Market-Based Policy Instruments for Water Pollution Control in China (Draft Final Report) | Water Resources | Combined Sewer

Market-Based Policy Instruments for Water Pollution Control in China

Draft Final Report

Submitted to: Asian Development Bank and Ministry of Environmental Protection

May 2010

CONTENTS
PREFACE ................................................................................................................................... 3 1. WATER POLLUTION CONTROL POLICY NEEDS IN CHINA................................................ 1 1.1 1.2 1.2 1.3 1.4 2. STATE OF HEALTH OF CHINA’S WATER ENVIRONMENT ...............................................................1 OVERALL STATE OF SURFACE WATER QUALITY .........................................................................1 IMPROVED WATER POLLUTION CONTROL SYSTEM ....................................................................7 PRESSURES AND TRENDS OF CHINA’S WATER ENVIRONMENT .................................................12 WATER POLLUTION CONTROL POLICY NEEDS .........................................................................23

INTERNATIONAL EXPERIENCES ON MARKET BASED INSTRUMENTS FOR WATER POLLUTION CONTROL ................................................................................................... 25 2.1 2.2 2.3 2.4 2.5 WATER QUALITY TRADING ......................................................................................................25 WATER POLLUTION LEVIES .....................................................................................................30 PPP AND MARKETIZATION ......................................................................................................35 WATER TARIFF AND SEWAGE TREATMENT PLANT CONSTRUCTION AND CHARGE .....................40 SUMMARY OF EXPERIENCES WITH MARKET-BASED POLICIES..................................................42

3.

ASSESSMENT OF ECONOMIC POLICIES FOR WATER POLLUTION CONTROL IN CHINA 45 3.1 3.2 3.3 3.4 OVERVIEW .............................................................................................................................45 EX-POST EVALUATION OF MAJOR ECONOMIC INSTRUMENTS...................................................49 ECONOMIC POLICIES, LAWS, REGULATIONS AND INSTITUTIONS ...............................................70 SUMMARY ..............................................................................................................................93

4.

ECONOMIC POLICY FRAMEWORK AND IMPLEMENTATION STRATEGY FOR WATER POLLUTION CONTROL IN CHINA .................................................................................... 95 4.1 4.2 4.3 4.4 MARKET-BASED ECONOMIC POLICY FRAMEWORK FOR WATER POLLUTION CONTROL .............95 DESIGN OF POLICY OPTIONS ..................................................................................................98 IMPLEMENTATION STRATEGY ................................................................................................124 SUGGESTIONS FOR IMPLEMENTATION OF KEY POLICIES ........................................................128

5.

DESIGN OF WATER POLLUTANT DISCHARGE TRADING ........................................... 151 5.1 5.2 5.3 5.4 INTRODUCTION TO TAI LAKE BASIN .......................................................................................151 CONSIDERATIONS WITH REGARD TO DISCHARGE TRADING IN TAI LAKE BASIN .......................160 DESIGN OF TRADING PROTOCOLS FOR TAI LAKE BASIN ........................................................167 SUPPORTIVE POLICIES AND MEASURES ................................................................................175

REFERENCES APPENDICES

PREFACE
Thirty years ago, the Chinese Government announced the economic reform and opening up to the outside world policy. Since then, the implementation of the reform and opening up policy has contributed to the sustained rapid development of the economy and the remarkable improvement of the living standards of its people. Moreover the implementation of the policy has also promoted the transformation of China’s socioeconomic system through the significant improvement of the regulatory and public administration systems, The accelerated economic development has also been accompanied by the remarkable progress in environmental management. Environmental protection and population control have been pronounced to be basic national policies. A system of environmental laws, regulations and standards has been gradually established and improved. Regulatory, economic and information instruments have been applied to environmental management. Market-based instruments, such as pollution charges, wastewater treatment tariffs have been introduced. Water pollution control is one of the important aspects of environmental management in the PRC. Significant achievements in this area include the comprehensive regulatory system, preparation of pollution prevention and control plans for key watersheds, requirement for industries to comply with discharge standards, closure of polluting enterprises, construction of urban wastewater treatment plants, promotion of cleaner production and application of circular economy. Yet, as the transformation to market economy deepens, China faces amounting new environmental challenges. In response, the Chinese government has proposed to expand the use of market-based instruments, supported by regulatory, economic and administrative measures, to control environmental pollution. In April 2007, ADB signed an MOU with the Chinese government for a technical assistance on the use of market-based instruments for water pollution control in China. The purpose of the advisory TA is to support the Chinese government in its endeavour to make better use of market-based instruments, by bringing in international experiences and best practices. The study covered: i) a comprehensive analysis of the present state of water pollution in China, key issues and policy needs; ii) review of international experiences in the use of market-based policies in water pollution control; and iii) recommendations on a market-based policy framework and an emission trading scheme for water pollution control in China. This report consists of five chapters. Chapter one outlines the key issues of water pollution control in China and policy needs. Chapter two provides a summary of international experience in the use of market-based instruments for water pollution

