidity on organisms include mortality, decline in activity, changes in fecundity of sensitive organisms, and changes to population structures. Nutrient cycling is also heavily influenced, driven by the reduction in the number and effectiveness of microorganisms. When the pH declines to less than 5.0, the propagation and development of some fish species are severely affected due to the toxicity of metals such as aluminium. There is much evidence that the direct impact of acidic and toxic ions (Al 3+ , Mn 2+ ) is to 14  delay the hatching of fish eggs, to result in the mortality of eggs and parr, and to interfere with the growth and development of fish (Isom et al., 1986; Morris et al., 1989). The accumulation of heavy metals, especially mercury, causes fish asphyxiation. Furthermore, acidificatio n of the water leads to a structural transformation amongst aquatic organisms, with an increase in acid -resistant algae, fungi, rooted plants, and bacteria, and a decline in sensitive bacteria, plankton, and decomposition rates. Water acidification and fish mortality caused by acid rain has not so far been documented in China, but water acidification is likely to be present in regions heavily polluted by acid rain, such as Sichuan, Chongqing, and Guizhou. Associated annual losses, especially to fisheries, have been estimated at 6000~7500×10 4 RMB (Larssen et al., 1999). 1.1.3.1.2. Effects on terrestrial ecosystems-soil. In regions experiencing acidic precipitation in China, the dominant soil component is kaolinite. Because of this, the soils have relatively low buffering capacity. In addition, these soils contain large amount of aluminium, and are easily acidified (Zhang and Zhang 2001). Soil acidification can be a major consequence of acidic deposition, depending on the nature of the soil. Based on the outcome of a simulated acid rain treatment, soil acidification can be directly correlated with the concentration, intensity, and duration of acid rain (Larssen et al., 1999). Soil acidification also depends on the nature of the inorganic content, the var ious soil components, soil structure, the pH value, the salt content, as well as infiltration capacity of the soil. The primary impact of acid rain on soil is the loss of cations. Losses of K + , Na+, Ca2+, and Mg2+ are apparent. Long-term acidic deposition may result in a decline in soil fertility, due to the loss of plant nutrients. Significant amounts of Al may be released, and this may be toxic to some plant species. The activity of toxic elements such as Mn2+, Cu2+, Cr2+, Pb2+, and Zn2+ may also be enhanced by acidic deposition, as their solubility increases with decreasing pH (Kaupenjohann et al., 1989). Moreover, the enzymes and microorganisms necessary for the transformation and circulation of soil nutrients in the soil are also influenced by acid rain. The total number of microorganisms, especially the number of bacteria, markedly decreases, whereas the number of fungi rises. Microorganisms participating in nitrogen transformation and circulation, such as Azotobacter and Bacillus, are affected so the intensity of nitrification and nitrogen fixation declines, with nitrogen fixation being reducing by up to 80% and nitrification by 30–50%. As a result, the nitrogen cycle in the soil is severely affected (Kaupenjohann et al., 1989). 1.1.3.1.3. Effects on terrestrial ecosystems – vegetation Adverse effects on plants and crops can occur through: a) changes in soil properties, indirectly affecting plant growth; b) direct injury to plant tissues; c) impacts on chloroplast photosynthesis and 15  seed germination; d) impacts on crop growth and yield (Lee et al., 1981; Zhong and Yuan 1999). The effects of sulphur dioxide on plants typically vary with the concentration of sulphur dioxide and duration of exposure, as well as with the rate of plant uptake. Exceptions include those plants (e.g., lichens and mosses) that are highly sensitive to sulphur dioxide because they lack a protective cuticle. The uptake rate of sulphur dioxide by plants is largely controlled by the surrounding environmental conditions, such as temperature, humidity, and light levels, since these environmental factors control the stomata (WHO, 2000). Chronic injury induced by long-term exposure to sulphur dioxide, even to relatively low concentrations, is a cumulative process that interacts with the effects of environmental stresses on plants, and is much more significant than the effects of acute injury caused by high concentrations of sulphur dioxide (WHO, 2000). Additionally, visible symptoms can arise from chronic injury, including chlorosis, necrotic flecks, dehydration wilting and premature shedding of foliage. Invisible symptoms associated with chronic injury include decline (or inhibition) of plant growth and yield, metabolic disturbances (such as changes in stomatal conductance; activati on of foliage enzymes such as peroxidase, pH reduction of leaf cells, and decreased chlorophyll content in the foliage), as well as the acceleration of senescence (Haines et al., 1985; Fan et al., 2000). There are few estimates of the economic impacts of sulphur dioxide in China, but during ―the 7th Five-Year Plan (1986–1990)‖ and ―the 8th Five-Year Plan (1990–1995)‖, acid rain in the provinces of Sichuan, Guizhou, Guangdong, Zhejiang, Anhui, Fujian, Jiangxi, Hunan, Hubei, and Guangxi Zhuang Autonomous Region, was estimated to have damaged 12.9 million ha. of farmland, with an corresponding annual economic loss of 4.26 billion RMB (Feng et al., 2000; Feng et al., 2002). 1.1.3.1.4. Effects on terrestrial ecosystems – forests The impact of acidic precipitation on forest is typically recognized as involving disturbances to the nutrient cycling, impairment of leaf functioning, and the release of toxic substances, e.g. aluminium, from the soil. The direct effects tend to trigger several symptoms, including slow growth, leaf or bark injury, and even death of trees. However, such symptoms rarely occur as a direct result of acid rain alone, they usually occur when acid rain is combined with other environmental stresses, such as other air pollutants, extreme weather conditions (e.g. drought, frost), and diseases and insects. Significant foliar leaching of nutrients, such as magnesium, potassium and calcium, may be associated with acid deposition (DeHayes et al., 1999). Damage to leaf cuticles may make trees more susceptible to environmental stresses such as insects or diseases (Dehayes et al., 1999; Neufeld et al., 1985). Forests located in high-elevation areas may be at particular risk because of the combination of environmental stress and the acidity associated with clouds and fog, which is often greater than the 16  acidity in rainfall (Igawa et al., 2002). Damage to and mortality of forest caused by acid rain was first reported in southwest China, the most heavily polluted region in the country in the mid-1980s. Up to 46% mortality was found in a 1500 ha. stand of Masson Pine (Pinus massoniana Lamb.) at Nanshan in Chongqing City (Larssen, 1999). The investigated frequency of acidic precipitation was 100% at Nanshan, with an average pH of between 4.2 and 4.4. The frequency of acidic fog was 88%, with an average pH of between 3.55 and 4.91. In another area of Sichuan Basin, Fengjie County, mortality in a 6000 ha. stand of Armand Pine (Pinus armandii Franch) reached 96% at the Maocaoba Forest Farm. Observations made at Fengjie indicate that the pH mean was between 4.0 and 4.4, with the lowest value being 3.7; and that the mean pH of acidic fog was between 4.34 and 4.95, with the lowest value being 3.8 (Zhang et al., 2001). Acid rain is also believed to have had significant impacts on the rare endemic vegetation of Emei Mountain (Sichuan Province). The observed mortality in stands of Chinese fir (Cunninghamia lanceolata (Lambert) Hooker) at Emei Mountain was 63.5%, with the impacts on non-commercial vegetation remaining unknown. In this case, the mean pH of the acidic precipitation was between 4.6 and 4.76 and the mean pH of acidic fog was between 4.89 and 5.5 (Fan, 2003). Elsewhere, severe damage to forests, attributed to acid rain, has been reported in Liuzhou suburb (Guangxi Zhuang Autonomous Region), Guangzhou suburb (Guangdong Province), Hangzhou suburb and at Tianmu Mountain (Zhejiang Province) (Feng et al., 2002). It is unclear whether these represent the effects of chronic pollution or acute pollution episodes. Species vary in their sensitivity to acid rain. Based on studies conducted in China during the 1990s, the relative sensitivities of 108 woody plant species to simulated acid rain were divided into three categories, based on the symptoms developed at a given pH, the time taken to develop the symptoms, and the rate of leaf lesion. Of the species, 27 were considered to be sensitive, 55 to be moderately sensitive and 26 to be tolerant. Amongst the most sensitive were the endangered Dovetree ( Davidia involucrata Baill), Ginkgo (Ginkgo biloba L.), and Dawn Cypress (Metasequoia glyptostroboides Hu et Chung) (Feng, 2000). Acid rain generally altered the physiology of trees, causing them to become more susceptible to pest attack. Pathogens such as Polyporus schweinitzii and Fomes pini are widespread in the regions polluted by acid rain. Such outbreaks of pests and pathogens have accelerated forest decline and mortality (Feng et al., 2002). In addition to the symptoms described above, there is evidence in some areas for a decrease of tree height, diameter and volume associated with a pH value <4.5. Economic losses associated with the effects of acid rain on forests can be typically divided into two categories: direct losses and indirect losses. Direct losses are common ly calculated through timber volume, which can be measured financially; indirect losses refer to the losses in ecosystem goods and services (Larssen et al., 1999). The ecological benefits of forests usually include water conservation, such as the prevention of floods, soil conservation, including the prevention of soil erosion and sand storms, protection of wildlife, provision of clean water and climate regulation. 17  According to studies undertaken in Japan and the USA, the ecological benefits of forest accou nt for 90–93% of the overall forest benefits (Feng, 2000). Investigations undertaken in the 1990s indicate that the largest areas of forest damage associated with acid rain were in Sichuan Basin, involving approximately 275,000 km2 , and accounting for 32% of the forest area. The annual economic losses associated with the decline of timber volume were estimated to be 0.14 billion RMB (Wu et al., 2006). Annual economic losses associated with timber volume and ecological benefits of forests in southern China were estimated at 1.8 and 16.2 billion RMB, respectively (Feng, 2000). 1.1.3.1.5. Effects on construction, monuments and historic sites Acid rain can have chemical or electrochemical reactions with materials, such as metals, stone, and concrete, accelerating the erosion of buildings, bridges and monuments (Larssen et al., 1999). White marble statuary at the Forbidden City in Beijing and frescoes at Dunhuang in China are amongst the historic sites and artifacts that are currently being damaged by acid rain , with the damage in some cases being serious (Wu et al., 2006). 1.1.3.1.6 Effects on human health Sulphur dioxide and acid rain can directly irritate skin, eyes, and respiratory tracts. There are also indirect effects, such as the mobilization of toxic metals and contamination of drinking water (Ozkaynak and Spengler, 1985). The increase in the solubility of heavy metals that results from acidic deposition increases the likelihood of heavy metals, particularly mercury and cadmium, entering the food chain. For example, lead is a cause of hypertension and the impairment of children‘s nervous systems (Goyer et al., 1985). In many countries affected by acid rain, the content of aluminum, copper, zinc, and cadmium in groundwater has reached 10 –100 times the national standards. In addition, regional photochemical smog is strongly correlated with acidic deposition (Newbery et al., 1990 and Wang et al., 2003). 1.2 China’s objectives for sulphur dioxide and acid rain control Emissions of pollutants are currently limited through the ―Designation scheme of control zones for acid rain and sulphur dioxide‖ and the ―State ‗the 10th five-year‘ environmental protection plan and future objective in 2010‖, authorized by the State Council in 2000. According to these regul ations, total pollutant emissions are required to be kept at the same level as in the ―9th five -year‖ period, which ended in 2000 (Gao et al., 2009). The regulation covers industrial sources, municipalities, Special Economic Zones, provincial capital cities and tourist cities. These locations are all required to meet the state environmental quality standard. In 2010, all urban SO 2 concentrations must also meet state air quality standards, and the area affected by acid rain with a pH lower than 4.5 is expected to decrease significantly (Gao et al., 2009). Moreover, China‘s 10th Five Year Plan (2001–2005) on Environmental Protection prescribed that national SO 2 emissions should decline 10% by 2005, based on 2000 emission levels, and that the SO 2 emissions in ―two control zones‖ (the 18  Acid Rain Control Zone and the Sulphur Dioxide Control Zone, commonly referred to as the "two control zones"), should decline 20% by 2005 (based on 2000 emissions). China failed to achieve most of the objectives for environmental protection and ecological restoration stated in its ―10th Five Year Plan‖ (2000–2005). As a result of the pressures exerted by the rapid development in the economy and the continuous growth in demand for energy, total SO 2 emissions in the two control zones rose dramatically and acid rain pollution has increased. 1.2.1 Overall trend of sulphur dioxide and acid rain Precipitation acidity, after showing no trend in the 1990s, has increased since 2000. Average concentrations of sulphate and nitrate in precipitation rose 15% and 33% above the concentrations recorded in the 1990s. The total land area affected by acid rain has remained relatively constant, but the area severely affected by acid rain and the area with a frequency of acid rain >50% has continuously risen, and by the end of 2004 accounted for 6.8% and 7.9% of China‘s total land area, respectively (MEPPRC, 2005). Sulphur deposition has also increased China over the past two decades. Regions with a relatively high sulphur deposition include Central China, North China, Sichuan, Guizhou, Guangxi, Guangdong, Jiangsu, Shanghai and Shangdong. The spatial distribution of sulphur deposition is generally divided into a number of high-deposition regions: the southwest, centred on Guizhou; East China, centred on Shanghai and South Jiangsu; South China, centred on Guangdong; North China, centred on Henan and Shangdong; Central China, centred on Hunan; and the northeast, centred on Liaoning. Areas where the exceedances of sulphur deposition are particularly seri ous include the southwest, the middle and lower reaches of the Yangtze River, and the Pearl River Delta. Other forms of air pollution are also becoming more severe, particularly the incidence of fine particulates. Sulphur dioxide and nitrogen oxides not only create acid precipitation, but also produce sulphate and nitrate particles during long-distance transportation via chemical transformation, resulting in the occurrence of fine particulates (Davis and Guo, 2000). Atmospheric visibility is declining because of the prevalence of fine particulates. There is also evidence of ozone appearing as a pollutant in some areas, associated with the high levels of nitrogen oxides. Sulphur dioxide and nitrogen oxide concentrations in China‘s urban regions have remai ned roughly constant in recent years. However, approximately 16% and 1% of the monitored cities did not reach either the Grade II (0.06 mg/m3 ) or Grade III (0.10 mg/m3 ) state standards for annual average concentration of sulphur dioxide. Affected areas included Shangxi, Hunan, Henan, Hebei, Guizhou, Sichuan, Guangxi, and Chongqing (MEPPRC, 2009). During China‘s 10th Five Year Plan (2001-2005), the annual average concentration of sulphur dioxide, which had declined in 113 key cities as a result of air pollution prevention and control during 1990s, showed increased levels of pollution. Concentrations of nitrogen oxides in metropolises, such as Beijing, Guangzhou, Shanghai, 19  and Chongqing, were relatively high and have been increasing, although all the monitorin g cities met the Grade II state standard (MEPPRC, 2006). 1.2.2 Future control of acid rain and sulphur dioxide The production of sulphur dioxide in China is growing constantly. Since the 10th Five Year Plan, energy consumption in China has risen dramatically – coal consumption increased from 1.25 billion tonnes to 2 billion tonnes between 2000 and 2005, and sulphur dioxide emissions grew from 19.95 million tonnes in 2000 to 26.80 million tonnes in 2005. According to statements made by the Ministry of Environmental Protection in 2004, if acid rain is to be eliminated, then national sulphur dioxide emissions should not exceed 12 to 14 million tonnes. If economic development continues as at present, and societal demands for improved living standards continue, it is expected that the demand for energy will steadily rise. The total energy consumption and coal consumption by 2020 is anticipated to reach 3–4 billion tonnes standard coal equivalent (1 kg Standard coal equivalent = 29.27 MJ) and 2.5–3.3 billion tonnes respectively, among which 1.73 billion tonnes are expected to be consumed by power generation. Moreover, sulphur dioxide emissions are expected to reach 28 million tonnes. The likely impacts on ecosystems and human health are considerable, and the associated economic losses will correspondingly increase. One of the critical principles for acid rain control is to focus on emissions from large sources, especially coal-fired power plants. However, under existing regulations, local governments are only responsible for the environmental quality within their administrative territory. Management of large sources requires overall planning and coordination between the state and local administrations. In addition, desulphurization and denitrification in the power sector requires considerable investment and a relatively long establishment period. Because of the lack of continuity in policy and the paucity of effective allocation measures, the achievement of acid rain control under existing policies remains elusive. The control of nitrogen oxides emissions requires urgent reinforcement, as the contribution of nitrogen oxides to China‘s acid rain has increased in recent years. Large amounts of nitrogen oxides emissions have resulted in a series of environmental iss ues, such as the formation of photochemical smog and fine particulates. Emissions of nitrogen oxides in China were close to 20 million tonnes at the end of the 10th Five Year Plan. Two thirds were derived from coal combustion, primarily from coal-fired power plants. The failure to achieve the established objectives for air pollution abatement, particularly in relation to sulphur dioxide and acid rain control, and the predicted trend of energy consumption and associated pollutant emissions, have provided an urgent warning for China. If the country continues to rely on existing administrative mechanisms, successful control of sulphur dioxide and acid rain is unlikely.  20  1.3 Preventive strategies for China’s sulphur dioxide and acid rain 1.3.1 Principles for sulphur dioxide and acid rain prevention A number of principles have been designed for the reduction of sulphur dioxide emissions and the prevention of acid rain. These include: a) Integrated management from all aspects of the economy, law, and adminis tration; i) Constituting regulations, such as pollution levy, emissions trading, and control of concentrations of pollutants; ii) Strengthening environmental monitoring and management, establishing emission guidelines for individual factories, departments and areas; and iii) Enhancing education and outreach with respect to the importance, policies, regulations, and laws of environmental protection (Liu and Diamond, 2005). b) Enhancing research and technology related to acid rain prevention and SO 2 pollution, including the improvement of acidified soils, the development of regionally sustainable agriculture in the acid rain regions; studies of the formation of acid rain and the ecological problems associated with it, and the development of approaches and policies for ecosystem rehabilitation, etc (Liu and Diamond, 2005). 1.3.2 Countermeasures and strategies for China’s sulphur dioxide and acid rain prevention A number of possibilities exist for the amelioration of sulphur dioxide pollution and its associat ed problems. Measures need to be adjusted to the different conditions throughout China, and the distribution of point sources needs to be rationalized. Most of the soils in southern China are acidic or strongly acidic and have a low buffering capacity (Wang and Wang, 1996). The mountainous terrain and high humidity prevent the dispersion of smog. It is also common that the coal burnt in southern China has a high sulphur content (Wang and Wang, 1996). The government therefore needs to treat the control of pollution carefully, taking into account the locations of the sources and the sensitivities of the ecosystems in each area. In certain regions, it may be possible to locate heavily-polluting industries in leeward or downstream positions and in locations wher e smog is more easily dispersed. Saving energy provides another means of reducing pollution. Energy is not utilized effectively in China, thereby increasing the demand. A number of problems exist, including ineffective management of energy sources, an excessive waste of energy, relatively out-of-date means of energy regeneration, and inadequate utilization of residual heat, coal and gas. The profits associated with energy production are relatively low in China, and energy consumption/10,000 RMB GDP is thr ee times the world mean, not only much higher than in developed countries, but also higher than developing countries such as Brazil and India (Sinton et al., 1998). As there are a series of problems 21  associated with energy consumption in China, multiple strategies need to be adopted, including but not restricted to better energy management, modernization of technologies, integrated use of energy; appropriate use of residual heat created during generation and reduced gas emissions (Jiang et al., 2007). The sulphur content in fuel needs to be reduced through: 1) shutting down or restricting production in high-sulphur coal mines; banning the development of coal mines with a sulphur -content greater than 3%. 