Amid growing public concern and mounting scientific evidence prompting governments to address global warming, the pressure is building for Hong Kong and the mainland to implement emissions trading schemes to improve air quality. By turning air emissions into a tradeable, scarce commodity, emissions trading schemes have proliferated in the US, the EU and Canada. Hong Kong, which has been described as the freest market in the world, is also struggling to push through a localised pilot scheme involving the neighbouring Pearl River Delta region to trade pollutants such as sulphur dioxide in an effort to improve regional air quality, which regularly more than doubles US standards for fine-particle air pollution. The scheme, with high-level official support, has been hailed as a cost-effective, flexible way to encourage power companies to cut emissions and restore our blue skies. The idea sprouts from the economic principle that money should flow to areas where clean-up costs are much cheaper and emissions reductions are therefore easier and faster to achieve, provided the neighbouring area falls under the same air shed. After all, one of Guangdong's largest coal-fired power plants in Shajiao spent only US$200 million to install scrubbers to clean polluting gases, whereas CLP Power could spend many billions of dollars to achieve the same. But implementing such a scheme, particularly when it involves cross-boundary co-operation between Hong Kong and different city and provincial authorities on the mainland, will require huge efforts to overcome institutional barriers and build mutual trust and a belief in the common interest. 'It is possible to design a scheme which would take into account the differences in development, pollution and economic systems,' said Charlotte Streck, director of Brussels-based Climate Focus and a legal expert on environmental issues who visited Hong Kong last month. 'However, it would be crucial that the governments of Hong Kong and Guangdong work extremely well together and that both have an interest in the success of the system.' In August, a meeting in Guangzhou between Guangdong and Hong Kong leaders released a proposal on such a scheme for consultation by the end of this year. Details of how to implement it, however, have yet to be publicised. Some local academics are sceptical about such a scheme. Doubters cite a poor working relationship between Hong Kong and Guangdong, while others fear insufficient pre-conditions and infrastructure to make the pilot scheme as successful as, say, the Acid Rain Programme (ARP) in the US. 'Under an emissions trading scheme, participants exchange a commodity that one can neither see nor touch,' said Ms Streck. 'Emissions trading therefore depends heavily on institutions and regulations. An essential pre-condition is that participants believe in the enforcement capacity of the government.' Introduced in 1990, the ARP has led to a reduction of 5.5 million tonnes, or 41 per cent, of sulphur dioxide nationally and is estimated to yield US$122 billion in benefits in health and ecology by 2010, at an annual cost of US$3 billion. Driving the ARP is the cap-and-trade approach under which annual emissions allowances, normally in terms of a tonne of pollutant, were allocated at no cost to thousands of polluting sources by the US Environmental Protection Agency. No polluting source should emit more than their allocated amount. Those that have met the caps in surplus as a result of emissions reduction measures could sell their spare allowances to other sources, which are in deficit of allowances. Sources that fail the caps are penalised by fines of at least US$2,000 per tonne of pollutant. However, judging from the limited information leaked by officials so far, a HK-PRD pilot scheme will lack the fundamentals that make the ARP a success. First, the ARP is administered by a centralised body, the EPA, whereas the local pilot scheme would be overseen separately by Hong Kong and Guangdong environmental watchdogs reporting to an expert group under a high-level, cross-border co-operation conference. Secondly, it is uncertain if the pilot scheme would have the legal backing the ARP enjoys under the Clean Air Act in the US that binds the pollution sources, regardless of their locations. As to transparency, the ARP guarantees public access to a central registry recording trading transactions. No such registry at such a level of transparency has been pledged in the Hong Kong and PRD area. One of the most often cited technical hurdles faced by emissions trading schemes in China is the lack of proper accounting, reporting and auditing systems, which are crucial to providing the evidence if emissions reductions have been achieved. Under the ARP, all power plants must install devices that enable continuous emissions monitoring at stack, which automatically update emissions data with the EPA every 15 minutes. A similar system has been implemented at Hong Kong's power stations, with emissions reported to the Environmental Protection Department. But it remains to be seen how many power plants in Guangdong have been installed and how the operation is enforced. According to Guangdong's Environmental Protection Bureau website, online monitoring devices are being installed at about 120 key polluting sources and are expected to be completed by the end of this year. But the 'data reliability' has yet to be strengthened through the centralised procurement of facilities. 