Emission trading – a new hope to a clear sky?

The filthy air in Hong Kong is getting harder to breathe. Expatriates even receive ‘hardship allowances’to compensate for their sufferings. Air pollution has been on the top of the agenda since Tung’s administration. The high profile launch of ‘Blue sky campaign’ by Tsang’s administration doesn’t make a difference. The air is still filthy and choking! Tighter pollution control act such as the ban of the high sulphur gasoline has effectively curbed the emissions from vehicles. However, control of emissions from factories and power plants in mainland China is out of reach of the SAR government.

Tightening the law on emissions has been seen by mainland officials as a contrading policy halting the booming economy in China. Therefore, act of this kind is unpopular and seems to be ineffctive in abating air pollution owing to its passive nature. Local environmental agency is now thinking of the possibility of introducing ‘Emission Trade’ as an alternative to the current solution of air pollution. ‘Emissions trading is an administrative approach used to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants.’(Wikipedia, 2006).

In such a plan, the government sets a limit on the amount of a pollutant that can be emitted. Companies or other groups that emit the pollutant are given permites which represent the right to emit a specific amount. The total amount of permits cannot exceed the cap, limiting total emissions to that level. Companies that pollute beyond their permits must buy permits from those who pollute less than their allowances. This transfer is referred to as a trade. In effect, the buyer is being fined for polluting, while the seller is being rewarded for having reduced emissions. The more firms that need to buy permits, the higher the price of permits becomes -- which makes reducing emissions cost-effective in comparison.

Because emissions trading uses free markets to determine how to deal with the problem of pollution, it is often touted as an example of effective free market environmentalism. While the cap is usually set by a political process, individual companies are free to choose how or if they will reduce their emissions. Moreover, the government does not need to regulate how much each individual company emits, making cap and trade a very cost-effective method of controlling pollution on a large scale.

One critical part of emission trading is enforcement. Without effective enforcement, the permits have no value.

However, enforcement is never easy. It is quite expensive for the agency to monitor the measure facilities of those companies emitting pollutants and the burden may be translated into special taxes. Another problem is the benchmarking of enforcement standard. In mainland China where corruption is under table. Companies owners may find it far less expensive to corrupt inspectors than purchase emission permits. The net effect of corrupted agencies is the discount on the emissions permits and greater pollution.

The idea of introducing ‘Emission Trading’ is innovative and the success of this scheme relies upon the determination of administration from both sides on matters such as enforcement and anti-grafting measures. I am not pessimistic on the successful implementation of this scheme because the health hazard caused by poor air quality does incur a cost to human capital, which is an essential element sustaining the economic growth in China.