control. Chapter three contains an evaluation of the domestic experiences in the use of market-based instruments China for water pollution control. Chapter four puts forward the recommended market-based policy framework for water pollution control in China. Chapter five discusses the various options for the design of a water pollution discharge trading scheme. The report also contains four appendices that covers a summary of international case studies on water pollution discharge trading, a field study of agricultural non-point source pollution, a questionnaire survey on the use of market-based instruments on water pollution control in China and a series of case studies on ecological compensation in China. . It is worth mentioning that the initial focus on the use of discharge trading in improving water quality. At the recommendation of the Ministry of Environmental Protection and in response to the expert comments at the TA inception and midterm review workshops, the scope of the study has been expanded to include other issues such as water pollution prevention and control financing policies, based on the broader definition of the polluter-pays principle. Therefore, the discussions in the report, as related to international and domestic experiences and the design of the policy framework, refer to a broader definition of environmental economic policies, namely, emission and discharge charge policies, trading policies, public fiscal policies and investment and financing polices.

1.

WATER POLLUTION CONTROL POLICY NEEDS IN CHINA

In order to understand China’s policy needs for water pollution control, this chapter begins by introducing the water quality management issues in country’s seven key water bodies, including their states of health, pollution sources, pollution prevention and control investments, environmental management systems, water pollution prevention and control policies and the problems and pressures of water pollution prevention and control in China. 1.1 State of Health of China’s Water Environment

The major attention of the Chinese government to the water environment focuses on the key river systems and basins, including the formulation and implementation of abatement targets for key pollutants and direct investments. 1.2 Overall State of Surface Water Quality

The overall quality of the country’s surface water bodies has witnessed improvement during the 11th Five-Year-Plan period (2006-2010), with an overall rating of medium pollution. According to the 2008 National Report on the State of the Environment, 55.0% of the state-level monitor stations reported water quality at Classes I to III and 20.8% reported below Class V. This compared favourably with the year of 2005 which had 14 percentages lower for Classes I to III and 6.2 percentages higher for below Class V. Detailed water quality monitoring data between 2001 and 2008 are provided in Table 1-1 and Figure 1-1. The information reported in the national state of environment reports in regard to continued improvement in water quality is consistent with the results of the questionnaire survey undertaken under this study. The questionnaire survey reported 73% of the respondents giving a positive evaluation of the quality of the water environment, including 11% who gave a response of “significant improvement” and 30% “somewhat improvement”, and 32% who responded “the trend of worsening pollution has been generally under control”. It can be concluded that the general population is “cautiously optimistic” about the present state of the water environment. A summary of the survey results is presented in Figure 1-2.

Year 2001 2002 2003 2004 2005

Table 1-1: Water Quality in China between 2001 and 2008 (Unit:%) Below Class I Class II Class III Class IV Class V Class V 1.5 18.0 10.0 17.7 8.8 44.0 2.7 13.8 12.6 18.9 11.1 40.9 3.4 21.4 13.3 23.8 8.4 29.7 4.6 20.9 16.3 21.6 8.7 27.9 4.0 20.0 17.0 25.0 7.0 27.0

1

2006 2007 2008

3.0

18.0 49.9 55.0

19.0

22.0 26.5 24.2

10.0

28.0 23.6 20.8

Source: National State of the Environment Reports.

七大水系各年份监测断面水质变化
I类-III类 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2001 2002 2003 2004 2005 2006 2007 2008 IV类-V类 劣V类

Figure 1-1: Water Quality between 2001 and 2008 for Seven Major River Basins

Figure 1-2: Percentage of Responses on Status of Overall Water Quality

The improvement in water quality is reflected in the average concentrations of pollutants. In 2008, the average annual permanganate index reported in the state-level surface water quality monitoring stations decreased to 5.53 mg/l from 7.62 mg/l in 2005; and the average annual concentration of ammonia nitrogen

