Benxi To Experiment With Emissions Trading


A June 2000 report from U.S. Embassy Beijing

Benxi, a heavily polluted industrial city in Northeast China’s Liaoning province, is preparing to implement a city-wide emissions trading system modeled after the scheme applied to utilities in the United States. City officials expect to have the legal framework in place by July 2000. The trading system will apply to all industrial enterprises within the city and will cover sulfur dioxide, soot and industrial particulates. Important implementation details still need to be worked out. But the Benxi experiment shows China is moving forward with market-based pollution-control mechanisms.

An environment, science and technology officer from the U.S. Embassy in Beijing and an economic officer from the U.S. Consulate in Shenyang visited Benxi June 6 to learn about the city’s innovative plans for reducing industrial air pollution. They were accompanied by a visiting fellow from Renmin University’s Institute of Environmental Economics, which has acted as a consultant for the project, in partnership with the U.S.-based Environmental Defense Fund (EDF now Environmental Defense). They met with city government leaders and the director and staff of the municipal Environmental Protection Bureau (EPB).
 

Background: Benxi

Benxi (population 1.2 million) is home to China’s fifth largest steel plant  Benxi Iron and Steel (Bengang) and produces more steel per capita than any other city in China. It also has many chemical, cement and manufacturing plants. The city is ringed by mountains, which prevent pollution from dispersing. It lies within the sulfur dioxide (SO2) control zone designated by the State Environmental Protection Administration (SEPA). Special regulations apply within this zone, and local officials are encouraged to experiment with innovative pollution control measures. Like other industrial cities in the Northeast, Benxi has been hit hard by plant closures and layoffs in recent years. But local officials said Premier Zhu Rongji had recently praised their efforts to construct a social safety net for laid-off workers and maintain stability.

About 7 million tons of coal are burned in the city each year, of which nearly 40 percent is accounted for by just four sources: Bengang, Gongyuan Cement, the Benxi Chemical Industry Group and the municipal heating company.
 

Pollution Baseline

The EPB officials claimed pollution was so heavy in Benxi in the 1980s that the city disappeared from satellite photos. Over the last decade, the city has invested RMB 500 million (USD 60 million) to reduce pollution -- mostly end-of-pipe controls. Dust precipitation fell from 53 tons per square kilometer per month in 1989 to 39 in 1995 and 36.6 in 1999 -- still more than four times the provincial target. Total SO2 emissions fell from 110,000 tons in 1995 to 70,000 in 1999. But the average annual SO2 concentration in 1999, at 90 micrograms per cubic meter, was still 50 percent above the national standard and more than twice the World Health Organization’s recommendation. Total particulate emissions (TSP) have fallen 10,000 tons since 1997, but the average concentration in 1999 still qualified as “moderately polluted.”

Why Benxi?

SEPA has become increasingly attracted of late to market-based mechanisms for reducing pollution. At the advice of non-government experts, it chose Benxi last year as a pilot case for emissions trading. Among the factors favoring Benxi were:
 

  • Industrial pollution is high and comes mostly from coal smoke;
  • It is within the national SO2 control zone;
  • The city has independent legislative authority, meaning it can enact its own local ordinances with only provincial-level approval;
  • Since it sits in a bowl, its airshed is relatively isolated, making it easier to judge the effectiveness of the program;
  • Local leaders were enthusiastic to try the approach.

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    Preparing The Legal Framework

    The director of the Institute of Environmental Economics (IEE) at Beijing’s Renmin University has been studying the pollution situation in Benxi for some years. In 1999 he worked with EDF to organize a trip to the United States for Benxi environmental officials to show them how SO2 and nitrogen oxides (NOx) trading works there. He then organized an expert group to study the feasibility of instituting such a system in Benxi. EDF participated in the expert group meetings and explained the U.S. experience. In October a group of environmental, energy and legal experts began drafting legislation. The group essentially adapted U.S. legislation to local circumstances and customs. The city formed a working group, chaired by the vice chairman of the Benxi People’s Congress, to study and revise the draft text. Industry groups were consulted, and IEE conducted outreach to explain the benefits of the approach to them. Industry now “understands and accepts” the approach, according to the EPB director. The text went through 12 revisions.

    The draft law is now awaiting approval of the Benxi City Council, which is expected to discuss it this month (June). It must then be approved by the Benxi People’s Congress and the Liaoning Provincial People’s Congress. The EPB director expects both those bodies to approve the bill in July. It will enter into force upon approval.
     

    Rules of the Trading Scheme

    As currently drafted, the emissions trading scheme will operate as follows:

    Many details (e.g. how to allocate the allowances, how new plants will acquire allowances, how emissions will be calculated) remain to be worked out through administrative regulations. Currently, no pollution sources in Benxi have continuous monitoring equipment. ESTOFF was told that initially emissions will be calculated based on the amount and quality of coal burned. This, of course, provides no incentive to burn a given batch of coal more cleanly or efficiently. But Zhang explained that a factory that installs smokestack scrubbers or improves its production process could install its own monitoring equipment to verify the reduced emissions and conserve allowances. Revenue from fines under the scheme could also provide a revolving fund for improving monitoring and oversight, he said.

    Comment

    The new air pollution control law that will come into force September 1 gives a more solid legal underpinning to the sorts of market-based mechanisms and total emissions control approach officials are preparing to implement in Benxi. The Benxi officials appear to be sold on the concept. But they seem a bit fuzzy on the details. For instance, they could not answer questions about the ultimate goals of the policy — how much are pollutants to be reduced. Ostensibly they will base their emissions targets on the national targets stipulated in the 10th Five-Year Plan, which is to be finalized early next year. Embassy sources report that the current plan draft calls for reducing total SO2 emissions just 10 percent from 1998 levels by 2005. Emissions in 1999, at 18.6 million tons, were already 11 percent below the 1998 level, according to SEPA’s latest annual report. Enterprises will thus be able to comply with the cap by simply stabilizing emissions at current levels and will have no reason to trade allowances. While the plan will probably call for steeper reductions in the acid rain and SO2 control zones, the modest overall cap does not bode well. Also, since in Benxi four large polluters account for the bulk of total emissions, there may not be enough players in the emissions market to balance supply and demand.