'Online monitoring is technically sound. But in terms of management, there might be flaws that render the system ineffective,' said Carlos Lo Wing-hung, from Hong Kong Polytechnic University, who is collaborating with several local and Guangdong academics on cross-border environmental management research. He said legal backing on the use of data obtained was required to make trading an enforceable system. Another thorny issue is how emissions allowances are allocated to the power plants, and whether they should be allocated at a cost. Wang Jinnan, a mainland engineer working on emissions trading schemes, who took part in a forum on the subject in Hong Kong earlier this year, said a clear, transparent formula on allocation was needed. But a spokesman for the Jiangsu Provincial Environmental Protection Bureau warned that total emissions controls were inherently at odds with fast economic growth, and this had led to difficulties implementing trading schemes. 'The SO2 emissions rights gradually turn into a rare commodity and businesses and local authorities tended to keep their rights for further development, making it almost impossible to form a trading market,' he said. A meaningful trading scheme could only occur under a total emissions cap that needs to be lowered gradually. As in the Hong Kong-PRD case, apart from cross-border 2010 emissions targets, officials have so far indicated no timetable for stricter targets in the long term. All these uncertainties have added to the worries of Professor Lo, who believes the pilot scheme is only a 'temporary exit' for local power companies, in case they fail to meet the 2010 emissions targets. He said that on one hand, the political and economic reality in Guangdong did not require emissions trading with Hong Kong, as administrative orders on the mainland always delivered what authorities wanted. On the other, it was in the interests of Guangdong to control the pace of emissions reductions amid current power shortages. 'Why do we have to bother introducing an emissions trading scheme when administrative orders from the top on the mainland can be stepped up to ensure all power plants install clean-up devices?' he said. 'These orders are far more efficient and speedy. 'There is also no incentive for Guangdong to co-operate, as it will cost too much in terms of information transparency and public monitoring. It is a matter of balance of power, and they just don't want to share their power with Hong Kong, with a few tens of million dollars transferred to them.' Professor Lo said genuine emissions trading could only happen in a free market with little government intervention, whereas the central government still firmly controlled its electricity sector's ownership and tariff setting. Despite all those queries, Professor Julia Tao Lai Po-wah, the director of governance at the City University's Asia Research Centre, said the HK-PRD pilot scheme's significance lay more in its contribution to the gradual perfection of China's proposed emissions trading system, rather than an immediate solution to the regional air quality problem. 'Emissions trading in China still has a long [way to go] to perfect its system, and Hong Kong would have a role to introduce more market elements and transparency needed for credible trading,' the professor said. 'Many have told about the flaws of the system and have many worries on implementation. But these details could be corrected. If the overall direction is recognised, an emissions trading scheme is still worthwhile.' Hong Kong should not keep its distance from the latest development in China, which was pushing for emissions trading under a new environmental management policy that would see air polluters pay an initial sum for the allowed amount of pollutant they emitted, Professor Tao said. The scheme would be vital to China's energy security, she said, as coal would remain a key source of energy in the future of the country, which is now the world's biggest SO2 emitter. Government officials have admitted emissions trading cannot be seen as the only way to cut emissions. Some green groups have said stopping the sale of local electricity to the mainland and expanding the use of cleaner fuel could be an effective way to cut local emissions. Ms Streck said the EU had never adopted emissions trading to deal with its sulphur dioxide or nitrogen dioxide problems. The EU scheme was simply for carbon dioxide. It had only imposed stricter standards on power stations and that was said to be quicker than America's ARP in delivering results. Hahn Chu Hon-keung, the environmental affairs manager of Friends of the Earth, said: 'Emissions trading is just one of the means. Power companies can still rely on other ways, like selling less electricity to the mainland or speeding up the LPG-receiving terminal project.'