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June, 2006:

Hong Kong Pollution Ownership

One thing is clear: It’s time to take ownership

In this article – the final in a four-part series on Hong Kong’s air pollution – Douglas Woodring, Associate for Civic Exchange offers solutions for ways in which Hong Kong manufacturers can help clear the air. “P2E2” is one effective program that gives guarantees to banks who can then lend to Hong Kong-based “Environmental Service Companies” (EESCOs) in order to supply environmental technology and services to factories in Guangdong. “The beauty of this program is that the factory pays nothing,” Woodring writes.

Imported Air – We Own Much of the Problem

In last month’s article, we learned that the poor fuel mix in Guangdong is a major contributor to our air problems. We now focus on the users of that fuel – the factories, which for better or worse, are largely owned by Hong Kong companies. So far, however, we have seen that these factories are not owning up to the extensive problems they are creating for us, as we end up importing the impacts of their poorly managed production processes.

Sources of air pollution in Guangdong include inefficient coal-fired power plants lacking effective emissions controls, growing vehicle fleets, heavy industry and the manufacturing sector. Many believe the view is wrong that Hong Kong can do nothing about our air imports, and to date, our side has failed to effectively tackle emission reduction on the part of Hong Kong-owned manufacturers.

In 2003, “manufacturing” accounted for 45 per cent of all public power consumption in Guangdong. Due to the shortfall in supply and transmission problems with Guangdong’s power grid, almost all of the factories in Guangdong developed alternate power sources which tend to be run on coal or poor quality fuel. In some cases, it is cheaper to run generators full time, rather than using the public grid at all, but in others, it is simply a necessity, which could change if and when the supply of power from the grid is greater than the increasing demand. One alarming fact is that the manufacturing sector’s consumption of coal was two thirds that of the power sector’s, increasing at a rate of 20 per cent from 2000 to 2004. Considering coal’s use for public electricity, as well as its direct use of coal, the manufacturing sector is responsible for 75 per cent of all coal used in Guangdong – most of which is not “clean” coal.

Similarly, manufacturing uses 90 per cent as much diesel in its generators as is used by the transportation sector – much of it with high sulphur content coming from smaller, unregulated refiners. To put this danger into perspective, California has just done a study that shows that 70 per cent of all health problems relating to air pollution come from diesel fuel (though remember that California does not have the wide use of coal that China has). These results should be a wake-up call to all of us in Hong Kong, where over 60 per cent of our locally created vehicle emissions come from our extensive diesel fleet.

The Clean Air Map is still Uncharted

The problem of addressing manufacturing air pollution in Guangdong is a difficult one. Things should improve somewhat by 2008 when the power grid increases overall supply (unless expansion of the manufacturing base outstrips this new supply, which has been the case in the past). Sources of cleaner fuel are generally not available, in part due to national fuel pricing controls and some sectors (textiles, paper, food and nonmetal mineral products) have shown a marked increase in direct coal use to augment the use of grid power. Despite the hope of cleaner fuels and increased public electricity supply, the near term prospects are not bright for the following reasons:

  • Coal will remain the major source of power generation and a major industrial fuel in Guangdong;
  • Those sub-sectors relying on coal or heavy fuel oil are likely to continue to self-generate because it is cheaper;
  • Constraints in the public power supply are not just in generation, but in transmission line capacity;
  • To initiate a large clean-up, higher quality fuels must be readily available, which is unlikely until price controls are eased;
  • Higher energy prices provide an incentive for manufacturers to switch to cheaper, dirtier fuels;
  • There is little hope that voluntary measures will result in worthwhile improvements. Stringent environmental mandates must be enforced on manufacturing;
  • Slow improvements in manufacturing emissions now will be compounded with an exponentially expanding Guangdong motor vehicle fleet.

Is there Blue Sky on the Horizon?

We know how to reduce pollutant emissions from within Hong Kong, but the fact that we have not done more to clean up our own act is a failure of political will to face up to the higher costs of implementing fundamental changes. Unfortunately, we have not come even so far as to seriously evaluate what the options are for making a major dent in our pollution imports. Guangdong’s rapidly increasing motor transport sector is likely to prove the most challenging to deal with in environmental terms, but at this point, manufacturing is the most important contributor to our air shed, and these issues can, and should be, quickly addressed through both cleaner fuel use and energy efficiency programs.

