VZCZCXRO3403
RR RUEHCN RUEHGH RUEHHM RUEHLN RUEHMA RUEHPB RUEHPOD RUEHVC
DE RUEHGZ #0377/01 0820904
ZNR UUUUU ZZH
R 230904Z MAR 07
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 5920
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/USDOC WASHDC
RHEBAAA/USDOE WASHDC
RUEAEPA/HQ EPA WASHDC
RUEHZN/ENVIRONMENT SCIENCE AND TECHNOLOGY COLLECTIVE
RUEAIIA/CIA WASHDC
RUEKJCS/DIA WASHDC
RHHMUNA/HQ USPACOM HONOLULU HI

UNCLAS SECTION 01 OF 03 GUANGZHOU 000377 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DOE FOR INTERNATIONAL/PUMPHREY 
DOE ALSO FOR EERE/DIXON 
USDOC FOR NOAA/OFFICE OF GLOBAL PROGRAMS/BUIZER 
USDOC ALSO FOR 4420/ITA/MAC/MCQUEEN, DAS LEVINE 
EPA FOR OFFICE OF AIR AND RADIATION/MCLEAN 
EPA ALSO FOR INTERNATIONAL/YANG AND THOMPSON 
STATE FOR EAP/CM, OES/OGC, OES/ENV AND OES/PCI/STEWART 
STATE ALSO PASS USTR FOR STRATFORD, CELICO and CHINA OFFICE 
USPACOM FOR FPA 
 
E.O. 12958: N/A 
TAGS: SENV ENRG PGOV CH
SUBJECT: Let's Make a Deal: Slow Start for Cross Border Emissions 
Trading Pilot 
 
REF: A. 06 Hong Kong 3633 B. 06 Guangzhou 30165 
 
(U) THIS DOCUMENT IS SENSITIVE BUT UNCLASSIFIED.  PLEASE PROTECT 
ACCORDINGLY. NOT FOR RELEASE OUTSIDE U.S. GOVERNMENT CHANNELS.  NOT 
FOR PUBLICATION ON THE INTERNET. 
 
 
¶1. (SBU) Summary: The long-planned Guangdong-Hong Kong cross-border 
emissions trading pilot program was implemented on January 31, 2007. 
 Despite years of cooperative planning between both regions' 
environmental protection bureaus, no deals have yet been struck. 
Furthermore, the plan has been met with criticism from Hong Kong 
lawmakers and potential participants due to the lack of transparency 
and uneven enforcement on the Guangdong side of the border and a 
limited participant pool.  The Guangdong Environmental Protection 
Bureau had little to say in response to voiced concerns.  The 
emissions trading framework as currently implemented does not appear 
to offer much help in meeting agreed upon emission reductions in the 
Pearl River Delta by the target of 2010. There have been no deals 
involving emission credits so far and prime Guangdong candidates 
have not even begun to engage potential Hong Kong purchasers. End 
Summary. 
 
Emissions Trading Framework Genesis 
----------------------------------- 
¶2. (U) In April 2002, Hong Kong and Guangdong province signed a 
joint declaration on air quality for the Pearl River Delta (PRD). 
The agreement put forth targets for emission reductions of 40% for 
sulfur dioxide, 20% for nitrogen oxide, and 55% for particulates and 
volatile organic compounds from 1997 levels by the year 2010. 
Notably, carbon dioxide was left out of the reduction agreement. 
After setting up a joint team to look at emission monitoring 
techniques and emission reduction technology, the team introduced 
the idea of a cross-border emissions trading framework in late 2002 
as a method to further help power plants meet the agreed upon 
targets. 
 
¶3. (SBU) According to the Guangdong Environmental Protection Bureau 
(EPB) policy discussions within the Guangdong government delayed the 
emissions trading plan from progressing for almost four years.  In 
the meantime, the Guangdong EPB investigated and closely monitored 
the first sulfur dioxide trading scheme in China, a regional system 
where the first trades were between two power plants in Jiangsu 
province in July 2003.  In early 2006, the Hong Kong-Guangdong plan 
began to move forward but implementation slipped until January 
¶2007. 
 
Trading Framework Details 
------------------------- 
 
¶4. (U) The implemented emission trading framework is strictly 
voluntary and is open only to coal-fired power plants in Hong Kong 
or the Pearl River Delta in Guangdong province.  All deals must 
include one plant in Hong Kong and one in Guangdong so mainland-only 
emission trades are currently not allowed.  Amounts, durations, and 
prices are totally at the discretion of the parties involved in the 
deal with no limitations set by the framework. 
 
¶5. (U) Once a deal is struck; the details must be reported to both 
the Guangdong EPB and the Hong Kong Environmental Protection 
Department (EPD).  The corresponding EPB or EPD must evaluate that 
the power plant selling emission credits actually has enough 
emissions under the cap to complete the deal.  After this approval, 
the power plant must have real-time emissions monitors installed if 
they are not already in place.  As Guangdong's power plants are 
generally newer and all plants over 125 MW are required to have 
desulphurization scrubbers by 2010, the expected flow of emissions 
credits is from Guangdong to Hong Kong. 
 
