China's pollution permit market must be revamped

New government plans to strengthen China's "pollution permit" market have been applauded as the meaningfulness of existing trials of the system has been called into question. Since 2007, China has set up more than 20 local pilot trading platforms for the permits. Not to be confused with carbon trading, which targets greenhouse gases led by carbon dioxide, this scheme allow industrial firms to buy and sell rights to emit pollutants like sulphur dioxide and nitrogen oxide, major causes of smog and acid rain. Under the system, a region first sets a maximum amount of key pollutants the area can absorb during a certain period, before translating the amount to pollution rights and making them available to companies. In the "primary" market, companies are required to pay for the rights through auction or government-directed quotas. Firms with pollution rights can then trade the permits in the "secondary" market. However, according to insiders, few of the pilot markets are working properly due to lax implementation, and the absence of a fair pricing mechanism and legally binding regulations forcing firms to use the permits. SUSPECTED PUBLICITY STUNT Take the markets in Beijing, Shanghai and Tianjin for example. All three cities set up pollution permit trading platforms in 2008, but the former two have not seen a single trade between them. Tianjing Climate Exchange (TCX) did function once, on Dec. 23, 2008, when Tianjin Hongpeng Logistics won permits to emit 50 tons of sulphur dioxide by bidding at a price of 3,100 yuan per ton. But there have been no deals since then. Further detracting from the credibility of the pollution permit trials, mystery surrounds the lone Dec. 23, 2008 deal. According to media reports at the time, there was suspicion that Hongpeng was a front company, fabricated to win an auction organized as a publicity stunt. Researching this article, Xinhua dialed the phone number found on the website of Hongpeng and asked to learn about the bidding in 2008. "The company has already been deregistered. I know what happened at that time, but there is nothing I can tell you. I don't want to make trouble," a middle-aged man said before hanging up the phone and never answering again. TCX general manager Wang Jing reacted strongly when asked about the incident, saying, "There is no need to ask this anymore. It was five years ago." Tian Yu took part in the bidding on behalf of his company Tianjin Tasly Group, a traditional Chinese medicine maker. He told Xinhua that all participants were persuaded or lobbied by their industrial park base, TCX or the government to help make the publicity stunt work. Bao Jingling, engineer in chief of the Tianjin Environmental Protection Bureau, said that, for many companies, it was through government "coordination" rather than the trading platforms that they got pollution rights. Labelling pollution permit bidding "forced marriage" directed by the authorities, the insiders said the Hongpeng case in Tianjin is not the only one of its kind. NO REASON TO BID Experts attribute the dysfunction of the pollution permit market to the absence of a mandatory system forcing all polluting firms to use pollution permits. Wang said, "Since there is no compulsory regulation from the authorities requiring all companies to trade pollution permits, not many firms are willing to buy them. "If most firms can freely emit pollutants without permits, then why would anyone buy them?" asked Tian. Both Wang and Tian point to the large number of cases in which companies discharge much more key pollutants than their quotas allow but get no punishment. Wang Jinnan, vice head of the Chinese Academy for Environmental Planning (CAEP) under the Ministry of Environmental Protection, blamed the lack of a fair distribution and pricing system. "The government's goal is to control the overall amount of pollutants. The question of which company gets how many permits doesn't seem to be so important," he said. The government itself decides the prices of the permits, "which do not necessarily have a very convincing basis." Meanwhile, the value of the permits, which is in big part determined by their effective period, varies from regions to region, making cross-regional trading impossible, according to Wang Jinnan. Even in the same region, the value can change as the government tightens or loosens environmental protection measures, which could mean permits bought in different years have different values. This would create a "wait and see" attitude among potential buyers and sellers of the permits, Wang Jinnan said. SOLUTIONS There is consensus that the authorities should, above all, draw up and implement a nationwide regulation mandating firms to buy permits before emitting pollutants. "It must be confirmed by the central government that pollution permits are valuable rights that companies must pay to obtain," Wang of the CAEP said. Wang Jing called for legally binding regulation to force all companies to get their permits through auction and make emission without a permit illegal. The value and effective period of the permits should also be set and verified nationwide. Wang Jinnan believes there should be a uniform effective period for the permits of, say, five years, and their issuance should not be tightened or loosened as government policies are adjusted. For companies that have permits to spare as a result of the application of new technologies, it must be ensured that the extra permits can be sold at a price, said Bao of the Tianjin Environmental Protection Bureau. Judging by its recent announcements, it seems that the central government has noticed the problems. On March 24, the finance ministry announced a plan to establish a nationwide system for use and trade of pollution permits within three years. The ministries of finance and environmental protection also said they had submitted draft guidelines for a market to the State Council, something almost all the insiders and experts Xinhua interviewed deemed essential. The market would cap emissions of key pollutants from major facilities and force those that exceed their caps to buy permits, thereby providing economic incentives for polluters to invest in cleaner technologies. Though they called permit trading an important arrangement for the market to play a role in cutting emissions, the ministries did not provide details on how the market would work.