Normally, the most cost-effective first step in reducing air pollution is to upgrade the fuel being used, either by fuel switching (e.g., from solid to liquid, or liquid to gas) or when staying within a certain type of fuel to move toward ones with lower sulphur, and less of other contaminants. Due to limited options for fuel suppliers and their ability to locally source fuel of higher quality, energy efficiency in combustion and end-use seems to be the next best option. Better process design also has the advantage of potentially being a net cost-saver to the manufacturer through lower energy bills. The Hong Kong Government should look for ways to encourage such moves, for example, through investment assistance for energy efficient equipment, and codes of practice on the part of Hong Kong-owned and managed manufacturing plants.

An excellent program, recently launched with the help of the Asian Development Bank and the IFC is called “P2E2” (Pollution Prevention and Energy Efficiency), and is based on a five-year-old cooperative framework agreement between the US Environmental Protection Agency and the State Environmental Protection Administration of the PRC. This program gives guarantees to local banks, who can then lend (on very favourable terms) to Hong Kong based “Environmental Service Companies” (EESCOs) in order to supply environmental technology and services (from any country) to factories across the border. The beauty of this program is that the factory pays nothing. Yes, nothing. The EESCO is paid back based on the cost savings that are generated from a five-year service contract with the factory, and verified by an approved third party firm. Future service contracts can then be renewed, as improved technologies for further savings and pollution reductions are introduced. EESCOs can also gain the benefit of pollution credits that they have generated from such contracts, which can then be sellable in the growing market of pollution emission credit trading. This is arguably one of the most innovative market incentive mechanisms anywhere in the world today, and Hong Kong companies have an enormous opportunity to take advantage of this, both to help China’s growing pollution problems, as well as to be a leader in any of the developing Asian countries.

In order to combat our dire air quality situation, the Hong Kong Government should be explicit in stating that we have a direct interest in Guangdong’s energy use. The Government should be working with Guangdong in areas which aim to:

  • End price controls on petroleum products through the implementation of a market based pricing system;
  • Discouraging (and if possible, ban) the use of high sulphur fuel, with moves to facilitate the comprehensive use of low sulphur content fuels;
  • Ban the use of coal with sulphur content above 1.5 per cent, and as feasible, require the use of fuel gas desulphurisation controls;

We should then work with Hong Kong’s owned manufacturers to invest in energy efficient equipment and processes (with the help of programs like P2E2). At the same time, Hong Kong’s business associations should work with its members to raise the awareness about their responsibility toward reducing the Territory’s “imports” of air pollution from across the border. Energy audits should be highly encouraged, with Hong Kong companies hopefully taking the lead in energy conservation across the border, as well as demanding the use of clean fuels.

Hong Kong faces a unique problem due to the jurisdiction issues across the border. It is time, however, that our own factories face up to the enormous burden they are putting on our territory, at the expense of all of us. Effectively, we are subsidising these factories for their low cost production, and the economics of this action cannot continue unabated. If so, we will continue to pay the price in terms of high health costs, premature deaths and lost competitiveness due to declining living standards. Solutions are possible, but we must act on them now with, both locally, and with the powers that be across the border.

Pall Of Gloom Over Hong Kong

Jun 17, 2006 – By Kent Ewing – Asia Times Online

HONG KONG – After years of economic gloom following the Asian financial crisis of 1987 and the handover to Chinese rule in the same year, this city’s economy is booming again.

With gross domestic product (GDP) growing 8.2% in the first quarter of the year and government coffers overflowing with a surplus expected to be at least US$1.2 billion, Hong Kong officials should be exhorting the city’s 7 million people to let the good times roll as the ninth anniversary of the handover from British to Chinese rule approaches on July 1.

What, then, is everyone so worried about?

Fortune magazine’s famously provocative 1995 article “The death of Hong Kong” turned out to be a false prediction. But as mainland China’s economy continues its extraordinary rise and Hong Kong strains to keep up, the marginalization of this once-undisputed hub of Asia looms as a distinct possibility, despite its current prosperity.