2) Developing steam coal preparation – to establish or reconstruct associated coal preparation facilities; for areas with dense small -scale coal mines, associated coal preparation plants are required. It is recommended that coal preparation byproducts, such as coal slime, pyrite, etc., be reclaimed, avoiding secondary pollution. 3) Controlling sulphur content in urban fuel. It is advisable for local governments to prescribe the upper limit for sulphur content in coal and fuel, and to restrict the distribution and use of high-sulphur coal and high-sulphur fuel. Local governments are also being encouraged to facilitate the popularization of clean energy, such as natural gas and liquefied petroleum gas (LPG), by defining specific areas where the use of highly-polluting fuel is forbidden. 4) Strengthening the control of the export of high quality coal with low sulphur content, and forbidding the import of coal and fuel oil with a sulphur content higher than 1%. A second suite of strategies, most of which have been proposed by environmental protection departments but without full enforcement, relate to the strengthening of environmental administration and law enforcement in environmental protection, particularly for sulphur dioxide and nitrogen oxides: a) Polluting enterprises, especially large-scale power generating stations, are required to maintain their treatment facilities and online monitoring systems, cooperating with environmental protection departments to complete the periodic surveillance and examination of the performance of monitoring facilities. The intention is to ensure that emissions are monitored adequately (MEPPRC, 2005). b) A state department and several regional or local agencies with a responsibility for acid rain surveillance and control need to be established (Liu and Chen 2007). Potential re sponsibilities include: promulgating relevant policies and administrative regulations; tracking acid rain pollution and evaluating the effectiveness of acid rain control countermeasures; improving the national acid rain monitoring system so as to track trends in acid precipitation in China; and constructing dynamic databases covering the sources of acidic pollution. c) Strict control of sulphur dioxide and nitrogen oxide emissions from coal -fired power plants is required. This will involve preventing the construction or extension of coal-fired generators and fuel turbine generators in urban suburbs, and restrictions on the construction of coal -fired power plants in regions already heavily impacted by acid rain or with sulphur dioxide concentrations higher t han the state standard (MEPPRC, 2005). Newly-built coal-fired generators and fuel turbine generators should have desulphurization facilities, should introduce low-nitrogen burning techniques and install 22  fuel gas denitrification equipment, particularly in regions with high nitrogen oxide concentrations and severe photochemical pollution. Over time, low-efficiency, high energy consumption and heavily polluting sources should be phased out. d) Sulphur dioxide and nitrogen oxide emissions from other primary i ndustries need to be better controlled, including steel production, metal mining, construction material production and chemical engineering. Clean production mechanisms need to be promoted, and nitrogen and sulphur should be recycled (Jiang et al., 2007). e) Sulphur dioxide emissions from coal- and oil-fired boilers need to be controlled by establishing the technical criteria for coal and fuel oil and by ameliorating the integrated processing and supply systems for coal and fuel oil, amongst other mechanisms (MEPPRC, 2005). There needs to be active development of low energy-consumption and light- or non-polluting industrial furnaces, and industrial furnaces wherever possible should use gas, low-sulphur coal or oil. f) There is a need to strengthen measurement systems for nitrogen oxide emissions, particularly for coal-fired power plants, and to formulate a control scheme for nitrogen oxide from power plants. In addition to the above, steps are needed to improve the technologies used in energy generation , including developing and deploying various techniques and equipment for desulphurization, techniques for reducing nitrogen emissions, enhancing the energy utility ratio, and abating sulphur emissions from coal combustion and waste gas. In China, 90% of S O2 emissions come from coal consumption. The most important step in the control of SO 2 emissions is to identify the sources, and specifically to restrict the production and consumption of coal with a high sulphur content. By cleaning and the appropriate choice of coal, more than 60% of the ash and 50–70% of the pyrite sulphur (FeS 2 ) (the most common type of sulphur) can be eliminated, greatly abating the pollution derived from coal combustion (Williams, 2001). In addition, improved combustion techniques nee d to be implemented. Fluidized bed combustion needs to be more widely adopted, with advanced fluidized bed boilers having extremely high combustion efficiencies (nearly 99%), eliminating 80–95% of SO 2 and NO x (Williams, 2001). Flue gas desulphurization could also be applied to reduce SO2 emissions from stacks; it has a desulphurization efficiency of 95% or higher. CaSO 4 , produced by a reaction of SO 2 in flue gas with lime or limestone, can be reclaimed for use in construction (Chen and Xu, 2009). Such mat erials have the added benefit of being in demand under green building codes. Sulphur fixation in briquettes provides an opportunity to reduce sulphur emissions while providing a product that can be used by industry or in residential areas (Lu et al., 2003). Another alternative is the replacement of coal by clean energy sources such as hydropower, solar energy, wind energy, nuclear energy, and geothermal energy. Current techniques associated with alternative energy sources will not satisfy the energy deman ds of industry. The successful 23  development of clean energy sources, particularly hydropower and nuclear power, will be an important tool in the reduction of SO 2 emissions (Figure 2). Although hydropower and nuclear energy are a clean energy source (from an atmospheric perspective), there are still a series of problems associated with both. The disadvantages of hydropower potentially include: a) ecological deterioration; b) relocation of residents from river valleys flooded for hydroelectric schemes; c) reductions in the area of fertile alluvial soils. The problems of nuclear power include: a) safety issues, such as the disposal of radioactive waste; b) the reduced thermal efficiency of nuclear power stations in comparison to power stations run on fossil fuels; c) the high construction costs of nuclear power stations; and d) the political controversies and local opposition that invariably surround the construction of a nuclear power station (Wu et al., 2006).  3.50%  7% 1%  Coal Oil  20% Natural gas Hydropower 69% Others (wind power, nuclear power)  Figure 2 China’s primary energy sources in 2008 (NEAPRC, 2009). There is a need to strengthen standards for automobile emissions. Automobiles are an important source of NO x, accounting for a large proportion of the total NO x emissions in China. Controlling automobile exhaust is therefore important if NOx emissions are to decline, as the number of automobiles is rapidly rising in China. The followings steps would help reduce this source of pollution: 1) establishment of exhaust standards for various types of vehicles, 2) speed limits for vehicles, 3) improvements to engine structure and combustion, and 4) installation of catalytic converters, which is a device aiming at converting the toxic emission to less toxic matters from a combustion engine (He and Cheng, 1999). The enhancement of organic matter content in soils through the use of organic fertilizers could help slow down soil acidification. Increasing vegetation and forest cover would also help reduce atmospheric pollution concentrations. Plants have the ability to regulate climate, conserve water and soils, and take up toxic gases, and are of great value as long-term sinks for pollutants. Thanks to 24  their large absorption surface and extensive root systems, plants can take up pollutants in large quantities, accumulating the pollutants or converting them to non -toxic substances (Larssen et al., 1999). Rehabilitation of degraded ecosystems by increasing the vegetation cover (particularly trees) is highly recommended, and provides a number of other benefits, particularly in cities, where air quality problems tend to be the greatest. Both state and local governments should increase investment in research on acid rain, improve evaluation systems for acid rain impacts and formulate better policies for coal -fired power plants. In order to develop consensus and public participation in the implementation of acid rain controls, there is a need to popularize knowledge of and public awareness of acid rain. Thi s should be accompanied by a policy to promote energy conservation, as currently there is a huge amount of energy wastage in most parts of the country. Last but not least, there is a need to promote relevant economic policies for sulphur dioxide abatement and acid rain control, based on the ongoing policy of ―total emission control‖. Electricity pricing mechanisms that incorporate the desulphurization costs for coal -fired generators are needed, and there also should be higher charges for the emission of su lphur dioxide and nitrogen oxides. Since the late 1990s, driven by a series of both domestic and international factors, Chinese central government and environmental authorities have expressed increasing interest and value in introducing a market-based trading program to control SO 2 emissions and acid precipitation effectively. With the social improvements in China, greater attention has been given to balancing economic growth with ecological and cultural conservation, and the public has placed higher emphasis on improvements in environmental quality. Also, the USA, one of the world‘s leading coal producers and consumers, has provided an excellent example in dramatically reducing its SO 2 emissions while maintaining rapid economic growth. Additionally, internationally there is a priority on applying market-based mechanisms as an instrument of environmental protection. With the improvement of China‘s special market economy conditions, integrating market mechanisms with ―total amount control‖ to establish an emissions trading system is therefore likely to have a bright future for the control of sulphur dioxide and acid rain in China. This least -cost approach should be especially appropriate for China, which is facing great pressures to meet social demands but has relatively few resources available to do so (Ellerman, 2002).  25  2. International and domestic development of “emissions trading” 2.1 Basic principles of total emission control and emissions trading Total emission control, as an environmental control measure, aims to determine the environmental capacity (i.e. pollution carrying capacity) of a given area (or space), such as an administrative area or river basin. It is determined for a specific period, and is directly linked to any proposed environmental quality objectives. It ensures that the total emissions of a specific pollutant from all pollution sources within the designated area (or space) do not overrun the determined environmental capacity, thereby ensuring that the environmental quality objectives are achieved. In the total emission control system, the environmental administration initially allocates allowable pollutant emission amounts in the form of emission rights to individual pollution sources. There are two options for any subsequent actions: a) the pollutant discharge of every polluting enterprise is required to be within the emission rights determined in the initial allocation, or b) enterprises are allowed to trade emission rights with each other – to reallocate environmental capacity by transactions (Tietenberg, 1985, Wang et al., 2002). The first approach adopts a traditional ―command-and-control‖ mode of operation, whereas the second method, known as emissions trading, is acknowledged as a more effective way to implement total emission control. The optional approaches for the initial allocation of permits by governments include public auction, sale at a fixed price, and free distribution, amongst others (Xue, 2008). With the establishment of an emissions trading market, polluters are allowed to purchase or sell emissions allowances under the surveillance of environmental departments. The associated emissions rights/allowances are defined as a type of permit that allows pollutant discharges. The environmental capacity for pollution is valued as a resource, and pollutant emissions by facilities are therefore considered to be a form of resource utilization. Emissions trading is therefore a transaction involving environmental capacity (Xu, 2004). 2.2 International development and experience of emissions trading The most successful design and implementation of an emissions trading scheme is in the USA. The total generating capacity of coal-fired power plants in the USA in 2005 was nearly 40% more than 1990. However, sulphur dioxide emissions declined by approximately 35% in the same period as a result of the enactment of the ―Clean Air Act‖ and the implementation of emissions trading (Xu and Wang, 2001). Based on the experience in the USA, an emissions trading system will gradually evolve into three distinct modes: a) a baseline-and credit mode, also known as the emission reduction credit (ERC) mode; b) a cap-and-trade mode, also known as the emissions allowance (EA) mode; and c) a discrete emissions reduction (DER) mode (Wang et al., 2002). The ERC and EA were fully implemented over the past two decades; the DER was designed and improved based on the ERC mode, but is less widely practiced. The following discussion therefore focuses on the ERC and the EA. 26  2.2.1 Introduction I) Baseline-and-credit (ERC) The pollutant emissions baseline is established by the environmental administration, from which polluters are allowed to gain emissions reduction credits, provided that their planned pollutant emissions are lower than the officially-determined baseline and that the emissions reduction is permanent (Tietenberg, 1985). The emissions reduction credits are marketable. The U.S. Environmental Protection Agency has four basic prescriptions regarding ERC: a) authenticity – ERCs are created based on actual emissions reductions; b) enforceable – the creation of ERCs and implementation of subsequent transactions are enforceable for environmental administration; c) measurable – is measurable and can be evaluated in terms of accepted procedures and methods; d) permanent – the emissions reductions are not interim or periodic during the process of construction or extension (Qu, 2006). The US EPA has applied the market-based trading mechanism since the late 1970s. During the late 1970s to around 1990, the ERC model dominated preliminary testing, including four primary policies known as bubble, offset, banking, and netting. These terms are explained below. a) Offset – this aims to deal with the problems associated with newly-built pollution sources and the extension of existing pollution sources (facilities). The US Environmental Protection Agency (EPA) enacted the offset policies in 1976. Newly-built pollution sources were permitted in cases where their pollution control facilities enabled them to attain the Lowest Achievable Emission Rate (LAER), and the excess emission reduction of other pollution sources within the same area could offset the emission increase posed by newly-built polluter sources (Wang et al., 2002) b) Bubble – the bubble policy was enacted in 1979, and ended around 1990. It allowed multi-pollution sources within one operation to be subject to a general emission baseline. Bubbles were, therefore, likely to include several operations of one enterprise, or several operations of various enterprises. All of the pollution sources/emission sources, however, were required to be designated within the same attainment area or non-attainment area (Wang et al., 2002). c) Banking – the US initial offset policy does not allow the deposit of ERCs for future use or transactions. This is because such an action might encourage the continuous operation of heavily-polluting facilities without the supply of deposited ERCs. For those polluters that do not have their own ERCs, finding a supply of ERCs could take some time. The number of ERCs that the US EPA approves for depositing is limited, and there are a series of strict rules regarding the application of deposited ERCs (Wang et al., 2002). d) Netting – the netting policy, which came into effect in 1980, prescribes that newly built 27  facilities/pollution sources are exempt from examination and application for new emissions rights/allowances, as long as the polluting enterprises are able to prove that their overall emission amount, i.e., the sum of pollutant emission from all pollution sources within the enterprises, remains constant. Netting has been the most widely applied policy during the first phase of US emissions trading practice (Tietenberg, 1985). The cost savings that can result from the implementation of a netting policy seem considerable: a) newly built emission sources do not have to apply for their respective emission allowances; b) the exemption from emissions rights applications prevents potential construction delays associated with the complex application procedures. II) Cap-and-Trade (EA) The objective of a total pollutant emission (cap), established by the environmental administration, is to release polluting facilities through emissions allowances/permits. In terms of the ―cap-and-trade‖ system, emissions from polluting facilities are not allowed to exceed their emission allowance during a given period of time. Polluters that do not attain the above requirement receive economic penalties and have to compensate for any environmental losses resulting from their excess emissions. However, polluters are allowed to either reserve or trade their extra emissions allowances during the valid term of their emissions allowances/permits (Wang et al., 2002). An example of the ―cap-and-trade‖ model is the ―Acid Rain Program‖ launched in 1990. The system was backed up by continuous monitoring, an emission allowance tracking systems (ATS), and enforced penalties.  28  2.2.2 Comparison between the ERC and the EA Emissions trading systems are gradually evolving from the ERC type to the EA type, but ERC systems are likely to continue for some time. The two models provide alternative means to the same end, and their applicability very much depends on the local situation. 2.2.2.1 Comparison of administration mode The ERC system, which was developed based on existing administrative systems, brings flexibility to polluting facilities through the introduction of a transaction mechanism. The establishment of emission permits/rights for each facility is primarily based on the differences between the target and current emission level (Portney, 1990). The EA system is independent of and completely different from the traditional ―command-and-control‖ systems. In terms of environmental objectives (or environmental capacity in few cases), environmental departments frame the upper limit (i.e., cap) of pollutant emission, which is subsequently divided into emission allowances/permits and released to individual polluters. The total emissions of polluters are required to be equal or less than their allowances/permits in the designated period, and the emissions allowances are tradable during the whole given period. 2.2.2.2 Comparison of transaction costs There would be a transaction cost associated with both the ERC and EA systems, but it is more distinct for the ERC model. According to the requirements of the ERCs, it is obvious that their examination and approval, specifically for determining the authenticity, measurability, permanence, an d enforceability, among others, must be extremely rigorous. This rigorous and complex procedure, requiring environmental departments to examine every creation and transaction of ERC, is likely to result in an increase in administrative costs and the decline of potential traders‘ expectations and confidence in the timely approval of transactions by the environmental administration. Due to its complex examination procedure, the number of participants in the ERC trading system will be relatively limited. It is therefore difficult to set a stable price for emissions allowances. The price for individual transactions needs further negotiation, thereby increasing the transaction cost. For the ERC system, transactions of the reduction credits are only bilateral a nd ordinal, while for the EA system, allowances transactions could be multilateral and simultaneous (Xu and Wang, 2001). Accordingly, the EA system is a more comprehensive example of the theoretical emissions trading mechanism and a cost-effective design.  29  2.2.2.3 Comparison of the role and responsibility of the government In light of the US experience, emissions trading in other parts of the world is likely to develop into the EA system in the future. However, from a practical point of view, several fact ors have to be taken into account when choosing between the ERC and EA models. These include the transformation and transition of the role and participation of the government and the details of the scheme‘s implementation. Both systems are applicable and feasible for achieving the objective of the ―TEC‖, as the ―baseline‖ referred to in the ERC system theoretically equals the ―cap‖ (i.e., upper limit) referred to in the EA system. In contrast, the participation of the government in these two systems is entirely different. Relative to the EA, implementation of the ERC system needs less initial design, requiring only a few supplementary interrelated articles based on existing administrative systems. Nevertheless, administrators involved in the ERC system must pay much more attention to individual transactions during the system implementation. For the EA system, other than enacting supervisory regulations, plenty of work needs to be completed by the environmental administration at the very first stage, including framing the objectives of the TEC, initial allocation of emission allowances, establishment of transaction platforms (e.g., affiliated organizations in charge of information collection and exchange) as well as installation of a series of continuous emis sion monitoring and allowance tracking systems (ATS). Preparation prior to the operation of the EA system seems complex and time-consuming, but rather than tracking individual transactions, the primary task of the EA system administrators is to compare the balance of the emission allowance accounts of the polluters and the data collected by continuous monitoring and tracking devices (Song, 2004). The ERC model is an additional supplement to existing control measures (Xue, 2008). While it was developed from theories that are independent of traditional environmental supervision, the EA system tends to be affected by factors such as the transformation of administrative departments, the familiarity level of administrators to new operations, and the adaptation of polluting facilities to new supervisory systems. The successfully implemented ―Acid Rain Program‖ in the US was developed based on the ERC system, and has been lasted for around two decades.  