Guangdong, Hong Kong and Macao will go on the program if all continues to go well in the first batch of four provinces and three cities, a State Environmental Protection Administration (SEPA) representative said.

SEPA began experimenting with the trading system in seven heavily industrial regions - Shandong, Shanxi, Jiangsu and Henan provinces, and the cities of Shanghai, Tianjin and Liuzhou - earlier this year.

The expected expansion is a prelude for a national emissions program based on the trial, satisfying the government's ambitious goal of cutting sulphur dioxide emissions by 10 percent from the level in 2000 by 2005, said Zhang Jianyu, program manager of China Emission Trading at the United States Environmental Defence (EDF).

SEPA has partnered with EDF, which pioneered the successful emissions trading program in 1990 in the United States, to model the existing project.

A new member, Huaneng Group, has been included to make the border trade more convenient, said Zhang.

The power company is the only cross-provincial independent power generator in the latest reform of China's monopolized power industry.

"We are preparing the first trade across a provincial border, which will come soon," Zhang said.

Sulphur dioxide creates acid rain, which has become a major environmental problem in China, due to the nation's heavy reliance on coal-burning electric power plants.

Emission trading schemes have come about because of caps set on the amount of pollution that can be produced by industrial sources, such as power plants and factories.

Companies producing fewer emissions than the permitted level are allowed to store the excess capacity for future use or trade it with other corporations that cannot meet the pollution targets set by authorities.

An official from the Asian Development Bank said the mainland market for sulphur dioxide trading could be worth at least US$1 billion, depending on future penalties for pollution associated with acid rain.

The penalty for excessive sulphur dioxide emissions is 5 yuan (60.4 US cents) per ton, which is low by international standards. In the US, it is up to US$200 per ton.

"The pilot program is going smoothly in the four provinces and three cities in accordance with related documents on emission allocation, licensing, trading rules and monitoring issued by SEPA," Zhang said.

Jiangsu Province had the first provincial level rules on sulphur dioxide emission trading, as of September 30, and Shanghai will soon follow, Zhang said.

A plan approved by the State Council last week for the first time clearly encouraged regions to use the trading mechanism.

The plan, which aims to cut emissions in areas troubled by gas pollution and acid rain, involves 96.7 billion yuan (US$11.7 billion) of investment.

By 2005, it aims to cut the amount of sulphur dioxide emissions by one fifth from the level of 2000 in the four municipalities of Chongqing, Beijing, Shanghai and Tianjin, the 21 provincial capital cities and 175 other cities.

(China Daily November 20, 2002)