Ironically, the most urgent threat to Hong Kong’s competitiveness – the city’s increasingly foul air – is intimately tied to the phenomenal growth on the mainland, particularly in the Pearl River Delta in neighboring Guangdong province. This is where more than 70,000 largely unregulated Hong Kong-invested factories belch poisonous pollutants into the air on a daily basis.

While the factory owners have become rich as a result of the low labor and manufacturing costs in the region, their once-beautiful city has become a sick patient in need of emergency care. Although there are other contributing factors – automobile emissions and lack of concern by the two privately owned local electricity suppliers, Hong Kong Electric and China Power and Light – there is a general consensus that the bulk of Hong Kong’s pollution creeps over the border from the factories in the delta.

Chinese authorities always hoped that manufacturing in Guangdong would combine with Hong Kong’s superb financial and service industries to create a gateway to China for a flood of foreign capital, and the formula has worked brilliantly – except that it is now hard to breathe.

The problem has become so acute that it is no longer just green groups and fringe politicians who are harping about it. The city’s international business class has chimed in, urging the Hong Kong government to develop a more coordinated anti-pollution strategy with mainland officials.

Speaking recently for the International Business Chamber, which represents overseas chambers of commerce in the city, Jens-Erik Olsen expressed the business community’s recruiting fears, which are directly related to Hong Kong’s unhealthy environment.

“We are going to tell the government that we [Hong Kong] are no longer attractive to professionals,” he said, “because they do not want their children to live in Hong Kong.”

Olsen was speaking in the aftermath of the release of a survey on living conditions in 257 cities worldwide conducted by ECA International, a global human-resources organization. ECA International shocked Hong Kong people with its recommendation that companies recruiting expatriates to work here should offer them a 10% hardship allowance in addition to their basic pay and other perquisites.

The survey showed concern about food scares, infectious diseases such as severe acute respiratory syndrome (SARS) and bird flu, as well as worries about the typhoon season that buffets the city every year. But it was definitely Hong Kong’s polluted skies that tipped the scales toward “hardship”.

While the survey ranked Hong Kong in the top five cities for Asians within Asia, the city fell below its arch-rival, pristine Singapore, as well as three Japanese cities: Kobe, Yokohama and Tokyo. What’s more, on a global scale for Asians living abroad, Hong Kong dropped from its 20th slot last year to 32nd this year.

According to study released this month, the city’s choking air quality is costing Hong Kong 1,600 lives and nearly US$258 million in health-care costs and lost productivity each year. The study – carried out by a team of experts from the University of Hong Kong, Hong Kong University of Science and Technology, Chinese University and think-tank Civic Exchange – found that Hong Kong’s air pollutants exceeded World Health Organization standards by 200%.

So, as alarm bells ring, one of the city’s most pressing problems has been largely unaddressed. True, there has been much talk about air pollution over the past several years, but very little action has been taken by the Hong Kong government, which on this issue is a prisoner of the very economic growth on the mainland that is supposed to ensure its future.

Beyond the health concerns associated with pollution, there are other problems gradually undermining Hong Kong’s competitiveness. The city’s rapidly aging population and shrinking birth rate are also major concerns. Government data for 2004 show a fertility rate of 0.93 child per couple, giving Hong Kong the second-lowest birth rate in the world, behind only its smaller neighbor, Macau. This rate is expected to improve slightly – to 0.95 – by 2008 and then plateau at around 0.99 in 2018 and beyond.

At the same time, research done by accounting firm CPA Australia projects that, by 2033, 24% of Hong Kong’s population will be older than 65, whereas that age group represents just 10% at present. And by 2033, those aged 55 and above will rise from 20% of the population to 38%.

Unspoken conclusion: at a time when Hong Kong will need to attract youth and professional talent from the outside more than ever before, the city may become an increasingly unpopular option for those it is so keen to welcome.

Hong Kong’s more geriatric future also has profound implications for the city’s budget and business-friendly low-tax regime. This year’s boom surprised even Financial Secretary Henry Tang – who, after years of deficits – had set a modest goal of a balanced budget. Now Tang finds himself with at least a US$1.2 billion surplus in the kitty and faces mounting calls for tax cuts, which he has dismissed as hasty and ill-advised.