Criticism Abounds in Hong Kong 
------------------------------ 
 
¶6. (U) Criticism from Hong Kong lawmakers, media, and other 
 
GUANGZHOU 00000377  002 OF 003 
 
 
potential stakeholders is that the framework's lack of transparency 
and uniform measurement systems could make the system prone to 
manipulation (reftel A).  Revelations last summer that Hong Kong and 
Guangdong used different measuring scales to calculate emissions 
reinforced concerns about the lack of accountability on the 
Guangdong side. Additionally, the limited pool of participants on 
both sides excludes many of the worst sources of polluting emissions 
such as factories and therefore the framework won't do much to helpQhe problem.  The overall concern is that Hong Kong is likely to pay 
Guangdong for emission reductions that might not even actually 
exist. 
 
Guangdong EPB Response Short on Answers 
--------------------------------------- 
 
¶7. (SBU) During a meeting on March 2 with the Guangdong EPB, General 
Affairs Office Director Guo Han Yi, countered these criticisms 
stating that the framework was still just a pilot program and both 
sides recognized that it still has loopholes in it. Guo said that 
there are currently 16 shared monitoring sites, 3 in Hong Kong and 
13 in Guangdong province, which can be seen by both the Guangdong 
EPB and Hong Kong EPD.  Furthermore, any power plant participating 
in emissions trading would also have to be able to be monitored by 
both organizations.  After over one month there have been no deals. 
Mr. Guo believed Guangdong Yudean Group, Guangdong's largest owner 
of power plants, and China Light and Power in Hong Kong were in 
discussions but since there was no requirement to report until a 
deal was made, he could not be sure. 
 
¶8. (SBU) When asked about the limited pool of participants, Mr. Guo 
responded that over 50% of all sulfur dioxide emissions in both 
areas came from power plants.  He further commented there were no 
plans to add in other fixed-point polluters such as factories. 
Asked, why carbon dioxide was not included in the trading framework 
or monitoring, Guo said that there was no national standard for 
carbon dioxide.  Finally, Mr. Guo equivocated that the Guangdong EPB 
has confidence it can meet the reduction goals of the 2010 agreement 
with Hong Kong but until the mid-term evaluation report comes out 
later this year, he is unclear how far Guangdong has to go. 
Guangdong EPB would like to increase inspections and improve 
enforcement but he admitted that environmental challenges were 
growing at least as fast as the EPB's financial and human resources, 
making it difficult to stay ahead. 
 
Yudean Has Questions As Well 
---------------------------- 
 
¶9. (SBU) On March 21 Conoff met with Mr. Zou Shang, Vice Chief 
Economist at Guangdong Yudean Group.  Yudean produces 29% of the 
power for the Pearl River Delta.  Mr. Zou stated Yudean owns 14 
thermal power plants, 12 of which are coal-fired.  All but one of 
the power plants with 300 MW or greater generating units have had 
desulphurization equipment installed.  He further stated that it has 
been difficult to meet the yearly reductions of emissions in each 
plant, requiring significanQnvestment in equipment and closer 
monitoring of coal quality.  The government has helped with tax 
incentives and low-interest loans to defray costs of pollution 
controls. 
 
¶10. (SBU) Mr. Zou said Yudean currently had several power plants 
with available emission credits and had been given a copy of the 
framework but the company still had many questions about how trades 
would work and the company has requested further details. 
Furthermore, he confessed Yudean had not had any discussions with 
either China Light and Power or Hong Kong Electric and was not even 
sure if either company had a need to buy emission credits. 
 
Challenges Remain 
----------------- 
 
¶11. (SBU) As some in Hong Kong have justifiably voiced, several 
issues still remain for the framework to be successful. 
Transparency is an issue.  While there are shared monitoring 
 
GUANGZHOU 00000377  003 OF 003 
 
 
stations in Guangdong, access to shared emissions monitors is not 
available in real time to the Hong Kong EPD, although it is to the 
Guangdong EPB, but is rather updated to a web site once each day. 
Moreover, numerous reports suggest the Guangdong EPB has in the past 
adjusted emissions caps and monitoring systems in efforts to make 
targets more reachable for power plants.  As a case in point, the 
Hong Kong EPD freely revealed all emissions caps for each power 
plant in Hong Kong but the Guangdong EPB refused to reveal the same 
information about any power plants in Guangdong, stating it was a 
complex process that depended on too many variables to generalize 
and individual plant information was confidential.  Yudean stated 
the company had no idea how the cap was calculated and it received a 
cap number each year for each plant but declined to provide specific 
cap numbers. 
 
¶12. (SBU) Limitations in the participant pool and the lack of 
provisions to do intra-provincial trades will severely hamper the 
usefulness of the current framework.  Hong Kong has only two 
coal-fired power plants while Guangdong has dozens.  Many of the 
older, worst polluting power plants in Guangdong are currently over 
their caps and will continue to be serious polluters.  This will 
leave the deals to only the newer plants who have already installed 
desulphurization technology.  Once these deals are completed, the 
need for Hong Kong plants to buy additional credits should be 
minimal.  Correspondingly the incentive for emissions trading 
opportunities to entice other Guangdong plants to install 
desulphurization technology ahead of regulated timetables will be 
minimized. 
 
Comment 
------- 
¶13. (SBU) While some commendation is merited for an attempt to bring 
a market-oriented approach to help the Pearl River Delta region 
clean up its air, in its current form the implemented emissions 
trading framework is unlikely to put even the smallest dent in 
reducing emissions in the region.  Without expansion of the program, 
the same market-based incentives that are being trumpeted as a 
positive step in reducing emissions for Hong Kong power plants will 
be quickly forgotten and reliance in Guangdong will remain on the 
current system of regulation by an already overburdened and 
non-transparent bureaucracy. 
 
ROCK