December 11, 2007 (NY Times) – As this city struggles under a daily cloud of noxious fumes from local traffic and nearby factories in mainland China, the Hong Kong Stock Exchange is considering using its financial muscle as part of a solution.The exchange’s board is scheduled Wednesday to consider setting up system for trading in pollution emissions allowances. Such system could serve as a financial platform for mainland China and other Asian countries entering a burgeoning new business.
A feasibility study delivered to the exchange’s board this week charts the way for Hong Kong to gain a share of the fast-growing international market in trading carbon emissions, implicated in global warming, and the types of local industrial pollutants that turn the skies here murky gray for most of the year.
For one of the region’s leading financial centers, emissions trading is a potentially valuable new kind of product. Estimates of the size of the global emissions trading market by 2010 vary from $40 billion to $100 billion.
But the emissions trading market might also make a significant contribution to solving the city’s alarming air quality problem in a way that suits its love affair with the free market and helps to develop an effective emissions trading system in China, now thought to be the world’s leading carbon emitter.
Under a typical pollution trading program, a power plant or factory is issued an allowance by the government for emissions up to a mandated cap. If it does not use all its allowance, the remainder can be sold to other plants and factories that would otherwise be fined by the government if their annual emissions exceeded their existing pollution allowances.
The global emissions trade has to date been dominated by the United States and Europe, which have leading players like the Chicago Climate Exchange and the European Climate Exchange.
A team of consultants, led by the law firm Mallesons Stephen Jaques, worked on the four-month feasibility study for the Hong Kong Stock Exchange. They say the city’s financial strengths and its proximity to the mainland mean it has the potential to become a regional, and possibly global, leader in emissions trading.
“Hong Kong is sitting on the doorstep of a major, major player,” said Roger Raufer, a consultant engineer with the International Environmental Trading Group, an American company that advised on the study. “It could be very, very significant business.”
He added: “Asia has an environmental problem and everyone recognizes the market has to be part of the solution. You have got to have economics driving the cleanup.”
Mr. Raufer, who has advised the United Nations and World Bank, said there was compelling evidence from around the world that putting a price on pollution under an emissions trading program hastened the speed and efficiency of the environmental cleanup.
“The main point is that you accomplish environmental goals at a lower cost,” he said. “Because you put a price on the pollution, these economic instruments force you constantly to think about ways to get rid of pollution. By using resources efficiently, the government can afford to be more aggressive in terms of protecting the environment.”
There is no doubt that Hong Kong has a huge problem. Roadside pollution on an average day in the busiest parts of the city is several times the levels deemed acceptable by the World Health Organization.
Anthony Hedley, professor of community medicine at the University of Hong Kong and one of the report’s authors, said there were few days in the year “where you could put your hand on your heart and say it’s safe to breathe.”
Mr. Hedley said the scale of the damage to public health and the burden placed on the health system required the government to adopt mandatory restraints on emitters.
He said that from a public health perspective, emission trading might be part of a long-term solution, “but here and now the immediate need is for radical action to reduce individual exposures.”
Still, the advocates of emission trading say there is ample evidence that using free-market incentives to reduce air pollution lets governments demand cuts to emissions faster and more effectively than by simply imposing limits on emissions in isolation.
The biggest emerging market for emissions is in carbon, driven by global efforts to reduce greenhouse gases. But emission trading has proved effective in dealing with local problems of smog – emissions of particulates, sulfur dioxide and nitrogen oxides.
In the United States, an emission trading plan has allowed authorities to impose aggressive pollution caps to tackle the acid rain problem, limiting the annual allowance of sulfur dioxide to 50 percent of 1980 levels.
Environment officials in China have noted such success and embarked on several emission trading pilot projects. This year, the governments of Hong Kong and adjacent Guangdong Province moved to set up a pilot emission trading plan that aims to reduce the amount of sulfur and other pollutants pumped into the skies of the Pearl River Delta.
Last month, The South China Morning Post, a Hong Kong newspaper, reported that the China Beijing Equity Exchange had well-advanced plans to set up the mainland’s first national exchange for trading pollution quotas, providing potential competition for Hong Kong.
“We have finished initial research and consultations with overseas emissions trading bourses concerning the proposed Beijing Climate Exchange,” the newspaper quoted Peng Zhiyuan, the exchange’s general operating director, as saying.
But industry representatives and analysts say there has been slow progress in China to a full emissions trading system because of institutional weaknesses like poor enforcement and monitoring.
K.K. Chan, the managing director of renewable energy at the Hong Kong electricity company China Light and Power, said that in order to set up an emissions trading system that linked the mainland and Hong Kong, governments would have to ensure a “level playing field.”
“Hong Kong and the mainland have different standards,” he said. “They even have different standards in terms of monitoring pollution. So the starting points are quite different.”
That might pose some challenges to any ambitions the Hong Kong Stock Exchange might have to offer emissions trading.
Mr. Raufer said an emissions trade that started by focusing on the air quality problem facing Hong Kong and its neighboring region on the mainland was a potential stepping stone.
“It might well be that you start locally because there is real problem here locally,” he said. “If you get these markets up and running, ultimately you can move into carbon, which as a global commodity is going to be huge. Some people say carbon is the next oil in terms of commodities.”