The financial secretary is no doubt worried about how Hong Kong’s narrow revenue base, which depends on a tax system that requires billionaires to pay less than 20% of their income and is heavily reliant on land sales in a territory of only 1,100 square kilometers, can meet the city’s future financial needs.

When you do the math, it is clear that the current tax scheme will be stretched beyond the breaking point as the city ages and health-care costs rise in the heavily subsidized and heavily used public sector. As of now, public health care in Hong Kong is one of the best medical deals in the world; for example, emergency care is virtually free for Hong Kong residents once you discount the hospital entry fee of US$13.

Add to that the cost of reforming Hong Kong’s outdated, elitist educational system, which currently allows only a third of its students to go to university (in comparison with 80% for the United States and much of Europe), and then official anxiety, despite this year’s plump surplus, starts to make sense.

Most economists and officials concede the need to widen the tax base, and a sales tax is the option most frequently mentioned. But any additional tax – especially a regressive sales tax – is not popular among Hong Kong people, and with a chief-executive election coming up next March, the government clearly lacks the political will to enact any significant reform. (Witness the bevy of proposals for much-needed health-care reform that were just this month delegated to the back burner.)

This brings us to perhaps the most intractable of Hong Kong’s problems – its uniquely awkward (if evolving) political system. The catchphrase of the handover – “one country, two systems” – promised that Hong Kong would retain its treasured autonomy and rule of law. But, at least in its present state, the handover arrangement has turned into a recipe for political paralysis.

While the Basic Law, Hong Kong’s mini-constitution, promises full democracy to the city within 50 years of the 1997 handover, Beijing has shown no eagerness to implement this provision any time soon. What Hong Kong has instead is a 60-seat Legislative Council (Legco), half of whose members are directly elected, and a chief executive – currently the very popular Donald Tsang – who is a virtual appointment of the central government in Beijing. (An 800-member Election Committee actually “elects” the chief executive, but that committee is largely controlled by Beijing.)

Most of the legislators are affiliated with political parties, but the chief executive is barred by the constitution from any political affiliation. Although the pro-Beijing Democratic Alliance for the Betterment and Progress of Hong Kong (DAB) has become a reliable ally, otherwise the current arrangement has made Legco a permanent opposition to the central authority represented by the chief executive’s office and thus served to hinder, if not stall outright, important legislation and government projects.

Recent examples of the political standoff include the impasse over a proposal to create a West Kowloon cultural district, which Legco critics charge would simply be sweetheart deal for property developers disguised as a cultural project, and the prolonged wrangling over a plan to build new government offices on prime, harborfront land at a cost of about US$657 million.

The chief executive’s most stinging memory of what he regards as Legco intransigence, however, is surely the humiliating defeat in the council last December of a limited package of democratic reforms that he had personally championed.

Tsang’s predecessor, Tung Chee-hwa, was forced to withdraw national-security legislation that was clearly a priority for Beijing because of opposition in Legco, not to mention a 500,000-strong demonstration in the streets on July 1, 2003, the sixth anniversary of the handover. As it turned out, the failure of the National Security Bill was the beginning of the end for the deeply unpopular Tung, Hong Kong’s first post-colonial leader, who resigned his office under further pressure in March 2005.

Tsang, a much abler and more politically adroit chief executive than Tung, enjoys his current popularity (estimated at 70% by a recent University of Hong Kong poll) and has learned from the political bruising he suffered last December. He does not want to go through another rough-and-tumble in Legco over tax or health-care reforms ahead of next year’s election. And on Hong Kong’s most urgent problem – pollution – his hands are tied by the mainland.

Hong Kong, then, is currently going nowhere on major concerns that will have an important impact on its long-term competitiveness. Despite the pundits’ doom-laden prophecies for the city after the handover, however, Hong Kong’s continued pluck and vibrancy cannot be denied. The city has beaten back an economic crisis, SARS, bird flu and the political ineptitude of its first Chinese leader.

Hong Kong has a proven track record of reinventing itself. What makes the job harder this time is that, as the city scrambles for a new identity, the motherland – to whose future it is now forever wed – is undergoing its own massive transformation. As usual, with another handover anniversary just around the corner, Hong Kong does not know whether to celebrate, protest or both.

Kent Ewing is a teacher and writer at Hong Kong International School. He can be reached at