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declined to 1.66 mg/l from 2.44 mg/l over the same timeframe. The overall average surface water quality for 2008 reached Class III for the first time in the history of water quality monitoring. The water quality in the seven large water basins––Yangtze, Yellow, Pearl, Songhua, Huai, Hai and Liao––has shown improvement. In 2008, the composite water quality in the seven river basins was rated “medium pollution”. The water quality of the Pearl and Yangtze rivers was generally good; Songhua slight pollution; Yellow, Huai and Liao rivers medium pollution; and Hai river heavy pollution. Out of the 409 state-level monitoring stations in the seven river basins, Classes I to III, Classes IV and V and Class V- accounted for 55%, 24.2% and 20.8% respectively. Compared to 2005, Classes I to III witnessed an increase of 13.5 percentage points, Classes IV and V a decrease of 8.3 percentage points and Class V- a decrease of 5.2 percentage points. The 2008 water quality data for the seven river basins are provided in Table 1-2 and Figure 1-3. Table 1-3: Water Quality of Seven Major River Basins in 2008 (% of Monitoring Stations)
River Basin Pearl Yangtze Songhua Yellow Huai Liao Hai Classes I to III 84.9 85.6 33.3 68.2 38.4 35.1 28.6 Classes IV-V 12.1 8.6 52.4 11.3 39.5 32.4 20.6 Class V3.0 5.8 14.3 20.5 22.1 32.5 50.8

比例 100% 80% 60% 40% 20% 0%

Ⅰ-Ⅲ类

Ⅳ-Ⅴ类

劣Ⅴ类

珠江

长江 松花江 黄河

淮河

辽河

海河

Figure 1-3: Water Quality for Seven Major River Basins in 2008

1.2.1

Total Pollutant Discharges Control

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The total volume of wastewater discharges for the country as a whole showed a slight increase. The volume of industrial wastewater remained relatively stable, but the volume of domestic sewage experienced a significant growth. The changes in industrial and domestic wastewater discharges between 2001 and 2008 are presented in Figure 1-4. This is due to two major reasons: first, the effective control of industrial pollution sources, and second, fast urbanization. However, the discharges from industrial pollution sources may have been under-reported as the statistics do not cover all industrial enterprises, especially the small-scale, multiple-variety township and village enterprises.
废水排放量 350 300 250 亿吨 200 150 100 50 0 2000 2001 2002 2003 2004 年份 2005 2006 2007 2008 工业废水排放量 生活废水排放量

Figure 1-4: Wastewater Discharges between 2001 and 2008

The abatement of major water pollutants, especially COD from industrial sources, has been effective. In 2008, the total discharge of COD for the country as a whole amounted to 13.21 million tons, or a reduction of 6.61% from 14.14 million tons in 2005. Of these, the COD discharges into nine key watersheds, including the “Three Rivers and Three Lakes”, upstream and middle-stream Yellow, Songhua, and the Three Gorges reservoir and its upstream were reduced by 7.95%, and NH3-N by 19.1% against 2005. The 2010 COD abatement targets for the Huai, Hai, Dianchi, upstream and middle-stream Yellow, Songhua and Three Gorges reservoir were already achieved ahead of schedule. The national total discharges of wastewater volume, COD and NH3-N are shown in Table 1-3.
Table 1-3: National Total Wastewater Volume and Major Pollutant Discharges between 2000 and 2008
Year 2000 2001 Volume of Wastewater (100 million tons) Total Industrial Residential 415.2 194.3 220.9 433 202.7 230.3 COD Discharge (million tons) Total Industrial Residential 1445 704.5 740.5 1404.8 607.5 797.3 NH3-N Discharges (million tons) Total Industrial Residential 125.2 41.3 83.9

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Volume of Wastewater (100 million tons) COD Discharge (million tons) Year Total Industrial Residential Total Industrial Residential 2002 439.5 207.2 232.3 1366.9 584.0 782.9 2003 460.0 212.4 247.6 1333.6 511.9 821.7 2004 482.4 221.1 261.3 1339.2 509.7 829.5 2005 524.5 243.1 281.4 1414.2 554.7 859.4 2006 536.8 240.2 296.6 1428.2 542.3 885.9 2007 556.8 246.6 310.2 1381.8 511.0 870.8 2008 572.0 241.9 330.1 1320.7 457.6 863.1 Source: Compiled from China State of the Environment reports.

