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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.

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