30  2.3 Development of emissions trading in China 2.3.1 Introduction Emissions trading, as an economic approach for environmental protection and pollution control, has been under development in China for approximately 20 years. This development can be divided into three stages: a) Initial development (1990s): The State Environmental Protection Administration [SEPA, redirected to Ministry of Environmental Protection (MEP) in 2008] issued ―Interim Measures on the Management of Water Pollutants Discharge‖ in 1988, prescribing that the indicator for the total amount of water pollutant discharge could be transferred among polluters within a local area (Wang et al., 2004). Directed by SEPA, a pilot program for air pollution emission permits was conducted in 16 cities in 1991, and another for air pollution emission reduction credits trading program was conducted in six cities in 1994. Approved by the State Council, China formally incorporated the TEC policy into the objectives on environmental protection in 1996 and promoted the nationwide emission permit system. This enforcement of a TEC and an emission permit system established a systematic foundation for the development of emissions trading in China. Moreover, the ―Laws on Prevention and Control of Atmospheric Pollution‖, authorized by the National People's Congress (NPC) in 2000, confirmed the transformation of the national strategy on pollution control from concentration control to total emission control and, more importantly, clarified the legal status of the emission permit system (Wang et al., 2008). Generally, the helpful experience gained from a series of pilot programs focusing on air pollution, during the initial development stage, laid the foundation for the subsequent exploration of emissions trading. b) Further exploration through pilot programs (2001–2006) During the 10 th Five-Year plan period (2001–2005), the emphasis of China‘s environmental protection switched to TEC. To facilitate TEC, SEPA enforced an emission permit system and extended its pilot programs. Examples included: 1) a Sino-US Cooperation Program on Environment Protection, ―Feasibility Study on the Use of Market Mechanisms to Achieve SO 2 reduction in China‖ and ―Study on promotion of China‘s SO 2 Total Emission Control and Implementation of Emission Trade‖, which both demonstrated the feasibility of market -based mechanisms for China‘s sulphur dioxide (SO 2 ) emissions abatement; 2) Pilot programs on SO 2 emissions trading in Taiyuan conducted by the Asian Development Bank, which helped in establishing the ―Administrative Regulation for SO 2 Emissions trading in Taiyuan‖; 3) Pilot programs on SO 2 TEC and emissions trading in seven provinces and cities, including Shangdong, Shangxi, Jiangsu, Shanghai, and Tianjin, developed by SEPA in 2002 with the support of the US Environmental Defense Fund (EDF). Under 31  these programs, a series of emissions trading cases were completed, giving some experience and identifying several associated problems and obstacles; and 4) Investigation and research in several regions jointly conducted in 2006 by the Ministry of Finance (MOF) and SEPA. With the use of sound SO 2 control techniques, research proved to be the most eligible tool for aiding the piloting of the emissions trading policy (Wang et al., 2008). All enterprises that participated in the pilot programs during this stage were directed or suggested by government departments. c) Further development of the pilot programs (2007– ) With the transformation of environmental protection strategies from traditional administrative regulation approaches to integrated measures constructed by jointly applying administration and market mechanisms, government departments have paid increasingly greater attention to the fundamental effects of market and economic policies on environmental resource allocation and issued a series of local regulations and plans on emissions trading. Examples include: 1) the Guangdong Environmental Protection Bureau (EPB) and Environmental Prote ction Department of the Hong Kong Special Administrative Region (SAR) promulgated the ―Emissions trading Pilot Scheme for Thermal Power Plants in the Pearl River Delta Region‖ in Jan 2007; 2) in March 2008, Wuhan Optics Valley United Property Right Exchange established a platform for emissions trading, attempting to introduce emissions trading into property rights exchange markets for the first time; 3) between August and September 2008, the Environment (Energy) Exchange and Emissions Trading Exchanges were founded in Beijing, Shanghai, and Tianjin (Wang et al., 2008). The piloting and practice of emissions trading policies in China has been developed for nearly 20 years. Nevertheless, many problems associated with the establishment of a real market -based mechanism for emissions trading still exist. There is a long way to go to incorporate the theory of emissions trading with China‘s current situation and condition. The long-term effects of a market-based mechanism are closely related to the direction and p rogress of China‘s economic and social development. Emissions trading in China is likely to evolve towards systemization and diversification and will likely occur on a large scale. The potential trend in development may include: a) the occurrence of policy pilots and the continuous strengthening and deepening of systematic regulations; b) encouragement of local and regional government units to explore and conduct their own trial practices; c) transitioning of emission allowance allocations from unpaid to paid, thus incorporating the scarcity and value of environmental capacity, although ensuring equity and fairness for the initial allocation of the emission allowance remains a challenge); d) commercial companies engaged in emissions trading and provided services, such as trading platforms; and e) widening of the area of focus, in the near future, to include various pollutant and environmental products, unlike the current situation which mainly includes only primary pollutants, such as SO 2.  32  2.3.2 Development of emissions trading in China – case studies Emissions trading, by establishing marketable emissions allowances and a market for allowance transactions, can create an incentive for pollution control. Emissions trading also efficiently allocates the obligation for pollution control, and the market tends to gradually become established as the primary instrument for allocating environmental capacity and resources, replacing the role of governments. Government must initially frame the TEC objectives, the sche mes for the initial allowance allocation, and the rules for transactions, and must supervise/track the entire transaction process. The total social cost associated with pollution control is expected to be minimized by explicitly defining environmental responsibilities of both the government and the enterprises involved. China is currently transitioning from a planned economy to a market-based economy. Existing systems for environmental administration in China are incapable of coordinating rapid economic development with the desire for environmental improvement (Wang et al., 2004). Most of China‘s current pollution control measures don‘t pay enough attention to the associated implementation costs. The pollution charge system, one of the basic instruments for environmental administration in China, is still unable to provide sufficient economic incentives for polluting facilities (Ren, 2006). Consequently, the disadvantages and limitations associated with traditional pollution control approaches are gradually becoming apparent. In addition, due to the long-term nature of the impacts and the subsequent uncertainties, public awareness of environmental problems has been slow to develop, and environmental improvement has lagged behind economic development. As a result, the establishment of long-term pollution control programs and environmental improvement schemes is required. The launch of various pilot projects on emissions trading could identify potential practical difficulties and challenges and explore possible solutions for diverse local scenarios. Pilot SO2 trading projects at both the city and provincial scales in China have provided valuable lessons for the development of a national trading scheme. China‘s three key pilot projects on emissions trading (local scale) were implemented in three different regions: a) the pilot project in Benxi demonstrated the significance and pathway for local legislation on TEC and emissions trading and the necessity for transparent emission reporting guidelines that would allow emitters to gauge the potential impacts on their businesses; b) the pilot project in Nantong demonstrated the potential transaction course under the existing environmental administration institutions; and c) the pilot project in Taiyuan demonstrated the need for establishing a robust regulatory framework, prior to implementation of the trading scheme, and the need for the establishment of an emission monitoring system and Allowance Tracking System (ATS) (Yang, 2004). Practice at the local level is also expected to provide potential solutions and experience for subsequent programs. To address transboundary SO2 and acid rain pollution, however, it is necessary to look beyond the local scale.  33  TEC has been practiced for years and will remain the primary principle for China‘s environmental protection in the future. TEC has proven to be a successful direction for environmental management, especially in China, which is expected to transform its environmental administration system from one which is ineffective in protecting public health and improving the environment to a new one that is more executable and compatible with continuous economic development (Song, 2004).  34  Table 7. Primary progress of emissions trading practices in China since 2006 (Wang et al., 2008) Time  Description of Events  Mar,  Ministry of Finance (MF) and SEPA jointly conducted an investigation of the  2006-Jun,  compensated use of emissions allowances and emissions trading  2006 Jan 30, 2007  Guangdong and Hong Kong governments promulgated ―Emissions trading Pilot Scheme for Thermal Power Plants in the Pearl River Delta Region‖, which took approximately two years to formulate.  Mar, 2007  ―Technical study on sulphur dioxide emissions trading for power sector‖, one of the Key Projects in the National Science & Technology Pillar Program, was initiated.  Apr, 2007  Hubei conducted its first SO2 emissions trading  Jun, 2007  ―Integrated Working Scheme for Energy Saving and Emissions Reduction‖ issued by State Council, suggested the development of administrative regulations on sulphur dioxide emissions trading immediately.  Jul, 2007  MF and SEPA selected the power sector and the TaiHu Basin for piloting projects on emissions trading.  Aug, 2007  Zhuji (Zhejiang, China) issued ―interim regulations on the compensated use of emissions allowances in Zhiji‖.  Sep, 2009  Jiangsu enacted ―the Taihu Lake Water Pollution Prevention and Control in Jiangsu‖, indicating that compensated use of emissions allowances and emissions trading for water pollutants will be gradually implemented by pilot projects.  Nov, 2007  The first emissions trading agency was established in Jiaxing – ―Jiaxing Emission Rights Trading Center‖  Dec, 2007  The third round of the ―U.S.-China Senior Dialogue‖ decided to cooperate on SO 2 emissions trading for the power sector.  Mar, 2008  Wuhan Optics Valley United Property Right Exchange introduced emissions trading into property rights exchange markets by establishing the platform for emissions trading.  Mar, 2008  Taiyuan enacted and implemented ―administrative measures on SO 2 emissions trading in Taiyuan‖  Aug, 2008  Beijing Environment Exchange established trading platforms for various environmental products.  Aug, 2008  Shanghai Environment and Energy Exchange established trading platforms fo r various energy rights and interests.  Sep, 2008  The SO 2 emissions trading center was established in Heilongjiang Province.  Sep, 2008  The Emission Exchange was established in Tianjing, and conducted an auction of extra SO2 allowances  35  2.3.2.1 The SO2 emissions trading pilot project in Nantong (Song, 2004) Nantong, located in the Yangtze River Delta, is one of the first 14 cities that implemented the opening-up policy in China. As the first city on the north shore of Yangtze River estuary, Nantong has an advantageous location. The emissions trading projects piloted in Nantong considered the following aspects: a) participating sellers have surplus SO2 allowances and the potential for further emission reductions; b) buyers with sufficient financial capacity have an immediate demand for more SO2 allowances; c) enterprises participating in the pilot projects are required to have normative pollutant emission records and monitoring systems. The primary participants to Nantong‘s emissions trading pilot project included the supplier of the emission allowances, which was the Nantong Tianshenggang Electricity Generation Ltd. (Tianshengang Power Plant), and the buyer of the emission allowances, which was the Nantong acetic acid fiber plant (Nanqian Ltd.). Tianshenggang Power Plant is a large power generation plant with a capacity of 500 MW and an annual electricity generation of 3 billion kWh. It relies on coal as its primary fuel, and is a large producer of SO 2, smoke, and dust. Tianshenggang has invested heavily in the consumption of low-sulphur coal, technical innovation, and pollution control facilities since the 1990s. As a result, it has significantly reduced its pollutant emissions. The SO2 emission allowance granted to Tianshenggang Power Plant in 2000 was 18,000 tonnes, accounting for approximately 10% of Nantong‘s total SO2 allowance. The actual emission in Tianshenggang, however, was 11,500 tonnes, leaving a surplus of 6,500 tonnes. Nanqian Ltd., with up-to-date facilities, great awareness of environmental protection, and efficient management, has passed the ISO 9000 and ISO 14000 certifications. Aiming for an SO 2 emission reduction, Nanqian Ltd. applied a low-sulphur coal strategy. In 2000, the total SO2 emissions produced by three boilers with 75 tonnes/hr reached 1,183 tonnes. The SO2 emission allowance granted by the environmental administration for Nanqian Ltd. was only 553 tonnes, to be followed according to the terms of an environmental impact assessment (EIA) report and a given desulphurization rate of 81%. However, according to the monitoring data from the local environmental administration, a desulphurization rate of 81% would have been extremely difficult to attain using current technologies. At the request of Nanqian Ltd., the environmental administration re-examined and adjusted the SO2 emission allowance allocated to Nanqian Ltd. from 553 tonnes/year to 990 tonnes/year, and the EPB decided to adjust the difference of 437 tonnes/year between the two polluting enterprises. In September 2001, the Tianshenggang Power Plant and Nanqian Ltd. signed an SO2 emissions allowance transaction contract, representing the first case of an emission allowance transaction in China. According to this contract, from 2001 to 2006, the SO2 emissions allowance traded between the two enterprises was 300 tonnes/year, bringing the total emissions allowance traded to 1,800 tonnes. The buyer, Nanqian Ltd., was 36  authorized to use the SO2 allowance. Moreover, the allowance surplus within the period of the contract could be applied in a subsequent year, or could be exchanged with third parties. The successful case of sulphur dioxide emissions trading between the Tianshenggang Power Plant and Nanqian Ltd. provides an example of an emissions allowance transaction. In the following couple of years, however, few influential allowance transactions were recorded, except for the case of COD (chemical oxygen demand) trading, which is the emissions trading of water pollutants, between Taierte Ltd. and Yadian Ltd. Based on my investigation and discussions with local environmental regulators, the reasons that emissions allowance transactions could not be applied to a larger scale were: a) insufficient emission monitoring – without the full establishment of an online emissions monitoring system, the frequency of air pollutant emissions monitoring, which is normally once per quarter, is extremely low, particularly for small emitting sources. b) Insufficient market supply of emissions allowances – it is not cost-efficient for polluters to undertake sulphur dioxide abatement and to try to trade their surplus emission allowance since currently the average abatement cost of sulphur dioxide in Nantong is around RMB 1200 – 1600/tonne, whereas the approximate market price of a sulphur dioxide emission allowance is only RMB 1000. c) Newly-built pollution sources are basically required to purchase most of their emissions allowances from the trading market. It is therefore inequitable for newly-built sources, as existing sources received their emissions allowances without any extra charge. d) The approach for determining the initial allocation of emissions allowances, based on historical emissions data, tends to be inequitable as well. For example, the expected environmental capacity of Suzhou and Nantong are not significantly different. The emissions allowances allocated by the provincial environmental protection department for Suzhou was almost three times the allowance allocated for Nantong during 2000-2005. 2.3.2.2 The SO2 emissions trading pilot project in Taiyuan As one of the most polluted cities in China, and possibly the world, Taiyuan‘s SO2 concentration is typically much higher than the Grade II state air quality standard, which is the standard applied in the following comparisons in this section. According to daily monitoring data collected by Taiyuan Environmental Monitoring Center, SO2 concentrations remained above the standard during the ―10th Five-Year-Plan‖ (TEMC, 2007). (Table 8)  37  Table 8. SO2 monitoring data from 2000 to 2005 in Taiyuan Concentration (mg/m3 ) Year  No. of samples  No. of  Multiples of  samples  Percentage over  average  the standard (%)  concentration  Average daily  Range of  over  concentration  concentrations  standard  over standard  2000  1336  0.2  0.014-1.090  605  45.28  3.33  2001  1923  0.137  0.001-1.544  556  28.91  2.28  2002  2189  0.129  0.002-1.380  586  26.77  2.15  2003  2186  0.099  0.002-0.781  489  22.37  1.65  2004  2177  0.079  0.001-0.651  320  14.70  1.32  2005  2553  0.077  0.002-0.775  358  14.02  1.28  2001-2005  11028  0.104  0.001-1.544  2319  21.03  1.73  Grade II of state standard  0.06  Drawing on the US experience in SO2 emissions trading, and funded by the Asian Development Bank, the US Resources for the Future (RFF) and the Chinese Academy for Environmental Planning (CAEP) cooperated to help Taiyuan start establishing SO2 emissions trading mechanisms in 2001. The objective was to achieve SO2 emission reduction targets at the lowest cost and to enable the daily average concentration of SO2 in Taiyuan to meet the Grade II state air quality standard. The participants in the SO2 emissions trading pilot program in Taiyuan suggested by government included 26 polluting enterprises, all of which were primary SO2 sources and whose SO2 emissions in 2000 accounted for more than half of the total SO2 emissions in Taiyuan. A free allocation was applied initially, based on the historical emission records of individual enterprises. Newly built pollution sources, however, were required to purchase their emissions allowances from the trading market. The continuous emissions monitoring systems (CEMS), which are connected to a central monitoring station, were to be installed in most of the 26 enterprises between 2001 and 2002. With the technical assistance of RFF and the US EPA, a computerized emission tracking system (ETS) aimed at facilitating the emissions reporting of polluting facilities and data management by the environmental administration was also developed. With the help of RFF and the EPA, the SO2 emissions trading pilot program of Taiyuan is now being managed by the ―ETS‖, which enables emissions reporting by polluting facilities and the verification of 38  enterprises‘ emissions data by the environmental departments, and by the ―ATS‖, which enables the supervision and management of allowance transactions. For the governance of the systems, RFF, CAEP, and Taiyuan EPB cooperated to frame the ―Administrative Regulation for SO2 Emissions trading in Taiyuan‖, which is the first local legislative document in China covering emissions trading and was a pioneering document in China‘s legislation on emissions trading. The administrative regulation includes the following aspects: a) Taiyuan EPB is to be the supervisory department for SO2 emissions trading; b) enterprises participating in this SO2 emissions trading pilot program are not exempt from other environmental protection obligations; c) the initial allocation of SO 2 emission allowance is based on historical emission data for the five-year pilot program; d) an explicit prescription regarding allowances transactions and banking: the allowance surplus of each year can be reserved for the following years or sold to other participants, and the price for allowances exchanged between enterprises is through bilateral negotiations; e) the income generated by the public auctions of emissions allowances is to be invested in environmental improvement in Taiyuan; f) the administration of Taiyuan‘s emissions trading is fulfilled in terms of the data collected by the ETS and ATS; g) a prescription regarding penalties for each tonne of SO2 emissions in excess of the allowance and legal responsibilities (Morgenstern et al., 2004). The administrative regulation in Taiyuan came into effect on January 1, 2003. Because of the lack of an official assessment of Taiyuan‘s emissions trading pilot project, the evaluation in this paper is principally based on the air quality monitoring data, questionnaires, and discussions with officials in the local EPB. As shown in Table 9, the average daily concentration of sulphur dioxide, one of the significant contributors to Taiyuan‘s air pollution, still exceeded the Grade II state standard in 2006, indicating that the system was still failing to meet one of its primary objectives, namely to bring SO2 concentrations under the Grade II air quality standard.  