NH3-N Discharges (million tons) Total Industrial Residential 128.8 42.1 86.7 129.7 40.4 89.3 133.0 42.2 90.8 149.8 52.5 97.3 141.3 42.5 98.8 132.4 34.1 98.3 127.0 29.7 97.3

COD discharges from industrial sources have exhibited a significant reduction because of effective pollution abatement. However, residential COD discharges have witnessed no apparent changes. The historical changes of COD from industrial and residential sources are shown in Figure 1-5. As China keeps up the pace of energy conservation and pollution abatement effort and the construction of urban sewage treatment facilities accelerates during the 11th FYP, the contribution of urban residential sewage treatment in the reduction of residential COD will grow. By 2008, there are 1,521 operational urban sewage treatment plants or an increase of 712 compared to that for 2005. The total treatment capacity amounted to 90.92 million tons/day. On average, the operational capacity stood at 73.3% of the design capacity. The rate of centralized urban sewage treatment reached 66% for the country as a whole. More than 1,300 treatment plants are installed with the online monitoring system.
COD排放量 1000 900 800 700 600 500 400 300 200 100 0 2000 工业COD 生活COD

COD排放量(万吨)

2001

2002

2003

2004 年份

2005

2006

2007

2008

Figure 1-5: COD Discharges between 2000 and 2008 However, a salient problem with China’s water pollution statistics is the exclusion of agricultural non-point sources. This mainly arises from the inherent difficulty and inability to accurately determine the discharges from these sources. Moreover, the present priority of water pollution control remains with industrial wastewater and urban sewage, although the role of controlling agricultural non-point sources in lake pollution is being recognized.

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In order to determine the contribution of agricultural non-point sources to water pollution loading, several major rivers in the Taihu Lake basin have been selected as case studies (details are presented in Appendix 2). Our study has revealed that the agricultural nom-point source has a fairly large contribution to water pollution for the rivers, with a ratio of 17.63%, 40.12%, 25.89% and 54.38% for COD, TN, NH3-N and TA respectively. A summary is presented in Table 1-4. This points to the need for controlling agricultural non-point sources in order to solve lake pollution. Table 1-4: Contribution of Agricultural NPS to Water Pollution in Taihu Lake Basin
River Taige Canal Caoqiao River Taige South Canal Shedu Port Guanshe Port Zhihu Port Weighted Average (%) COD (%) 23.07 19.07 16.98 10.33 18.94 17.41 17.63 TN (%) 44.99 46.53 40.18 33.4 52.43 23.74 40.21 NH3-N (%) 28.58 38.72 32.42 21.9 17.38 16.31 25.89 TP (%) 55.62 50.64 44.51 52.16 67.39 55.93 54.38

1.1.3

Strengthened Water Pollution Control

Since the “10th FYP”, the central government has beefed up efforts on environmental protection by increasing environmental protection investments. In 2007, the relevant agencies under the State Council established several special funds, such as the urban sewage treatment infrastructure supporting sewerage network fund, key watersheds pollution control fund, central special fund for environmental protection and the special fund for abatement of major pollutants. In 2008, the investment on environmental pollution control amounted to CNY 44.9 billion, accounting for 1.49% of the GDP. Of the total investment, industrial wastewater pollution abatement accounted for CNY 19.6 billion, or 35.5% of the total investment of CNY 55.2 billion on industrial pollution control. Shown in Table 1-5 are the environmental pollution control investments between 2000 and 2008. Table 1-5: Pollution Control Investments (2000-2008, in CNY billion)
Urban Environmental Infrastructure Industrial Pollution Abatement Pollution Prevention and Control Investment for New Industrial Facilities under the Three Simultaneousnesses 2000 56.13 23.94 26.00 2001 59.57 17.45 33.64 2002 78.53 18.84 38.97 2003 2004 107.24 114.12 22.18 30.81 33.35 46.05 2005 2006 128.97 131.49 45.82 48.39 64.01 76.72 2007 2008 146.78 180.10 55.24 54.26 136.74 214.67

Total 106.07 Source: China State of the Environment reports.

110.66 136.34

162.73 190.98

238.80 256.60

338.76 449.03

The implementation of the pollution control programs for the eight key watersheds (Huai River, Hai River, Liao River, Chao Lake, Dianchi Lake, Songhua, Three Gorges Reservoir and its upstream and upper and lower Yellow) has shown steady progress; the performance is better than the 10th FYP. By September 2008, of the 6

2,712 pollution control projects for these key watersheds, 881 were completed and 960 were under implementation. The realized investments totalled CNY 51 billion. The planned pollution control program for the Songhua performed well, with only 5.4% of the planned projects having not yet been started, compared to 17.6% for the Huai where 86 of the 488 pollution control projects had yet to begin. For the Hai river basin, the completion rates reached 37% for Hebei province, 48.5% for Shanxi province, 73% for Henan province, 76% for Shandong province, 90.5% for Beijing and 67% for Tianjin. For the Liao river basin, 95 or 43% of the 221 planned projects (including 86 in Liaoning province, 55 in Jilin province and 80 in Inner Mongolia autonomous region) were finished, 82 were under construction. 1.2 Improved Water Pollution Control System

