Regional Emissions Trading System in the Greater Bay Area and Its Impacts on Carbon-Mitigation Policy-Compliance Costs in Hong Kong and Guangdong Province

Professor Nam, Kyung-min   (Principal Investigator (PI))

Dr Wang Yue   (Co-Investigator)

30

2019-04-01

2021-09-30

53260

Regional Emissions Trading System in the Greater Bay Area and Its Impacts on Carbon-Mitigation Policy-Compliance Costs in Hong Kong and Guangdong Province

Carbon mitigation, Computable General Equilibrium, Emissions Trading, Greater Bay Area, Hong Kong

EnvironmentalUrban Development

201811159101

Seed Fund for PI Research – Basic Research

2018

Completed

In this proposed study, we examine the potential effects of a regional emissions trading system in the Greater Bay Area (GBA) on carbon-mitigation policy-compliance costs in Hong Kong and Guangdong Province. Both the Hong Kong and Guangdong governments have made increased efforts toward carbon mitigation but without tight policy coordination, which may lead to substantial carbon leakage and increased policy-compliance costs. In this situation, Hong Kong’s participation in Guangdong’s emissions trading scheme (ETS) is an available policy option to attain its existing mitigation targets at lower costs while minimizing potential negative externalities associated with local policies. To examine potential gains from a regional ETS in the GBA, we first develop a multi-region computable general equilibrium (CGE) model, which consists of five regions and 11 industrial sectors, and simulate the model under multiple policy scenarios. The GBA consists of Hong Kong, Macau, and nine cities of Guangdong Province. Hong Kong and Guangdong Province have their own carbon mitigation goals aligned with the national reduction targets. Guangdong Province aims to reduce carbon intensity--carbon emissions per unit of gross domestic product (GDP)--by 20.5% during the five-year period between 2016 and 2020 (NDRC, 2017). Hong Kong has also set a goal for 2030 of achieving a 65-70% carbon intensity reduction from the 2005 level (Environment Bureau, 2017). Guangdong Province has introduced increasingly strict carbon mitigation measures, in line with China’s national reduction goals. These measures include both command-and-control type regulations (e.g., shutdown of dated coal-fired power plants) and policy mechanisms based on economic incentives, including feed-in-tariff and an emissions trading scheme (ETS). Among these measures, the ETS has received an enormous spotlight in policy circles, as it is often considered more efficient than other interventionist measures in achieving a given carbon reduction goal (Stern, 2006). The Guangdong ETS is the first province-level pilot implemented since 2013, and is the largest established carbon trading market in China (Wang et al., 2016). It covers over half the gross provincial carbon emissions and six industrial sectors: electricity, iron and steel, cement, papermaking, aviation, and petrochemicals. Firms with ≥10 kt of annual emissions and public institutions with ≥5 kt of annual emissions participate in this scheme, with the initial allocation of the carbon credits determined at the 90% level of natural carbon-sink capacity. The remaining 10% of the carbon credits can be traded in the market through auction. Hong Kong has also made increased mitigation efforts, focusing on local electricity and building sectors. The local power sector alone accounts for over two-thirds of the city’s greenhouse gas (GHG) emissions, and >90% of the electricity generated is consumed by buildings (Environment Bureau, 2017). The local government has enforced a gradual phase-out of the existing coal-fired power plants, and introduced market incentives to promote renewable energy sources, aiming at their combined market share of 3-4% in 2030. Energy efficiency improvement through strengthening the existing green building stock sets another direction for mitigation efforts. However, an ETS—considered one of the most efficient mitigation tool—has been excluded from the list of feasible policy choices, given Hong Kong’s limited carbon markets and electricity-dominant emission structure. The local power sector, accounting for over two-thirds of the city’s GHG emissions, is oligopolized by two firms, and the local manufacturing sector is trivial, contributing only 1% of Hong Kong’s GDP. In this situation, it is hard to expect the launch of Hong Kong’s independent carbon market. An extended Guangdong ETS covering the GBA may make the ETS option feasible for Hong Kong. The GBA ETS has merit in two aspects. On the one hand, it can help reduce carbon leakage at the regional level. One plausible response of Hong Kong’s local power sector to stricter carbon regulations is to increase its stake in Guangdong-based power plants and import more electricity into the city. In this case, the source of emissions is simply relocated within the GBA, weakening the link between city and regional level mitigation outcomes. The launch of the GBA ETS can reduce this problem through functioning as a regional level carbon regulation. The other aspect relates to compliance costs. The extended ETS likely helps the GBA achieve its regional carbon mitigation goals at lower costs by incorporating Hong Kong into Guangdong’s carbon market, and the enlarged carbon market will be mutually beneficial. From Hong Kong’s perspective, making an efficient carbon mitigation option feasible for its local firms is itself an advantage. Also, if Guangdong-based firms can comply with carbon regulations at lower costs thanks to an enlarged carbon market, it may also benefit Hong Kong-based investors, given their stake in Guangdong’s manufacturing sector. A regionally integrated carbon market will also likely promote cross-border investment in the renewable energy sector, which has weak economic bases in Hong Kong due to limited land endowments. For these reasons, it seems timely and crucial from a policy perspective to examine the economic impacts of the GBA ETS. How big is the potential benefit of the GBA ETS, in terms of policy compliance costs? Will the launch of the extended ETS be mutually beneficial to both Hong Kong and Guangdong? Primary deliverables from this proposed study include the CGE model, which can easily be extended for various policy analyses, and a research publication, which conveys significant policy implications on the need for cross-border cooperation for regional carbon mitigation. Reference Environment Bureau. (2017). Hong Kong's Climate Action Plan 2030+. Hong Kong: Government of Hong Kong, SAR NDRC. (2017). 广东省""十三五""控制温室气体排放工作实施方案. Retrieved from http://qhs.ndrc.gov.cn/gzdt/201706/t20170616_851122.html Stern, N. (2006). The Economics of Climate Change: The Stern Review. Cambridge, UK: Cambridge University Press. Wang, W., Luo, Y., Xie, P., Luo, Z., & Zhao, D. (2016). The Key Elements Analysis of Guangdong and Shenzhen ETS and Tips for China National ETS Construction. Chinese journal of population resources and environment, 14(4), 282-291.