39  Table 9. Monitoring data for primary air pollutants in Taiyuan – 2006 (mg/m3) (TEMC, 2007) Inhalable particles Monitoring  Annual  site (name)  average of concentration  Sulphur dioxide  Multiples of  Percentage  average  of over  concentration  standard  over standard  (%)  Annual average of concentration  Multiples of  Percentage  average  of over  concentration  standard  over standard  (%)  #1 (Shanglan)  0.166  1.66  37.69  0.056  NA  3.89  #2 (Jianhe)  0.193  1.93  69.42  0.090  0.50  16.80  #3  0.136  1.36  32.87  0.061  0.02  3.86  0.136  1.36  31.87  0.073  0.22  9.62  #5 (Nanzai)  0.139  1.39  34.44  0.063  0.05  4.41  #6  0.132  1.32  29.69  0.085  0.42  13.73  0.147  1.47  41.48  0.134  1.23  31.04  #8 (Jinyuan)  0.111  1.11  20.00  0.051  NA  2.74  Taiyuan  0.142  1.42  37.12  0.080  0.33  11.74  (Jiancaoping) #4 (Jinsheng)  (Taoyuan) #7 (Wucheng)  (average) Grade II of state standard  0.10  0.06  Taiyuan‘s annual average of SO2 concentration in 2006 (0.08mg/m3) was 1.33 times the Grade II state standard. The daily average concentration ranged from 0.001 to 0.567 mg/m3, and the geographical distribution of SO2 concentrations demonstrated that power plants were the primary sources of Taiyuan‘s SO2. As a common and widely used method for policy assessment, a questionnaire survey was developed and administrated by the Taiyuan EPB in 2008. The aim was to assess and improve the awareness and participation of the local public in environmental protection. I was allowed to join the questionnaire design and analyse the results for this thesis. The 200 questionnaires in total were distributed to 5 randomly selected communities in Taiyuan. 165 out of the 200 were collected as completed questionnaires for the following analysis. The questionnaire was composed of the following four aspects: a) Awareness of air pollution problems. Of the respondents, 66% paid most attention to air pollution and 34% to other environmental problems, such as water pollution (18%) and land pollution (11%) (Figure 3). Of the various air pollutants, 46% of survey participants paid most attention to SO 2 pollution, while 28% 40  were mostly concerned about fine particulates (Figure 4).  70%  66%  60% 50% 40% 30% 18%  20%  11% 10%  3%  2%  Noise/light pollution  Others  0%  Air pollution  Water pollution  Land pollution  Figure 3. Level of concern about various environmental problems in Taiyuan b) Satisfaction with air quality in Taiyuan. 41% of respondents were very dissatisfied or dissatisfied with Taiyuan's air quality, 42% of respondents categorized Taiyuan's air quality as neutral, and only 17% were satisfied or very satisfied with it (Figure 5).  50%  46%  40% 28%  30%  18%  20%  7%  10%  1% 0% Sulphur dioxide  Inhalable particles  Nitrogen oxides Carbon monoxide  Others  Figure 4. Level of concern about various air pollutants in Taiyuan  41  50% 42% 40%  33%  30% 20% 12% 8%  10%  5%  0% Strongly dissatisfied  Dissatisfied  Neutral  Satisfied  Strongly satisfied  Figure 5. Respondents’ opinions on air quality in Taiyuan c) The literature indicates that in addition to affecting human health, severe impairment or even death of plants can also result from excessive SO2. The frequency of observation of discolored foliage, wilting, and plant death are, therefore, some of the potential indicators associated with the level of SO2 pollution. According to Figure 6, 25% of survey participants have often observed the above symptoms, 56% sometimes did, and only 19% seldom or never did. Approximately 25% of respondents considered that government departments had been unsuccessful in air pollution control during the past five years and were disappointed or very disappointed with the government‘s performance in this area. Meanwhile, 38% had positive opinions of the government‘s role and achievement (Figure 7).  60%  56%  50% 40% 30% 20%  15%  14%  10% 10%  5%  0% Very often  Often  Sometimes  Seldom  Never  Figure 6. Frequency of observation of symptoms associated with sulphur dioxide 42  37%  40% 30% 30%  19%  20% 8%  10%  6%  0% Strongly satisfied  Satisfied  Neutral  Disappointed  Strongly disappointed  Figure 7. Evaluation of government performance on Taiyuan’s environmental protection according to survey respondence d) Driven by the enhancement of both global and domestic concerns for environmental pollution and the increasing publicity of the significance of environmental protection, public awareness of pollution control and sustainable development seems to be greatly improving, especially in heavily polluted regions, such as Taiyuan. Around 80% of survey participants were willing to be involved in environment-related activities, including decision-making, publications, and other programs. More than 90% believed that enhancement of air quality and environmental improvements benefitted themselves. In general, by introducing updated desulphurization techniques and advanced mechanisms, such as piloting emissions trading projects, there have been encouraging signs of SO2 control and air quality improvement in Taiyuan during the past decade. However, monitoring data and public responses, especially those aimed at making Taiyuan‘s air quality meet the state standard in the near future, indicate that further efforts are still needed. With the increasing attention of the government and the public, environmental protection as well as the availability to the public and enhancement of relevant information, the continuous improvement of air quality in Taiyuan seems likely. However, clear evidence for adopting the market-based mechanism, as the main controlling instrument to achieve the proposed pollution abatement targets, still has not been observed in Taiyuan. 2.4 Summary The US experience and China‘s pilot programs on emissions trading both demonstrate the following advantages associated with the emissions trading system: a) it is more cost-effective than the traditional command-and-control system, as proven by the decline of the social cost on pollution control and the 43  decline of administrative costs of environmental protection; b) it has helped to achieve a more reasonable distribution of responsibility for pollution abatement; c) the sound initial allowance allocation system and establishment of emissions trading market create incentives for polluters‘ active pollution abatement; d) the timely publicity and assessment of the implementation of emissions trading scheme (Acid Rain Program) is an effective way to enhance public confidence in the trading/permit market.  44  3. Introduction of emissions trading to China’s environmental administrative system 3.1 Evaluation of the emissions trading system in terms of international experience and domestic pilot projects on emissions trading At present, there are two primary categories of environmental control policy: a) administrative control – for instance, uniform emission rate limits and environmental standards; and b) economic stimulation – for instance pollution levies and emissions trading. As one of the environmental economic policies, emissions trading, based on ―TEC‖, brings ―emission rights‖ into the market system as a special commodity, with the assumption of non-deterioration of the environment (Ren, 2006). The fundamental principle of emissions trading is to draw on market mechanisms to achieve the optimal allocation of environmental capacity. It internalizes the externality of the polluting facilities by including the cost of pollution in the production cost and facilitates the improvement of pollution control techniques for the enterprise. It also controls pollutant emissions through the scheme of TEC and reduces the administrative costs involved in resolving conflicts between continued growth and limited environmental capacity. International experience and the domestic pilot studies emissions trading have demonstrated that relative to other environmental control strategies, emissions trading has a number of advantages. These include: a) Administrative management is unlikely to achieve control of the total emi ssions, resulting in the emission amount exceeding the capacity of the local environment. Emissions trading helps control the total emissions through the optimal allocation of environmental capacity (Wang et al., 2002). Under a system of pollution charges, there is no specific upper limit for total pollutant emissions. In other words, any pollutant emission is allowed as long as it is paid for. However, emissions trading is restrictive, and pollutant emissions are compensated based on a reasonable evaluatio n of the environmental capacity. It not only provides an emissions regulation mechanism for newly developed programs and an extension or merging of existing facilities but also ensures that the total amount of pollution does not overrun the maximum allowable emission. Furthermore, the motivation for pollution control is somewhat conditioned, as the current pollution fees are generally lower than the costs of pollution control (Zhang and Hu, 2005). Under the emissions trading system, the price of the emission allowance is likely to be adjusted as transactions proceed, potentially increasing the costs of allowances as maximums are approached. As a result, the situation whereby polluters would rather pay for an extra allowance than control their pollution emiss ions tends to be avoided, eventually placing the price of emission allowances above the costs of pollution control. b) It provides a much more cost-efficient approach for attaining environmental requirements, i.e., decreasing the total cost of pollution control. The objective of TEC is to ensure the achievement of established environmental protection targets. In theory, the ceiling for the total pollutant emissions gradually decreases every period to guarantee the constant amelioration of environmental qu ality. Emissions trading is an allowance transaction within given ―emissions rights‖. Emissions 45  allowances are theoretically tradable between polluters, minimizing the total cost of pollution control among the whole society. Emissions trading benefits both sides involved in the transaction, as long as there are differences in marginal control costs between the polluting facilities (Wang et al., 2002). Polluters are also given more flexible management options. For example, facilities are likely to shut down heavily polluting programs to save emissions allowances and gain funds from transferring extra emissions allowances derived from industrial restructuring. c) It reduces the costs of environmental administration (Wang et al., 2002). According to the traditional ―command-control‖ system, administration departments need to collect and analyze considerable volumes of information, e.g., potential abatement methods for specific pollutants and marginal control costs associated with those potential abatement metho ds for individual polluting facilities, in order to frame the optimal pricing level and respective emissions standards. The determination of such marginal costs, which represent the monetary value of the physical damage of pollution and the public response to this damage, is complex. Data collection and analysis often lead to a dramatic increase in administrative costs (Ma et al., 2002). Through emissions trading, the responsibility for information collection is transferred to polluters. Hence, the central task of the administration departments becomes the establishment and maintenance of a standardized market system and verification of polluters‘ compliance with their permitted emission level, resulting in reduced administrative costs. According to the research conducted by US EDF, given the constant increase of power generation and the required 20% decline in annual SO 2 emissions based on 2000 emissions, the total cost for China‘s desulphurization, which would reach 3.1 to 4.5 billion RMB without the introduction of emissions trading. The costs are likely to decrease by 1.6 to 2.5 billion RMB through the adoption of inter-provincial emissions trading (Zhang and Wang, 2004). d) It promotes technical innovation among enterprises and improves the technical le vel of pollution control. Polluters pay more attention to technical innovation, provided that improving production or control techniques is more cost-efficient than purchasing emission allowances (Fu, 2008). Polluting enterprises with advanced techniques are able to reap profits through pollution abatement. e) It is favorable for macro-adjustment and control. The environmental administration is authorized to reasonably regulate marketable amounts of emission allowances by ratification, launch, and auction, in order to control the supply and price of emission allowances and further achieve control of the total pollutant emission. f) It provides a credible basis for determining environmental tax/levy rates. The fundamental requirement for the implementation of environmental taxes/levies is the determination of an accurate ―price‖ (i.e., tax/levy rate). The establishment of the emissions trading system provides reasonable evidence for tax/levy rates, which are difficult to set without a relevant market. g) It increases public participation and awareness of environmental protection. Emissions trading extends the range of participants of pollution prevention and control to the whole of society. Other 46  than polluters, social organizations, such as environmental protection organizations or even individuals with a desire to see pollution levels decline, are all admitted to the emissions allowances market (Xing, 2006). The purchase of emissions rights by those social groups or individuals without resale provides a major opportunity to reduce the overall level of pollution in the environment. Some environmental protection organizations in the US once collected donations to purchase emissions allowances and received positive responses. h) The emissions trading system facilitates the decline of energy and raw material consumption, enhancing resource recycling, and further creating a reasonable economic framework with a high production efficiency and low pollution level (Mu, 2008). In addition, emissions trading also accelerates the development of relevant industries (Zhang and Tu, 2002), such as the installation of desulphurization facilities that have clean energy and the manufacture of low-sulphur coal by power plants that aim to reduce SO 2 emissions. Consequently, this leads to a growth in demand for these associated products. Driven by the requirements of establishing a continuous emission monitoring system, there is continuous exploration and development of monitoring technology and a demand for relevant equipment. 3.2 Design of an emissions trading system for China In theory, the following would be necessary to establish a complete emissions trading system (Morgenstern et al., 2004): a) Subjects of emissions trading: other than polluters, governments, various or ganizations, and even individuals are all potential participants in emissions trading, as long as they are authorized by the administrative departments of environmental protection. b) Scope of pollutants involved in trading programs: one of the factors t hat can help ensure the success of emissions trading is the determination of an appropriate range of pollution sources (Xing, 2006). Emissions trading is typically conducted among homogeneous pollutants discharged from fixed pollution sources. The USA provides a good example of the development of emissions trading markets. They started with SO 2 emissions trading and then extended to nitrogen oxides and water pollutants. c) Spatial scope of the trading: The larger the area that is designated for emissions trading, the lower the total pollution abatement cost becomes for the whole society. At present, China‘s TEC is assigned to administrative districts. Local governments thus intervene in trans -boundary emissions trading. (Ellerman, 2002). China‘s administrative jurisdictions should ideally be delimited in a way that facilitates environmental management, and each should have specific departments dealing with the environment-related problems, similar to the watershed management committees in the USA. d) Trading approaches: decentralized and centralized trading are the two main approaches to 47  emissions trading. At the initial stage, decentralized trading is preferred, given the limited scale of the market. The extra emissions allowances of enterprises are tradable through public auctions or one-on-one negotiations between buyers and sellers. With the gradual establishment of new facilities with a demand for emissions allowances and increased awareness and understanding of the emissions trading system, it is likely that the number of participants will grow. As the market increases in size, a centralized trading system will gradually become more attractive. e) Agencies for emissions trading: there are various transaction costs associated with emissions trading, such as the cost of information and the cost of negotiation (Xing, 2006). The existence of transaction costs tends to counteract the benefits created by the potential cost -saving from pollution control. Transaction costs are much greater for China‘s small -scale and dispersed township and village enterprises, some of which are the primary contributors to China‘s industrial pollution. Professional agencies are therefore preferable for emissions trading. These groups could provide additional services, such as trading information, trading management, and deposit and loan of emissions allowances. f) Procedures for emissions trading (for polluters): participants in emissions trading are required to submit trading applications to the environmental administration, explaining the necessity and feasibility of the proposed trades. Environmental protection departments need to determine the tradable emissions allowance for each of the applicants in terms of the daily monitoring and further verification of polluters‘ pollution abatement ability and also need to assess the environmental benefits before and after trading. Buyers and sellers of emissions allowances need to sign transfer agreements in terms of their negotiation of the transaction allowance, transaction price, and transaction time. Following the verification and ratification of the transfer agreement by environmental protection departments, the emissions allowances and permits of the participants in the transaction need to be updated (Xing, 2006). g) Public announcements: a comprehensive public announcement system would raise market transparency and reduce transaction costs, ensuring the public‘s right to know environmental information. The emissions trading regulatory authorities in each pollution control zone need to set up information departments and should have timely public information announcements about all emission allowances and transactions. h) The plans for TEC are typically updated every five years in China and the validity period for emissions permits should be in accordance. Emissions trading would therefore be restricted to five-year periods avoiding the misuse by permit holders of environmental or emissions rights. Every polluter‘s emissions during that five-year period would have to equal or be less than their allowance. i) Legal sanctions associated with emissions trading: it would be desirable to determine the relevant legal responsibilities for actions that violated trading rules, such as private transactions and submission of false information to environmental administrations. Administrative penalties, such as 48  paying appropriate fines and revoking emission permits or operating licenses, need to be imposed on those with pollutant emissions without permits or overrunning the allowed levels. The US ―Clean Air Act‖ prescribes that an enterprise pays a fine of $2000 (adjusted annually with inflation) per ton of excess SO 2 . Currently, the transaction modes and procedures for pilot projects on emissions trading differ in the various pilot localities (Zhang and Tu, 2004). In order to achieve reductions in transaction costs and to facilitate the progress of emissions trading, it is recommended that the emissions trading system in China include the following six basic components: legislation, public in formation announcements, a monitoring and supervision system, ―TEC‖ systems, initial allocation of emissions allowances, and market-based transactions. These need to be consistent with China‘s actual situation and conditions (Morgenstern et al., 2004). (Figure 8)  Legislation regarding the emissions trading system  Environmental quality investigation and establishment of environmental protection objectives  Establishment of Objectives for ―Total Emission Control‖  Initial allocation of emissions allowances (environmental departments)  Public information announcements  Emissions allowances trading (polluters)  Guidance and supervision by environmental departments  Public supervision  Pollutant emissions  On-line monitoring  Macro-adjustment of emission allowance by environmental departments  Figure 8. A recommended emissions trading system for China  49  3.3 Potential issues with respect to the implementation of pilot projects on emissions trading in China There has been a consensus between the Chinese government and its citizens to build a resource-saving and environment-friendly society. ―Protecting the environment, facilitating the balance between economic development and population, environment, and resources as well‖ were some of the most significant objectives of China and were formally included in the government‘s ―Five-Year Plan‖. The traditional approach of ―command and control‖ used to play a remarkable role in environmental protection even though it came at considerable social cost (Guo, 2007). Because of the lack of evaluation of the effectiveness of administrative strategies and measures for environmental protection, China‘s overall environmental status remains challenging, although improvements have been observed. There is no doubt that pollution levels have increased along with China‘s dramatic economic growth. The introduction of a market-based mechanism for environmental protection has accordingly received increasing attention internationally (Ren, 2006). Driven by growing pressure for the protection of the environment and natural resources and a desire for improvements to the standard of living, Chinese society has decided that an exploration of low-cost pollution control strategies and the enhancement of capital utilization efficiency are essential. Emissions trading, with the precondition of TEC, is a policy instrument for effective emission control that is monitored by environmental protection departments. Enterprises/organizations with emissions permits are allowed to transfer or trade emissions allowances (emissions rights) according to the relevant laws and regulations. Emissions trading, as one of the primary economic policies for environmental protection and resource allocation, has been widely applied in several countries an d regions, creating remarkable economic and social profits (Xing, 2006). The core content of the pollution abatement mechanism referred to in the ―Kyoto Protocol‖, which came into effect in 2005, is to achieve the tradability of greenhouse gas emissions allowances. A series of pilot programs on emissions trading has been conducted in China over the past two decades. Theoretical feasibility studies and international and domestic experience gained from previous pilot programs have proven the effectiveness of emissions trading as an environmental administration system (Wang et al., 2002). However, various obstacles have emerged, including those related to law and regulation, administration, enterprises, and environmental protection awareness. Each situation is different, and there is no single optimal policy for pollution control. Hence, exploration and discussion of the rationale for emissions trading are of value. Based on my discussions with representatives of local environmental protection departments and polluting enterprises, institutional flaws in the emissions trading system are likely to be the ―bottleneck‖ for the implementation of emissions trading in China. a) Legal framework and foundation. There is lack of relevant laws and regulations supporti ng 50  emissions trading. At the national level, the existing ―Law of the P.R. China on the Prevention and Control of Atmospheric Pollution‖ and the ―Law of the P.R. China on Prevention and Control of Water Pollution‖ already cover the mechanism of the TEC and emissions permitting system. However, there are no specific laws and regulations on emissions trading at the national level (Wang et al., 2008). Issues, such as emissions trading rules, responsibilities and rights of trading participants, judgments on trading conflicts, and procedures for the custody of trades, have not been explicitly determined. So far, China has only the following three statutes, which propose the implementation of the market-based pollution control programs: ―The State Council on Adopting the Concept of Scientific Development and Strengthening Environmental Protection Decision‖ issued in December 2005, the ―Integrated Working Scheme for Energy Saving and Emissions Reduction‖, as well as the ―11th Five-Year Plans on Environment Protection‖ issued in 2007. Thus, it is suggested that pilot programs on emissions trading need to be further explored. Furthermore, based on emissions trading practices in local areas, the lack of an adequate legal basis is a pressing problem (Wang et al., 2008). Although there were attempts in Jiangsu and Zhejiang to constitute local regulations on emissions trading, the same is not true for most of the experimental units. A number of policies have been difficult to implement because of various contrary instruments and conflicts of interest. Consequently, there is great desire for the government to immediately promulgate specific laws, or at least relevant regulations, on emissions trading. The implementation of emissions trading is based on TEC policy, and it has been widely accepted that legislation on TEC is a critical step. The enactment of laws on both total emissions control and emissions trading at a national level is required. If not, promulgation of local regulations should at least play an interim role (Xu, 2004). The objective of ―TEC‖ is to establish a prescription on the total mass emissions of specified pollutant(s). The environmental capacity for pollutant purification is limited. Therefore, from an economic viewpoint, environmental capacity is designed as a ―limited resource‖ allocated by the market. Emissions allowances are expected to be allocated as ―goods‖ with distinct property rights (Li et al., 2006). An effective property rights system would allow the transfer of property rights between owners, who are then responsible for the associated costs and profits. However, incomplete or conflicting property rights are unlikely to facilitate the efficient operation of ―TEC‖ and emissions trading systems. China has lacked a complete property rights system during its social and economic transition period. The establishment of an emissions trading system based on the definition of private property rights will therefore not lead to the anticipated level of efficiency, particularly in terms of public ownership. Given this, the principle that owners of private property rights are responsible for the associated cost and profits is violated. Those involved in surveillance, and whose promotion or demotion mostly relies on political connections rather than achievement and performance, are not even required to take responsibility for misconduct during surveillance under public ownership (Guo, 2007). Emissions trading is therefore often not a preferred option for quite a few pollution administrators. 51  The following two relationships need to be emphasized: a) Emissions rights versus pollution control responsibilities – emissions trading provides more options for pollution control rather than exempting polluters‘ obligations for pollution prevention and control. Imp lementation of emissions trading, instead of reducing requirements for pollution control, tends to allocate emissions reductions to polluters with a relatively low marginal cost of pollution control (Chen and Jiang, 2004). b) Emission rights versus standardized emission – emissions trading, based on the objective of controlling the total pollutant emissions, has an important prerequisite, standardized emissions. Pollutant emissions are required to not only meet prescribed emissions standards but also to comply with the objective of controlling total pollutant emissions (Ju, 2007). b) Conflict between environmental zones and administrative regions The general procedure for China‘s implementation of TEC is as follows: a) the Ministry of Environmental Protection (MEP) is responsible for the allocation of the total emissions budget to the provincial level; b) provincial environmental protection departments assign respective emissions budgets designated by MEP to the sub-provincial, that is, the prefecture-level; c) environmental protection departments in each prefecture or prefecture-level cities allocate designated emissions budgets to various pollution sources (Jahiel, 1998). The whole procedure for emissions allocation, based on administrative relationships, neglects the intrinsic differentiation between ―environmental zones‖ and ―administrative region‖. In terms of the definition of ―TEC‖, ―total emissions‖ apparently do not refer to the total environmental capacity or total mass emission of specified pollu tant(s) within a specific administrative region. The definition of administrative regions is artificial, while environmental zones do not necessarily reflect administrative boundaries (Guo, 2007). Defining administrative regions in terms of historical, economic, cultural or military factors does not usually match natural environmental boundaries. For example, the whole Yangtze River Basin could be considered a single environmental zone. Administratively, however, the Yangtze River Basin covers several provinces, municipalities, and autonomous regions. Environmental capacity is always measured for a specific environmental zone, and the determination of the capacity of the environment to absorb pollutants is therefore inconsistent with the geographic units used to assess pollutant emissions. Environmental problems and conflicts require potential solutions based on specific environmental zones, such as river basins, or maritime space (Wu et al., 2006). As one of the preconditions for emissions trading, the measurement of environmental capacity or definition of environmental objectives is the foundation for determining emissions allowances. Environmental integrity requires the determination of environmental targets and the allocation of emissions allowances to be completed centrally. Even if individual environmental zones are divided into a number of parts, it is still necessary to collect data from different parts and to formulate the final result centrally for the specific environmental zone. 52  Environmental capacity for specific environmental zones is not constant (Yang, 2001). Changes in natural conditions frequently result in the alteration of environmental capacity. For example, the capacity of rivers to deal with pollutants varies with river discharge, requi ring the appropriate adjustment of allowable emissions. Without immediate awareness of these associated changes and timely actions – that is, allocating emissions allowances without taking into account fluctuations in environmental and resource capacity, over-consumption or even exhaustion of resources and environmental pollution will occur (Ma et al., 2002). The establishment of environmental administration agencies responsible for environmental zones is thus highly encouraged. In terms of relevant regulations, China‘s local environmental administration departments from the provincial level to the county level are only responsible for environmental quality within their relevant territories. In other words, none of the local environmental agencies is responsible for ―trans-boundary‖ issues. Although the jurisdiction of local environmental departments is limited to their affiliated territories, the range of environmental problems that they have to confront is typically ―regional‖, exceeding their authority. It is obvious that the inconsistency between administrative compartmentalization and naturally formed environmental zones is a factor hindering the promotion of emissions trading nationwide.  c) China‘s ongoing ―TEC‖ ―TEC‖, aimed at pollutant emission control during a given time period within a specified area, is the pre-condition of the implementation of emissions trading. In other words, TEC is the objective, and emissions trading is the measure or approach to accomplish the objective (Ma, et al., 2002 ). ―TEC‖ prescribes the upper limit of the mass emission of specified pollutant(s), defining the scarcity of environmental capacity. It also specifies polluters‘ access to environmental capacity via the allocation of the allowable pollutant emissions to individual pollution sources. Article 3 of the ―Law on the Prevention and Control of Atmospheric Pollution‖, amended in April 2004, indicates the principal requirements regarding China‘s implementation of ―TEC‖. ―The State takes measures to control or gradually reduce, in a planned way, the total amount of the main atmospheric pollutants discharged in local areas‖ (Ge et al., 2009). The effectiveness of ―TEC‖ and emissions trading are closely related. Currently, the objectives of ―TEC‖ in China are established by environmental departments based on environmental quality standards, assessment of environmental quality status, the environmental pollution situation, economic development and the technical availability in local areas. Because of the lack of an offic ial evaluation of the TEC system, the following general assessment of the practical effects of China‘s TEC is based on a group of important factors: I)  The Chinese government has just announced that it will adopt TEC as an environmental 53  protection strategy and declared its associated plan for the next five years. It did so without explicitly defining and establishing the overall objectives for TEC. II)  The accuracy of emissions data is critical for the success of TEC, as it determines the participants‘ confidence and willingness to cooperate. Today, however, the accuracy of pollutant emissions data in China is not guaranteed due to a lack of monitoring regulations, the absence of a widespread online emission tracking system, and the lack of monitoring systems for pollution sources (Ge et al., 2009).  III)  Full implementation of TEC requires the reasonable allocation of regional emissions allowances to individual pollution sources. There has not been any nationwide standard or provision regarding the allocation of emissions allowances. The general approach for the allocation of emissions allowances in China is in proportion to the total emissions from pollution sources as determined from historical data. However, because of the inaccuracy of pollution emissions data, the actual ―TEC‖ system will not attain its objectives (Ge et al., 2009).  IV) Implementation of TEC requires the explicit identification of the associated subjects and objects. The central government and environmental regulatory authorities is responsible for the determination of the objectives for pollutant emission control and for the allocation of emissions allowances to local environmental departments. Local environmental departments allocate their emission allowances to individual enterprises and facilities. Taking the ongoing TEC of SO 2 as an example, provided that it is aimed at the mitigation of acidic precipitation, polluting enterprises ought to be the responsibility of the central government rather than local governments, as acid rain is an issue that transcends regional boundaries. Enterprises are not yet required to report their emissions of SO 2 to the central government. They are, however, asked to report to local governments, which are in charge of the daily management of local emissions. Limitations associated with these measures are likely to result in a failure to meet the established objective, namely the mitigation of acidic precipitation. If the objective is to reduce SO 2 concentrations, then the central government does not need to be involved and local governments can take responsibility. Overall, the existing pollution management in China does not clearly identify the relationship between the policy objectives and the subjects (Guo, 2007). Appropriate incentives and disincentives are important components of a ―TEC‖ system (Yang, 2001). Without complete regulations on TEC and suitable incentives and disincentives, the effect of ―TEC system‖ will be limited. It is therefore not surprising that the implementation and popularization of emissions trading, which is based on TEC, has been slow to develop in China. d) Allocation of emissions permits/allowances One of the greatest concerns of the market-based trading progarm is the initial allocation of emissions allowances. This is because the initial allocation of emissions allowances not only 54  influences the financial status of individual enterprises, but because it also closely affects the gains and losses of some social groups (Li and Cheng, 2004). In other words, the potential for increasing social inequity is substantial. There are three approaches for the initial allocation of emissions allowances: a) public auctions; b) free allocation; c) fixed-price sales (Tietenberg, 2006). Although the equity and fairness of emissions allowance allocations have been improved based on experience gained from the pilot programs, a number of issues, including the lack of an explicit method for newly built facilities/enterprises to gain access to emissions allowances, the lack of specific standards to gain allowances, and barriers to the implementation of performance-based allocation of allowances at the sub-national level, remain obstacles to the full implementation of emissions trading (Ge et al., 2009). A reasonable mechanism for determining the initial market p rice of emissions rights has not been developed. During the pilot programs, considerable controversy arose over the determination of the initial price for the compensated use of an emission right, which embodies resource scarcity. An extremely low initial price does not provide the necessary disincentive for polluters. On the other hand, an extremely high initial price creates an excessive burden for enterprises (Xing, 2006). At present, the initial price for the compensated use of an emission right is join tly determined by several government departments, including environmental protection departments and the Development and Reform Commission. The participation rate for polluting enterprises, as the object of the allocation of emissions allowances, in the initial allocation of emissions allowances is relatively low, creating an impediment for policy implementation. An emission allowance has a different value to different enterprises, as the willingness to pay for the allowance varies from one enterprise to another (Ren, 2006). For those with lower marginal control costs, further pollution abatement needs relatively less investment. To bid for an emission allowance at a price that is higher than the cost of pollution control makes no financial sense. Conversel y, for those with relatively higher marginal control costs, paying for an emission allowance is profitable. As long as the bidding on emissions allowances is less costly than pollution control, such enterprises are willing to bid a higher price. Public auctions have been approved as a theoretically reasonable method for the allocation of emissions allowances (Guo, 2007). Today, however, financial capacity varies dramatically among different facilities, and the Chinese government‘s administrative ability h as significant limitations (Jahiel, 1998). Given that all emissions permits are allocated by public auctions, there is a potential for social unrest and political instability. Pollution sources, some of which perhaps are exempt from charges, are all mandated to pay for pollutant emission. An increase in cost adversely affects the competitiveness of such enterprises, which create employment and contribute tax revenue. Higher costs therefore result in increased resistance to the implementation of emissions tr ading. The free distribution of initial allowances is another widespread method for the initial allocation of emissions allowances. However, this raises serious questions over equitability, especially for new 55  industries established after the initial distribution of allowances. According to the current emissions trading pilot programs, most of which are based on historical pollutant emission data, enterprises with fewer SO 2 emissions receive fewer emissions allowances. This is unfair to those facilities that have already adopted desulphurization. The absurdities associated with this free allocation of allowances inevitably triggers mutual distrust and non-cooperation between polluting enterprises and environmental protection departments. Enterprises are likely to conceal their actual emissions, causing the loss of social benefits (Zhang and Tu, 2002). Moreover, some enterprises often look for extra emissions allowances through irregular approaches to environmental protection departments, and this potentially unacceptable behaviour can have a negative effect on those enterprises seeking to reduce their pollutant emissions. Another significant concern relates to the monopoly created by emissions allowances. A group of polluting enterprises tends to procure most of the emissions permits (Guo, 2007). If a given pollutant is an inevitable byproduct of a specific production process and one company or several companies largely owns the emissions allowances for that pollutant, then market entrance is firmly controlled by this one company or group of companies. Although the government‘s antitrust actions have been aimed at reforming such monopolies, government interventions are usually slow. One more potential consequence resulting from the geographically uneven distrib ution of emissions allowances or the potential trade-offs associated with emissions trading systems is that while there may be a nationwide decline in total annual emissions of a particular pollutant, there may be increases in particular areas. This is unacceptable for regions that are already heavily polluted. Fixed-price sales, with similar features to public auctions, face practical resistance because of two characteristics: a) the cost of gathering the necessary information for governments to determine the appropriate price; b) political and social opposition – polluters generally oppose any charges that will increase their costs (Wu et al., 2002). Both public auctions and fixed -price sales, having the objective of internalizing the externalities associ ated with environmental pollution, are abstractly effective methods for the initial allocation of emissions rights. The revenues collected from public auctions and fixed-price sales provide financial resources for governments to use in environmental protection, but the publics‘ opposition to such charges potentially counteracts these social benefits. The free allocation of emissions rights, which has been shown to have a noticeable influence on the development of enterprises, is likely to lead to the unreas onable use of environmental resources and unfair competition between enterprises. Although the free allocation of emissions allowances seems more practical and more acceptable to polluters, based on the above analysis, it is recommended that a combination of methods be used: free allocation, public auctions, and fixed -price sales, depending on the circumstances. The auction price or the price level of the fix -priced sale is expected to reflect the average social cost associated with pollution control and provide a reference for the market price of emissions allowances in the secondary market. Therefore, environmental administrations are advised to divide the annual emission allowance into three or more parts: one for the free allocation, one for the public auction, and/or others for the fixed-price sale. Some allowances may even be reserved to encourage those polluters that achieve remarkable pollution abatement by introducing 56  up-to-date techniques. e) Imbalance in regional development China‘s rapid economic development over the last two decades has created extreme imbalances in regional development. Coastal provinces are generally much more developed than inland regions, especially those in the western part of China. Driven by this economic imbalance, local governments have varied in the attention they give to environmental protection (Guo and Jian, 2006). Serious environmental pollution has emerged as a consequence of the tremendous economic growth in those relatively developed regions, resulting in a sharp decline in environmental capacity. Under the TEC system, the gradual decrease in available emissions allowances is restricting economic development in those areas (Morgenstern et al., 2004). Moreover, with the enhancement of people‘s living standards in these areas, the public‘s environmental expectations are growing. People are demanding better health and other related benefits for future generations. Consequently, governments are forced to seek the optimal approach for environmental protection. Emissio ns trading is therefore likely to be supported and facilitated by governments as it is one of the most effective measures for pollution control. In most of the less developed areas, there is still relatively greater environmental capacity. Local governments in these areas, however, are very likely to tolerate heavy polluters given that economic development, revenue enhancement, and employment generation are their top priorities (Guan and Jian, 2006). Achievement of economic objectives is an important indi cator in the performance evaluation system of local government officers and the environment has consequently suffered. f) Insufficient capacity for emissions tracking and monitoring Precise measurement, monitoring of pollution emissions, and effective surveillance and law enforcement systems are essential to any system of emissions allowances (Tao and Mah, 2009). However, currently, measurement and monitoring of pollution emissions in China is still at an initial stage. The foundation is weak, the monitoring capacity is insufficient, and the conditions are poor and unable to meet the requirements of proper supervision and tracking. These problems pose difficulties for environmental protection departments in collecting and accessing authentic emissions data for polluting enterprises. Consequently, full and effective tracking and verification of the trading situation is not achieved. This hampers the establishment of an emissions trading market (Wang et al, 2004). For example, all the subjects involved in t he emissions trading pilot programs in Jiangsu have installed an automatic online emission tracking system. However, tracking records and verification of the trading situation were not completed. One of the likely reasons for this was the inexperience of the government departments involved. Currently, problems lie in the mechanism for allocation of emissions permits and in the on-line monitoring and tracking of emissions trading. Moreover, surveillance of the emissions trading situation, as one of the essen tial components of the entire policy system, requires effective law enforcement and penalties for illegal actions. Lax 57  enforcement of laws is posing a significant risk to effective policy implementation (Tao and Mah, 2009). g) Potential size of the emissions trading market seems limited Most of the completed pilot programs looking at emissions trading in China are not pure market trading actions. They are typically directed and run by local environmental protection bureaus (EPBs) (Liu and Wu, 2003). Without the emergence of a professional agency, environmental protection departments not only make the rules but also play the role of ―intermediate‖. This trading action ostensibly is a kind of ―market behavior‖, in practice, however, it is administratively dictated and not linked to the market-price mechanism. Price leverage and competition mechanisms do not operate, resulting in artificial pricing systems for emissions trading. Thus, the trading actions do not reflect the true extent of resource scarcity. A proper market for emissions trading does not currently exist in China. It is unlikely to anticipate the future trend of emissions allowances allocation and trading prices for enterprises, which are consequently prone to reserve their extra emissions allowances for further development instead of seeking purchasers. This has slowed the development of market-based emissions trading and is the reason for the small amount of trading undertaken to date. A fundamental requirement for the establishment of an emis sions trading market and its continuous functioning is the development of market mechanisms for emissions trading that ensure that state policies can act as the incentive for the sufficient circulation of marketable emissions allowances. If the tradable emissions allowances or emissions reduction credits available in the market are insufficient, the problem of ―zero supply‖ emerges (Tao and Mah, 2009). This means that demand exists but the supply is inadequate. Major factors hampering the development of tra ding markets include: a) Unreasonable emissions reduction policies leading to most polluting enterprises being unable to make flexible decisions in the light of market circumstances; b) China‘s energy demand is growing steadily and rapidly, while the mid- and long-term objectives and policies for environmental protection, especially on emissions reductions, have not been finalized. With the lack of motivation for trading, polluting enterprises are more willing to reserve emissions allowances for their future development; c) Market segmentation is occurring as a result of local administration. This means that the platforms for emissions trading established by individual cities or provincial governments are likely to emerge as obstacles to large-scale markets for emissions trading, particularly for pollutants such as SO 2 . This is an issue affecting all regions. Currently, one of the primary factors that is restricting the popularization of emissions trading in China is the lack of a seller's market. Enterprises are not willing to sell their extra emissions permits for various reasons, such as their suspicions about policy continuity, and do not know whether or not emissions trading will be fully implemented (Tao and Mah, 2009). In China today, there is a difference between the assumptions related to the design of emissions 58  trading systems and what is actually happening. With its ongoing economic reforms, China is undergoing many transitions. The adjustments that market mechanisms create for economic activities require further improvement. One of the basic assumptions in designing an emissions trading system, which is discordant with reality in China, is that the market for emissions allowances trading is completely competitive, with plenty of sellers and buyers. However, this is not the case and there is currently no competitive market. h) Potential interactions with existing environmental policies There have already been a series of administration regulations and strategies aimed at environmental management and pollution reduction in China. Examples include pollution/emission charging/levies, sewage disposal charges (SDC), EIA, and TEC. It is necessary to identify and understand the relationship and potential interaction between emissions trading and other pol icies in order to understand its overall relationship with the environmental management system (Song, 2004). However, there has been insufficient exploration of this matter. Without an explicit evaluation of its role and function, it is unlikely to deepen pilot practices on emissions trading. Identifying and understanding the relationship and potential interactions between emissions trading and other institutions from both a theoretical and practical aspect is, therefore, a pre -condition for emissions trading and other environmental management measures to be complementary (Tao and Mah, 2009). i) Issues regarding transaction fees associated with emissions trading One of the theoretical assumptions associated with emissions trading markets is the absence of a transaction fee. This requires that participants have access to various forms of market information and have frequent transactions (Wang et al., 2008). However, in reality, transaction fees for emissions trading, including information seeking, discussions and decision-making, are appreciable. As one of the sensitive factors that could potentially influence the activity of emissions trading markets, transaction costs are likely to affect the participants‘ benefits, reduce turnovers, and even trigger the failure of emissions trading markets. One of the potential solutions to reduce the transaction fees for emissions trading is to develop information systems at national, regional or provincial levels; an alternative is establish professional agencies or cons ulting organizations that provide the necessary information services. j) Potential impact of emissions trading on pollutant discharge from coal -fired power plants Several pilot programs for emissions trading in China have involved SO 2 emissions from coal-fired power plants. Currently, there are several techniques available for SO 2 emission control in such plants. Full implementation of the emissions trading system for coal -fired power generation industry is, therefore, likely. Regarding the techniques available for SO 2 emissions control, flue gas desulfurization and circulating fluidized beds are the two that are most widely adopted in China.  59  However, problems still exist. The development and introduction of new techniques for SO 2 control are therefore a priority for the overall reduction of pollution. At present, the techniques for SO 2 control that have been adopted in most of the thermal power plants with large installed capacity in China include: a) use of low sulphur coal, b) circulating fluidized beds and c) flue gas desulfurization (Fu, 2008). The installation and operation costs associated with flue gas desulfurization, which is much more common due to the limited supply of low sulphur coal, are quite high. It is also necessary to monitor the man agement of gypsum, generated as a byproduct during desulfurization and potentially resulting in solid waste pollution unless a suitable use can be found for it. As a result, circulating fluidized beds are gradually becoming more acceptable, due in part to their low installation and operational costs. The large quantities of solid residues produced by circulating fluidized beds, however, present more of a problem than the gypsum created during flue gas desulfurization. Moreover, the reutilization of solid residues is more difficult, leading to greater challenges for the management of the residues. According to the SO 2 emissions reduction scheme framed by the central government, the annual increase in gypsum produced from desulfurization is likely to exceed 10 million tonnes (Yuan and Zhao, 2005). The generation of solid residues by circulating fluidized beds is much greater, being close to 200 million tonnes annually and growing continuously (Yuan and Zhao, 2005). The tremendous potential for the control of China‘s SO 2 emissions has been demonstrated, but the management of the solid residues/slag is becoming a new environmental problem, although it is still to arouse major concerns. Most of China‘s coal-fired power plants have little experience in the management of solid residues and slag, and all the pilot projects dealing with emissions trading are aimed solely at reducing SO 2 emissions. Investigations of the reutilization of solid residues/slag, especially those arising from the newly introduced and more efficient techniques for SO 2 control, lack sufficient recognition and support. It is also necessary to assess the relevant environmental impacts of the various desulfurization techniques so that the most appropriate techniques can be adopted and so that the waste and residues can be properly accounted for. Last but not least, the control of the solid residues/slag created from desulfurization will not be possible simply through emissions trading systems. Administrative regulations will be necessary. Summary for 3.3 So far, emissions trading pilot programs in China have only been aimed at solving specific problems. They act merely as a supplement for existing strategies and have limited participation and little influence on overall practices. Without the official evaluation and promotion of the pilot programs, emissions trading has not been formally developed as one of the policies for China‘s pollution control, even though there have been some local regulations on emissions trading. Moreover, most of the emissions trading pilot programs are arranged and authorized by government units during specific time periods. This administrative system, which is similar to the existing command -control mode, is one of the reasons slowing down the extension of emissions trading pilot programs. The 60  next step in the popularization of emissions trading in China is to increase the awareness and understanding of decision-makers of emissions trading as an economic measure with great potential. Another is to mobilize industrial initiative by reducing government participation and gradually expanding the influence of emissions trading. One factor of considerable significance for the successful introduction of emissions trading is cost saving, i.e., adopting more cost-efficient control measures. At present, however, environmental administrators in China are largely concerned about pollution abatement regardless of management costs. Discussions with local environmental staff indicate that only 25% of environmental managers consider cost efficiency to be of major concern. In addition, China‘s emissions trading is still at a pilot stage, having no policy transparency, equity, or stability, all of which are very important. Quite a few enterprises worry that any emissions allowances that t hey purchase may lose value in the future. There are also concerns over the ethics and morality of emissions rights. Tradable emissions allowances, regarded as emission rights, arouse the opposition of environmental groups and non-governmental organizations (NGOs). Enterprises are therefore afraid to compromise their public standing by purchasing emissions rights. To sum up, obstacles for the implementation of emissions trading in China mainly relate to: a) a lack of basic laws and regulations; b) conflicts between environmental zones and administrative divisions; c) problems associated with TEC; d) issues regarding the allocation of emissions allowances; and e) the establishment of an emissions monitoring system. If the objective of the full implementation of emissions trading in China is to be achieved, a number of steps need to be taken: a) the national legislature should  enact uniform laws and administrative  regulations; b) regional governments should establish environmental management agencies that are in accordance with environmental zones; c) specific provisions for the allocation of emissions allowances should be constituted, and incentives and disincentives associated with the implementation of TEC and emissions trading should be introduced; d) a precise and reliable emissions monitoring system should be established; e) the regulatory functions of market mechanisms in China‘s economy should be strengthened by accelerating the reform of the economic system; f) the advertisement and propagation of emissions trading needs to be intensified so that both government officers and the public are able to better understand the benefits associated with emissions trading as an environmental management measure and so that they will be more likely to actively participate in environmental protection, especially in facilitating emissions trading. 3.4 Recommended solutions for the problems and potential obstacles associated with the implementation of emissions trading in China In terms of both the international and domestic experience, the emissions trading has been suggested as one of the most effective measures to reduce emissions economically. The pressure to reduce China‘s pollutant emissions requires the introduction of emissions trading systems to achieve TEC, 61  to facilitate the management of pollutants, to minimize the social costs of pollution abatement, to promote enterprises‘ independent pollution control and technique upgrades, and to establish long-term mechanisms for energy saving and pollution abatement. Moreover, emissions trading also provides a mechanism for China to deal with climate change. An important aspect is that the development of any trading system must be compatible with the special situation of China. a) Facilitating the development of emissions trading The appropriateness of policies for emissions trading must be demonstrated by piloting practices in designated areas. These policies must then be extended to a larger scale based on the experience gained from the pilots. With TEC as an objective for the period of ―11th Five Year Plan‖ and the upcoming period of ―12th Five Year Plan‖, emissions trading pilot practices should focus on SO 2 emissions from the power industry (Wang et al., 2008). The power industry, accounting for more than 50% of China‘s SO 2 emissions, is the fundamental source of gaseous pollution and acid precipitation. The power industry also has the pre -conditions for the effective reduction of SO 2: a) it uses coal with significantly different contents of sulphur; and b) the differences in the marginal costs of SO 2 pollution abatement between power plants are considerable (Song, 2004). The differential costs of pollution control would provide the primary incentive for emissions trading in the power industry. A pilot study of emissions trading in the power industry is strongly recommended, and should have the dual objectives of compelling power plants to decrease their emissions and eliminating the problems caused by the development of power generation development at a time of limited availability of emissions allowances. The Ministry of Environmental Protection (MEP) and MOF (Ministry of Finance) have finalized the pilot projects for SO 2 emissions trading in the power industry (Wang et al., 2008). It is now necessary to issue an ―administrative measure on SO 2 emissions trading for power industry‖ as quickly as possible, and to strengthen both the policy implementation and its supervision. Through a better understanding of the mechanisms of emissions trading and the growing experi ence of the appropriate institutions, it will be possible to extend the scope of emissions trading to other industries that emit SO 2, including the chemical engineering, building materials, and steel production industries. The feasibility of extending emissions trading to GHG, renewable energy resource allocation, and natural reserves allocation should also be examined. Other than dealing with air pollution, emissions trading could be extended to the abatement of water pollution, and a number of international examples may help this (Song, 2004). As a starting point, COD emissions trading could be developed in the Taihu Basin in Jiangsu and Zhejiang Provinces, where there is a relatively solid foundation in pollution control. With the accumulation of management experience and the maturity of management mechanisms, trading systems could also be extended to other water pollutants, such as nitrogen and phosphorous. Eventually, all drainage basins in the country are expected to be covered by trading systems.  62  b) Strengthening the establishment of the ―seven primary systems‖ for emissions trading There are many factors affecting the development of emissions trading in China. Examples include the constitution of appropriate laws and regulations, the equitable all ocation of emissions allowances and the development of efficient trading mechanisms in the trading market, the interactions and linkages between various control measures, the capacity for surveillance and law enforcement, and capacity building amongst administrative and technical staff (Fu, 2008). Establishment of seven primary systems, outlined below, is also suggested: i) Exploration and development of the support systems needed for policy implementation There are still considerable technical problems associated with emissions trading (Wang et al., 2008). These technical problems are directly affecting the effectiveness and equity of policy implementation. Consequently, methods are needed to develop efficient trading mechanisms and pilot programs. Problems requiring solutions include: 1) procedures and approaches to ensure equity and fairness in the initial allocation of emissions allowances; 2) a mechanism to determine the initial price of emissions allowances; 3) determination of penalties associated with non-compliance; 4) schemes for effectively linking emissions trading to relevant institutions and policies, such as TEC, pollution levies, air quality standards, and emissions permits; as well as 5) establishment of a market or platform for emissions trading (Zhang and Wang, 2004). It is widely believed that that the construction and continuous improvement of technical supporting systems is the foundation for facilitating and exploring pilot programs at both national and local levels. ii) Determination of the allowable level of pollutant emissions, required as the basis for emissions trading The determination of environmental capacity, based on monitoring data concerning environmental quality and knowledge of the spatial distribution of specific pollutants, is complicated and requires considerable research (Yang, 2004). The environmental administration needs more technical input to determine the allowable emission amount for given areas in terms of local economic development and pollutant characteristics. The system and regulations for total pollutant emissions and allowances allocations must also be framed. Apart from establishing the objectives of TEC for individual facilities, constituting a legal system for ―TEC‖ is an important step in fulfilling environmental objectives. Existing laws and regulations need to be supplemented by specific measures for the administration of pollutant emissions. These measures include: a) confirming the detailed scheme for TEC, which involves the allocation of emissio ns allowances and punishments for exceedances; b) confirming the scheme for data collection and inventory of emissions, which will involve a system of emission declaration, registration, and ratification; c) confirming TEC objectives for specific industries; and d) establishing emissions tracking systems, which will involve the development of emissions monitoring and tracking systems (Liu and Wu, 2003).  63  iii) Establishment of a reasonable allowance allocation system, ensuring the effectiveness of initial emissions trading Equity in the initial allocation of allowances in the primary market, directed by government departments, is essential and a pre-condition for the effective operation of emissions trading (Wang et al., 2004). Appropriate policies are needed to regulate the emissions allowances in the primary market. The division of responsibilities between the MEP and local EPBs needs to be determined. There is also a need to define the conditions, procedures, and time limits for the collection of emissions allocations. The initial allowance allocation is suggested to be based on performance. (Wang et al., 2008). Newly built and existing enterprises need to be distinguished and dealt with separately, and any emitters that are bankrupted need to return their issued allowances. As the TEC program should be based on a five-year period, the validity of the emissions permits is theoretically five years. Full payments and payment by installment for allowance transactions are recommended to be both acceptable. Earnings from auctions of emissions allowances should be managed jointly as a special fund used for the exploration and development of renewable resources, thus enhancing energy utilization efficiency. With a reasonably designed mechanism, the allocation of emissions allowances are likely to be continually improved, and openness, fairness, and justice will be achieved. Also this will all help prevent potential corruption during the allocation of emission allowances. iv) Activation of the market system for e missions trading The determination of the total amount of emissions that will be permitted, and the allocation of the allowances, are only the first two steps in the process. The emission rights then need to be reallocated among the enterprises responsible for the pollution abatement via the emissions trading market (Ma et al., 2002). Consequently, implementation of emissions trading is the only way to catalyze the market‘s full effect on the allocation of environmental capacity. To establish an efficient market for emissions trading, attention needs to be given to the following: a) newly built enterprises should be allocated emission allowances from the trading market or from the government‘s reserve; b) the trading price should be determined primarily by the self-adjusting mechanism of the market, perhaps with limited guidance from the government; c) trading rules should be established to prevent price monopolies; d) a system needs to be established to track allowance transactions; e) specific attention should be paid to trans-boundary allowance transactions, so as to prevent the emergence of ―hot spots‖; f) local environmental protection departments should be responsible for any subrogation of emissions rights/allowances, and these need to be approved b y the Ministry of Environmental Protection to ensure that there is no misapplication or illegal subrogation of emission rights; g) enterprises that exceed their emission allowances need to be  64  punished; and h) financial and tax policies should encourage ent erprises to pursue profit maximization through the trading of emissions allowances. v) Establishment of a legal and regulatory system for emissions trading The constitution and continual improvement of relevant laws and regulations is a fundamental ste p in emissions trading (Zhang and Tu, 2002). Several primary laws, including the ―Environmental Protection Law of the P.R. China‖, the ―Law of the P.R. China on the Prevention and Control of Atmospheric Pollution,‖ and the ―Law of the P.R. China on the Prevention and Control of Water Pollution‖, need to be amended to include emissions trading. In the ―Law of the P.R. China on the Prevention and Control of Atmospheric Pollution‖ and the ―Law of the P.R. China on the Prevention and Control of Water Pollution,‖ there is only a general prescription about emission permits, and they lack detailed provisions for emissions trading. To enhance emission control, laws and regulations must be amended to cover the items, such as emissions trading monitoring and tracking, the special fund collected from the auction/sale of emissions allowances, and the rights and responsibilities of concerned government departments and enterprises. vi) Improvement of the monitoring and administrative system for pollution sources, and the strengthening of the supervisory capacity for emissions trading in pilot areas and industries (Morgenstern, et al., 2004; Wang et al., 2002) Full implementation of emissions trading requires the strengthening of the monitoring and supervisory capacity for pollutant emissions. Improved supervision will force enterprises to enhance their online monitoring facilities for detecting various pollutants. Given the complexity of emissions trading, the establishment of appropriate information systems is necessary. The infrastructure needs to include facilities to administer the emissions a database of pollution sources, information for the management of the allocation of emissions allowances, a system for pollutant emissions tracking and checking, account management for emissions trading, and an emissions inventory system. The emission tracking system (ETS) and allowance tracking system (ATS) are typically used for information management in emissions trading programs The ETS provides the management of the emissions database (Song, 2004) (Figure 9). Environmental protection departments are able to supervise the actual emissions from pollution sources through the emissions tracking system. All pollution sources involved in emissions trading programs are required to install a continuous emission monitoring system (CEMS). Data collected by the CEMS are processed by individual enterprises and transmitted to the central computer center in the local EPB. With the data acquisition and handling system (DAHS), polluting fac ilities submit both the electronic version and a hardcopy of monthly or seasonal emission reports to the local EPB where they are archived. The hardcopies of emission reports have to be signed by pollution enterprises. 65  One of the responsibilities of the MEP is the audit of emissions data. Periodic assessment, which might involve hands-on sampling and calculations based on the types and amount of materials consumed, is needed to track the performance of emissions monitoring devices and systems.  66  Pollution sources participating in emissions trading program (e.g., power plants)  Continuous Emission Monitoring System (CEMS)  Data Acquisition and Handling System (DAHS)  Local EPB  Emission Audit  Emission Tracking System (ETS)  MEP  Allowance Tracking System (ATS)  Figure 9. Emission tracking system  The ATS, which records the emissions allowances granted by environmental departments to individual polluters, exchanged in trading markets, or purchased at auctions, is very similar to a banking system. The ATS not only provides environmental departments with an automatic and effective supervisory instrument for emissions transactions, including the timely notification of changes in trading markets, the promulgation of administrative regulatio ns, and details of the distribution of allowances, but also allows participants of an emissions trading program to search the potential opportunities for transactions. The ATS typically posts information on initial allowance allocations, participants‘ possession of allowances, detailed information on allowance transactions (e.g., time, allowance exchanged), and the polluters‘ willingness to sell or purchase allowances.  67  Emission Tracking System  Application submission  Enterprises  Initial allowance allocation  Allocation  Trading account establishment  Application submission for allowance transaction Local EPB and MEP  Allowance transaction Qualification verification  Allowance transfer  Allowance audit  Actual emission  Environmental target  Figure 10. Structure of the allowance tracking system  vii) Improvements to the law enforcement and supervision system for pollutant emissions (Morgenstern et al., 2004): Strong and effective law enforcement and supervision provide the fundamental institutional assurance for the implementation of emissions trading (Chen and Jiang, 2004). Without effective law enforcement and custody, the regulation of emissions trading activities is unlikely to be achieved. It is therefore advisable to increase the cost associated with illegal behaviour by having 68  rigorous examination and approval procedures for allowance trading, intensified examinations, and strictly applied punishments and legal sanctions for infringements. Incentive mechanisms, such as tax mitigation or refunds and compensatory funds or subsidies, are effective as means to gain the acceptance of polluters. For emissions trading, the expectations of vendors and purchasers in trading markets may differ substantially. Purchasers with a relatively higher marginal cost of p ollution control will seek emissions allowances in order to avoid penalties for exceedances. Vendors typically do not have an urgent need to conduct trades, as their extra allowance represents an intangible asset with great appreciation potential. This dis crepancy may result in the inactivity or even failure of trading markets. Consequently, the environmental administration must frame adequate incentive mechanisms in order to promote the sales of emissions allowances. 3.5 Observations on the constitution of China’s emissions trading system 3.5.1 Basic requirements/conditions for developing emissions trading in China The effective operation of an emissions trading mechanism requires a series of basic conditions: a) pollutants involved in emissions trading have to be suitable for TEC policy. They should be homogeneously mixed pollutants, such as SO2 or Greenhouse Gases (GHG); b) for specific pollutants, there must be a definite and appropriate TEC objective and range (spatial, temporal and industrial) for emissions trading; c) the allocation of emissions allowances needs to be reasonable, equal, and fair, and the emission allowance needs to be tailored to specific pollution sources; d) an emissions tracking system and a trading management system must be est ablished; e) special laws and administrative regulations with respect to TEC and emissions trading are necessary for implementation of this market-based mechanism; and f) emissions trading policy needs to be compatible with existing, related environmental management systems, such as a pollution levy system (Song, 2004). 3.5.2 A two-level market for emissions trading The two-level market for emissions trading is composed of: a) a primary ―market‖ (platform) for the reasonable and equitable allocation of emissions allowances; and b) a secondary market for the free trade and circulation of emissions allowances (Wang et al., 2008). For the purposes of fulfilling a total emissions objective and for equitably allocating initial emissions rights, the allocation of emissions allowances is the primary step of the emissions trading system and is led by government (Xiao et al., 2002). The property rights for environmental resources lie with the state, and initial granting and assigning of emissions rights should, in theory, be compensated. In other words, enterprises should pay for the initial emissions rights. Based on the operation mode of the primary market, the responsible body in charge of the allocation of emissions rights should be the environmental protection department. Considering the regional disparities in environmental capacity, the allocation schemes should be jointly framed by state and local 69  environment regulatory authorities. Existing enterprises and newly built plants need to be treated differently, and bankrupt entities should return their emissions rights. Allocations should be based on historical emissions data or general performance, and the term for allowance holders should be five years, in accordance with the five-year periods of the TEC scheme. Funds collected from the allocation should be managed as a special fund for environmental protection and used to support the administrative costs, exploration and development of renewable resources and emissions reduction technologies. The secondary market involves the free circulation of emissions allowances. It aims to increase the efficiency of emissions reductions and reduce the social costs of pollution control (Ellerman, 2002). Entities involved in the secondary market are primarily polluting enterprises, namely those that are allowed to trade freely in compliance with trading regulations and market principles. New participants to the emissions trading system, such as newly-built enterprises, are advised to gain their allowances from the secondary market or from the government‘s reserve of allowances (Ellerman, 2002). The trading price is typically regulated by the market itself, under the direction of the government. A trading monitoring system, as one of the essential components of emissions trading, must have platforms for emissions monitoring and the tracking of allowances. All participants of an emissions trading scheme need to establish emissions monitoring and tracking systems. State and local environmental protection departments must have custody of and trace both the emissions and the allowances of the various polluters to ensure that measurements are accurate and reliable. Incentives to encourage enterprises to participate might include tax reductions associated with the selling of allowances. 3.5.3 Government’s roles and responsibilities in China’s emissions trading, focusing on SO 2 The role of the government in emissions trading generally includes the establishment and improvement/updating of objectives of ―TEC‖ and emission standards, the reasonable allocation of emissions allowances, the collection of monitoring data, the release of transaction information to the public, the implementation of prescriptions regarding allowance transactions, the surveillance and documentation of trading activities, and the macro-regulation of trading markets, such as the provision or withdrawal of allowances (Wang et al., 2008). One of the basic objectives of the emissions trading system is to accomplish the optimal allocation of environmental capacity through market mechanisms. The government should not intervene in the market operation, but adjustment and control of the emissions trading market by economic measures may be necessary. Government units should regulate the market price of the allowances t hrough periodic auctions or procurement of partial emissions allowances. Surveillance and guidance from the government is important for emissions allowances transactions. Through monitoring of the actual pollutant emissions, the market system will be promoted, avoiding any potential monopolies or unwarranted price increases, by punishing exceedances, and encouraging active participation in emissions trading through the allocation of extra allowances.  70  3.6 Feasibility analysis of implementing emissions trad ing in China Over the past decades, the primary ideas about China‘s environmental protection have gradually transformed from ―Concentration Control‖ to the ongoing ―TEC‖ (Li et al., 2006). Concentration control focuses on the control of the concentration of pollutants discharged from pollution sources based on national emission standards for pollutant concentrations (Wu and Li, 2008). The emission-concentration standard was also one of the basic assessment standards for most of China‘s environmental administrative policies, including the ―Pollution levy system‖ and ―Environmental Impact Assessment‖ (EIA). The TEC is a relatively newly-introduced environmental administrative system in China, aimed at controlling the total amount of emissions from polluting f acilities within specified areas during a given period time. Concentration control standards generally prescribe the allowable instantaneous emission concentration, such as upper limits of allowable emission concentrations, upper limits of allowable emission rates, and so on. Without provisions on allowable time periods, the concentration control of pollution sources is incomplete. The TEC, which aims to control the total emissions from polluting facilities, covers the concentration control of pollution sources and has an all-around control of pollution (Song, 2004). 3.6.1 Structural pollution has not yet been transformed China is currently experiencing its most rapid economic development, with an annual GDP growth rate of approximately 8% to 9%. According to official statistics, the contribution of industry to China‘s economic development was 40% to 50% over the last two decades (Li et al., 2006). The high-speed development of industrialization, which is one of the primary contributors to the increase in various pollutant emissions, is obviously the fundamental driver of the dramatic economic growth. A sudden transformation of the emissions from China‘s current industrial structure is, therefore, unlikely. Prevention and control of industrial pollution will remain an important aspect of environmental protection in the coming decades (Wu and Li, 2008). Confronted with such serious challenges, including the need to achieve total control of pollution at low cost, the existing administrative system for environmental protection in China will find it very difficult to reverse the trend of environmental deterioration. It is therefore important to seek new environmental management countermeasures to balance rapid economic development with environmental improvement. 3.6.2 Feasibility analysis of establishing an emissions trading system in China A) Comparison between a pollution levy system and an emissions trading system From an economic point of view, environmental protection can be clearly related to economic s. Human activities associated with environmental utilization and protection depends primarily on 71  economic benefits (Ju, 2007). The basic objective of environmental protection is to eliminate the disparity between the private and social costs associated wi th environmental utilization and protection. Traditional administrative measures associated with pollution charges are aimed at addressing the need for environmental protection. Fees collected from polluting facilities by environmental departments theoretically should be equal to the loss and damage to the whole of society resulting from the emissions. China‘s pollution levy system, based on the polluter-pays principle, has been implemented for over 20 years, with the objectives of encouraging reductions in emissions and funding pollution control measures and environmental restoration (Chen and Jiang, 2004). The introduction of a pollution levy system has played a significant role in environmental improvement and resource conservation in China. The system, h owever, faces limitations and problems due to the complexities and peculiarities of China‘s situation. The widespread occurrence of environmental deterioration associated with pollution strongly suggests that either the levies are insufficient or that the funds that are being raised are not being used effectively to ameliorate the environmental damage. A-1) Comparison of internal incentive mechanisms associated with pollution levies and emissions trading Under the pollution levy system, it is unlikely that polluting facilities have further incentives to reduce emissions as long as they meet the emissions standards prescribed by environmental departments. Under the emissions trading system, polluters are authorized to sell extra emissions allowances or reserve extra emissions allowances for future use, provided that they have invested in pollution control (Ellerman, 2002). When motivated to participate actively in pollution control, enterprises develop appropriate control mechanisms and the government trans forms to be the supervisor and rule maker for the emissions trading markets. As a result, pollution control evolves from government regulation to independent market behaviour amongst the enterprises. A-2) Comparison of functions on resource allocation between pollution levies and emissions trading Due to the difficulties in determining the social costs associated with pollutant emissions, the standards for pollution levy have been found to be relatively low, resulting in a notable disparity between private and social costs (Liu and Wu, 2003). Many polluters therefore choose to pay the pollution fees rather than control pollution, so the effective control of environmental deterioration is unlikely to be achieved. It is unlikely that the pollution levy rat e will rise in the short term. However, if the objective is TEC, then it is necessary to periodically update pollution levy rate, as there has been a dramatic increase in the number of new facilities, especially small -scale township and village enterprises, during China‘s recent period of rapid economic growth. As there is no systematic monitoring system for pollutant emissions from small-scale polluters, it is difficult to form a complete picture of the emissions and their dynamics (Xing, 2006). This makes any adjustment of pollution levy rates difficult.  72  In an emissions trading system, the unit price of emissions is determined by the emissions allowances transactions between various polluters with different pollution abatement costs. This results in the minimization of the social costs of pollution control (Song, 2004). The determination of the market price of the emission allowances involves a process of optimizing resource allocation and assigning pollution control responsibilities. As a dominant administrative measure for environmental protection, the pollution levy system is mainly focused on the control of individual polluters, without complete consideration of local environmental capacity and total pollutant emissions. Even if all of the polluting f acilities meet the emission limits, the total pollutant emissions tend to increase, driven by the growth in the number of enterprises. Ultimately, this results in environmental deterioration. Since the implementation of the pollution levy system in the 1980s, slight environmental improvements have been observed in some parts of China. The emissions of primary pollutants, however, are still growing, leading to continued environmental degradation. The pollution levy system is being gradually transformed into a fund-raising method for local environmental departments. The original intention of environmental protection is thus not being achieved. For example, in 2000, 5.79 billion RMB was collected from the pollution levy system, and the total wastewater discharge and total SO 2 emissions were 41.52 billion tonnes and 19.95 million tonnes, respectively. In 2003, the funds collected rose to 7.31 billion RMB, while the total wastewater discharge and total SO 2 emissions reached 46 billion tonnes and 21.59 million tonnes, respectively (Fu, 2008). During those three years, the revenue generated by pollution levy increased by 26.3%; however, wastewater discharge and SO 2 emissions grew by 10.8% and 8.2%, respectively. The pollution levy system, while creating revenues, is clearly not resulting in reductions in total mass emission of pollutants. Although China has had tremendous economic development recently, investment in environmental protection remains limited (Guo, 2007). Most of the existing environmental managemen t systems do not incorporate the idea of decreasing the costs associated with pollution control. The high costs of pollution abatement not only result in the increased costs for enterprises but also influence their progress towards pollution control. China is improving its specific market economy system. Applying market -based principles to optimize environmental and resource allocation is one of the important measures for environmental quality improvement and the mobilization of incentives for enterprises to participate in environmental protection (Wang et al., 2004). Environmental administrative reform is therefore likely to be most effective through adjusting the economic benefits obtained by enterprises. The introduction of an emissions trading system, with the objectives of improving the efficiency of financial investment and the efficiency of resource utilization, seems inevitable if economic development is to be balanced with environmental protection.  73  B) Coexistence of emissions trading and pollution levy (Wang et al., 2002; Ellerman, 2002) A market-based emissions trading system is distinctly different from the existing pollution levy system, which is based on the traditional ―command-and-control‖ mechanism. The comparison also leads to a subsequent question: would a pollution charge system still be needed when introducing an emissions trading system? The following three scenarios are proposed for further exploration: a) implementing emissions trading without a levy system, with pollution sources be ing required to pay a compensatory fee in return for their emissions allowances; b) implementing emissions trading without the levy system, with the free distribution of emissions allowances; c) the two mechanisms together. In a hypothetical example, it is assumed that there are three pollution sources, A, B, and C, with parallel magnitude and similar pollutant discharge. The average social cost associated with SO 2 reduction is $200/tonne. The situations associated with the three pollution sources are lis ted in the following table: Table 10. Hypothetical case A  B  C  Total  Amount of SO2 emitted  1500  1000  800  3000  SO2 reduction cost per tonne ($)  220  200  180  Emission allowance  1000  1000  1000  Average  200 3000  A‘s emissions allowance is lower than its actual emissions, B‘s emissions allowance is equal to its pollutant discharge, and C‘s emissions allowance is greater than its emissions (Table 10). The first scenario: implementing emissions trading without the levy system, and pollution sources are required to pay a compensatory fee for gaining their emissions allowance. It is assumed that the cost of each allowance is (x). The lower limit for pollution source C to sell an allowance would be x, and the upper limit of pollution source A to purchase an allowance would be $220. When considering transaction costs, which are assumed to be y, the price of the allowance exchanged between A and C would fall within the range (x+y, 1200 -y). A is likely to set up abatement facilities or reduce production, provided that purchasing the emissions allowance is not too costly. Provided that C‘s emission is 800 units, and there is no buyer for C‘s surplus allowance, the cost for each unit of pollutant emission for C would be 1.25(x). If C‘s pollutant emission is 100 0, the cost for each unit of pollutant emission would decrease to 1(a).  74  Advantages: i) The environmental administration in charge of the allowance allocation would gain $ (a*3000), which could be applied to pollution abatement and control. ii) There are incentives generated for polluting facilities with low abatement levels to reduce pollutant emissions. Disadvantages: i) The existence of a compensatory fee (x) and transaction cost (y) will curtail the potential range of allowance transactions. ii) For pollution sources with pollution control costs equivalent to the average social pollution control cost, there would be nearly no incentive for further pollutant abatement actions. iii) For pollution sources with high pollution abatement levels, there is l ikely to be an incentive to increase the discharge of pollutants. The second scenario: implementing emissions trading without the levy system, and free distribution of emissions allowances to individual pollution sources. Due to the free allocation of emissions allowances, the potential range for the price of allowances exchanged between A and C is (y, 220-y). Advantage: The potential range of exchange prices is relatively extended, facilitating the awareness of the participants in emissions trading of the benefits associated with allowance transactions. Disadvantages: i) There are difficulties in collecting pollution control funds if the relevant budget is limited. ii) Polluting facilities are likely to seek various approaches affecting the decisio n-making associated with the allocation of allowances. This will result in an increase in administration costs. The third scenario: coexistence of emissions trading and pollution levies. The allowances are distributed without charge, and charges are made for actual pollutant emissions. Thanks to the free allocation, the potential price range for the allowances exchanged between A and C would be (y, 220-y). An acceptable decision on pollution fees would motivate polluters to improve their pollution abatement techniques. The greater the potential emission abatement resulting from the technical upgrade, the more polluters would save. The pollution charge system would be acknowledged as one of the drivers of innovation in pollution abatement techniques. Pollution charges can facilitate the enhancement of the enterprises‘ economic efficiency. The production costs per unit decrease due to technical improvements. The decline in emissions is also likely to result in a drop in the marginal pollution abatement co st. 75  Under the TEC system, the integration of emissions trading and pollution charges is expected to generate funds for pollution abatement and to compensate environmental degradation. Advantages: i) The price range of potential transactions is extended. ii) All participants in emissions trading are encouraged to reduce pollutant discharges, as long as the levy rate is decided appropriately. iii) The revenue collected from the pollution charge system is the potential funding source for pollution control and the establishment of environmental improvement programs. iv) There is a decline in the total social cost of pollution abatement. Disadvantage: Integration of the emissions trading system and the pollution charges system could raise administrative costs. To sum up, according to these hypothetical scenarios, it is inadvisable for the emissions trading system to completely replace the pollution charges system, and the integration of the two systems would generate greater benefits. 3.6.3 Feasibility of establishing a SO 2 emissions trading system in China It is anticipated that China‘s economy will increase twofold and fourfold from its 2000 level by 2010 and 2020, respectively, and that there will be a concomitant rise in energy demand and consumption (Dudek et al., 2007). Power generation and consumption have increased dramatically over the past two decades, with an annual average increase of over 8%. The per capita power consumption is projected to rise continuously as per capita income increases. China, currently the second largest energy consumer in the world, is likely to become an economic leader within the next five years, overtaking the United States. China‘s energy demand by 2030 may account for 20% of the world‘s total demand (Dudek et al., 2007). China has abundant coal reserves, and coal is the major source of its energy supply. China will account for approximately half of global coal production by 2030 (Song, 2004). As one of the three largest regions in the world polluted by acid rain, C hina‘s precipitation acidity, which was stable during the 1990s, has shown an upward trend since 2000. The average concentration of sulphate and nitrate in precipitation has risen 12% and 40%, respectively, since 2000. As coal will remain the core energy source in the near future, emissions of pollutants from coal combustion, such as SO 2 and nitrogen oxides, will remain high and could increase if appropriate abatement technologies are not introduced (Yang, 2004). Although the existing countermeasures introduced to reduce SO 2 emissions have slightly improved 76  air quality in China, an environmental administration strategy that is able to facilitate pollution abatement while being cost-effective is needed (Chen, 2007). International experience has shown that an emissions trading system would be a much more cost-effective and sustainable way for SO 2 reduction, as it would provide a market-based mechanism to supplement the existing control strategies. Consequently, an emissions trading system has great potential to alleviate China‘s acid precipitation. There is also a series of advantages for China to develop a national trading scheme for SO 2: a) a large proportion of its SO 2 emissions comes from point sources (e.g., power generation plants) that are relatively easy to monitor; b) both international and domestic pressures are encouraging the central government to realize the significance of its commitment to SO 2 emissions abatement; c) China has learnt much from a series of market surveys and pilot SO 2 emissions trading projects, indicating that there is distinct variation in the marginal costs of pollutant abatement among polluters; d) through international cooperation, such as the SO 2 emissions trading pilots conducted by the Asian Development Bank and Taiyuan go vernment and the Sino-US (US EDF) cooperative program on emissions trading at the provincial and city level, China has collected valuable information on the effective implementation of SO 2 emissions trading; e) experience has demonstrated that for large-scale enterprises with relatively lower monitoring and supervisory costs, the adoption of an emissions trading system is the most appropriate way forward. A combination of a mandatory process of shutting down low-efficiency power generation and the introduction of SO 2 emissions trading to China‘s top 10 power generation corporations, which consume more than 20% of China‘s coal production, is likely to have a significant impact on SO 2 emissions abatement and the mitigation of acid precipitation in China (Song, 2004). Since China started its 11 th ―Five-Year-Plan‖ in 2006, pilot projects for a domestic emissions trading scheme have been pursued in 12 provinces. Local regulations and administrative measures at the provincial level have been enacted in Beijing, Shanghai, Tianjin, Guangdong, Jiangsu, and Zhejiang, and three platforms for environment exchanges have been established, in Beijing, Shanghai and Tianjin. China started drafting the ―Administrative Regulation for SO2 Emissions trading in Power Sector‖ in 2008. The newly revised ―Law of the People‘s Republic of China on the Prevention and Control of Atmospheric Pollution‖ has now identified the legal status of emissions trading. More than 3000 power plants have established online monitoring systems for the ir desulphurization facilities. Also, in terms of the TEC program, China has established the target for SO 2 reduction by 2010, meaning that a national emissions cap has been finalized. They have allocated total emissions allowances to individual provinces. When the trading scheme is ready, polluting enterprises will be required to participate in the emissions trading system in order to achieve the proposed objectives on pollution abatement.  77  Summary Currently, China is still facing considerable difficulti es over the compensated use of emissions allowances and emissions trading mechanisms. When integrated with the knowledge gained from experiences outside China, the pilot programs should achieve major breakthroughs in the near future, particularly during the current period of economic reform and transformation. If based on a reasonable implementation procedure, the establishment of China‘s emissions trading system should be completed between 2015 and 2020. The basic idea is to benefit from the advantages of the market system, under the guidance of governments. Administrative departments will need to support the emissions trading system, and enterprises are being encouraged to update their techniques of production and pollution control, and to develop and improve their awareness of environmental protection. With the improvement of the trading system, emissions trading between different industrial sectors and between different regions could be introduced to further adjust the industrial structure of the countr y. In addition, the total pollutant emissions need to be gradually reduced, with the objective of improving environmental quality. The implementation of both emissions trading and a pollution levy system will need to comply with the planning of social development – applying a discriminatory levy system to various functional zones, including natural reserves, tourism areas, commercial areas, residential areas, as well as industrial areas.  78  4. Discussion and conclusion Throughout the world, rapid industrial development creates not only wealth and welfare but also pollution. China is no exception. During the long course of human development, people have suffered many environmental disasters, most of which are due to anthropogenic factors, particularly since the initiation of the second industrial revolution in the 1870s. Tragic events, such as the SO 2 smog in London and the photochemical smog in New York City during the 1950s, the outbreak of Minamata disease in Minamata city in Kumamoto prefecture, Japan, and the Donora smog disasters in the USA, have caused serious ecological damage, human health impairment, and even mortalities. Contemporary China is enjoying wealth and well-being created by economic development, but the country is suffering from the throes of rapid industrialization. This includes environmental pollution, ecological degradation, and resource depletion. It resembles the experience of developed countries during the 19th and 20th centuries. It would, therefore, be no surprise if China soon followed in the footsteps of many developed countries. Environmental pollution and ecological degradation can not only bring pressure to bear on government and people but can also trigger regional and cross -boundary disputes. The continual emergence of environmental problems in China has resulted in constant criticism from some developed countries with service-based economies in North America and Europe. They call attention to China for allowing emissions that threaten human health, that do not conform t o their own environmental standards, and that disregard the balance of environmental capacity and pollutant emissions. While some rebuke China for producing large amounts of pollution, others appreciate its contributions as the ―world‘s factory‖. There is no doubt that this discord is likely to remain an international controversy and will tend to be an everlasting discussion between developed countries and the developing world, represented by countries such as China and India. This will happen as more and more third world countries, with a willingness to develop their economies, improve their living standards and conditions. If the evaluation, analysis, and criticism of China‘s problems can be adjusted to a more balanced or objective direction by considering China‘s long-term intense population pressure and specific stage of development, it should be possible to find a more acceptable solution not only for the Chinese government but also for international society. In terms of the experience of China‘s neighbours, Japan and Korea, balancing rapid economic growth and high population density without ample natural resources has created problems. Taking China as an example, excessive pollutant discharges have created unprecedented pressures on the environment, particularly in urban areas. Thanks to a series of relevant strategies and regulations, however, the efforts of the Chinese government to abate pollution have been obvious to all, and there is even a clear overall trend for ecological restoration and improvement in the quality of the environment. A highly polluted environment is not acceptable to any country or generation. Although criticisms are more common than praise, China has already achieved significant steps 79  towards pollution control. With distinct strategies and objectives for its long-term development, it is likely that China will resemble Japan and Korea, transforming from a country with high energy-consumption and heavy pollution to an intensive but sustainable economy. 4.1 Conclusion Although it has been widely accepted that there are many advantages associated with emissions trading as a market-based mechanism aiming at pollutant emission control, the introduction of this mechanism for environmental protection should be seen as being supplement ary to the existing administrative system in China, rather than entirely replacing it. The traditional ―command-and-control‖ mode remains authoritative and has been widely accepted. The control measures in China, which have developed over the last two decades, are all supported by legislation or government departments. All industrial sectors, environmental organizations, government departments, and individuals are familiar with this supervisory system and have experience of its operation. Consequently, the complete replacement of the traditional control measures is inadvisable. There are few uncertainties associated with the traditional ―command -and-control‖ system. Control measures represent direct restrictions and sanctions against environmentally unfr iendly actions, while the role of the market-based mechanism is only to facilitate improvement of environment-unfriendly actions. In terms of China‘s past practice and experience of control measures, the impacts of market-based approaches on environmental improvement are still unclear. It is likely, therefore, that the baseline-and-credit (ERC) system is more applicable to China‘s air pollution control at the current stage, focusing more on SO 2 and subsequent acid precipitation. The ERC mode, which creates flexibility via the introduction of a transaction mechanism based on existing administrative systems, instead of the ultimate transformation of traditional control measures, is expected to be relatively more acceptable in the coming years. The ERC syste m should be incorporated into existing control countermeasures, bearing in mind China‘s specific supervisory system for environmental protection. Further recommendations include: a) To practise a market-based mechanism based on the existing emissions permit system. The system, launched in the 1990s and successfully implemented for water pollution and air pollution control, prescribes the upper limits of pollutant emissions through the issuance of permits for individual polluting facilities. With a mechanism that allows transactions of excessive emission permits among polluters, it can achieve the efficient allocation of emissions reduction costs and the retrenchment of pollution control. b) To execute a market-based mechanism together with the pollution levy system. Although there seem to be more advantages associated with emissions trading, once other factors are taken into 80  account, such as the development of the necessary legislation, market conditions (especially during this social and economic transition) and controversies regarding the initial allocation of emissions allowances suggest that full implementation of emissions trading in China requires further consideration. Moreover, public awareness and acceptance of a newly introduced system take time to develop. At the current stage of development, a combination of emissions trading and pollution levies is the more advisable. The pollution levy system, with a history of implementation of approximately three decades, has shown its feasibility and its effects on both environmental management and the collection of funds for covering administrative cost and environmental protection. With the introduction and implementation of the ―TEC‖ system, however, the traditional ―command-and-control‖ mechanism will need to be rejuvenated if it is to achieve further environmental improvement and a decline in the social costs of pollution control. China‘s existing pollution levy system has gradually revealed its disadvantages as an economic incentive. The introduction of a market-based administration should therefore be an important supplement to the current supervisory systems, and will play a significant role in environmental improvement.  4.2 Recommended roadmap to action for facilitating emissions trading in China Based on the experience that has already been gained in the application of a market -based mechanism of pollution control globally, and the information derived from domestic pilot practices, there is likely to be a short transition from the ERC system to the full implementation of an emissions trading system. In the near future, the pollutants targeted under China‘s emissions trading will mostly be SO 2 (acid rain control) and perhaps gradually extend to nitrogen oxides and COD, all of which affect human health and are the primary contributors to China‘s environmental pollution. With the gradual alteration in the structure of pollution sources in China, the areas involved in emissions trading programs will likely spread from urban areas to the surrounding towns and villages. With the objective of establishing a fully functioning emissions trading program by 2020, the work that needs to be undertaken by 2015 includes: enhancing studies of the compensated use and trading of emissions allowances, as well as platforms for tracking and monitoring emissions; strengthening public information and education on emissions trading; actively supporting third -party for-profit organizations concerned with emissions trading; extending SO 2 emissions trading from the current pilot programs in the power industry to other major contributors of SO 2 emissions, such as steel production; supporting the exploitation of renewable resources; and increasing energy utilization efficiency. For the second stage (2015–2020), the primary objectives should include: i) extending the effective range of emissions trading or enhancing the number of participants in emissions trading and involving the power industry and all other industries contributing to SO 2 emissions and acid 81  precipitation; ii) extending the trading mechanism to pollutants, such as nitrogen oxides and COD in the forms of conducting nitrogen oxides emissions trading in the power and chemical industries and COD emissions trading amongst the key river basins throughout the country; iii) establishing national market mechanisms for SO 2 ,NO x and COD emissions trading; iv) facilitating Clean Development Mechanism (CDM) projects on the exploration of energy efficiency, which will improve China‘s low carbon technology; v) and developing e missions trading pilot studies on various other pollutants, such as GHG, nitrogen, phosphorus, and lead .  82  References Aunan, K., Fang, J.H., Vennemo, H., Oye, K., and Seip, H. 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