The water pollution control system in the PRC consists of several integral elements, including water environment management, water pollution control policies and pollution abatement measures. It has undergone continuous improvement. 1.2.1 Improved Management of the Water Environment

According to the current institutional arrangements, management of the water environment involves such agencies as the Ministry of Environmental Protection, Ministry of Water Resources, National Development and Reform Commission, Ministry of Finance and Ministry of Construction. MEP and MWR are the two agencies with primary responsibility. MEP is supposed to be responsible for coordinated management, but it does not have basin-based coordination organs although the five regional environmental supervision centers for the eastern, southern, north-western, south-western and north-eastern PRC perform the duty of environmental supervision for the respective regions. The Ministry of Water Resources is responsible for managing the water resources in the river basins. Under the direct administration of MWR are the river basin management agencies for the seven major watersheds of Yangtze, Yellow, Hai, Liao, Huai, Pearl, Songliao and Tai Lake. As subsidiaries of the MWR, these river basin commissions exercise administrative functions over the respective river basins on behalf of the MWR. The National Development and Reform Commission (NDRC) is charged with the responsibility for technological and economic policies for environmental protection. It also reviews and approves water pollution control projects within the basins, including urban sewage treatment plants and industrial pollution abatement projects. The Ministry of Finance (MOF) is responsible for formulating environmental protection-related fiscal policies. The Ministry of Construction (MOC) provides guidance on urban water supply and water conservation, construction of wastewater treatment plants and the development and protection of groundwater within urban areas. The existing management regime over the water environment has many problems 7

needing improvements. They include: i) duplication of mandates among the various agencies; ii) entangled relationship between water resource development and water pollution control; and iii) ununified management systems between the river basins. 1.2.2 Improving Water Pollution Control Policies

Water pollution control policy landscape in the PRC has shown gradual improvements with the use of common and specialized policy instruments. At the center of the policy landscape are the “command and control” instruments such as “three simultaneousnesses”, discharge standards, total pollutant discharges control and discharge permits, characterized by administrative coercion. Tangible results have been accomplished. A classification of China’s water pollution control policies is summarized in Table 1-6. Table 1-6: Classification of China Water Pollution Control Policies
Target Sectors Agricultural Sources of Industrial Sources of Pollution Pollution Basin water Basin water pollution control planning; Environment impact assessment and the pollution control planning “three simultaneousnesses”; Total pollutant discharges control; Discharge permits; Plant closure and suspension of production Pollution levies; Wastewater treatment tariffs; Ecological compensation pilot programs; Emission trading pilot programs Public reporting and grievance hotlines Urban Residential and Tertiary Industry Pollution Sources Basin water pollution control planning; Environment impact assessment and “three simultaneousnesses”; Discharge permits

Nature Coercive (Mandatory) Policies

Economic Policies

Pollution levies; Wastewater treatment tariffs

Public Participation Policies Incentive Policies

Public reporting and grievance hotlines Centralized sewage treatment

Centralized sewage treatment

A review of the policies can easily reveal: i) China’s water pollution control policies focus on the industrial sector; water pollution control for the agricultural and urban sectors is the extension and application of the industrial pollution control policies and has many gaps; ii) the existing water pollution control policies have a heavy reliance on the role of government, with the heavy use of coercive instruments; there is a lack of clear guidance and direction for enterprises and the general public to participate in water pollution control, and hence inadequate use of effective economic, participatory, incentive and voluntary policies; iii) from the stages of intervention, preventive policies include river basin water pollution control planning, environmental impact assessment and the “three simultaneousnesses”, total pollutant discharges control; an example of the middle stage policies is discharge permits; the end-of-pipe policies entail pollution levies, centralized wastewater treatment, plant closures and suspension of production. It is apparent that the existing water pollution policies have

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placed heavy emphasis on pollution control in the industrial sector on the one hand, and on the other hand on end-of-pipe measures, with inadequate attention to early prevention and middle-stage management. With the release and strengthening of river basin water pollution control plans and the effective implementation of the EIA system, the situation is gradually improving. 1.2.3 Deepening Water Pollution Control Measures

Water pollution control in China is achieved through the implementation of total pollutant discharges control, pollution control for key watersheds and special campaigns. A) Total Discharges Control for Major Pollutants

The 11th FYP (2006-2010) put forth the target of reducing the total discharges and emissions of major pollutants in the country as a whole by 10% over five-year period. By 2010, the total amount of COD discharges will be reduced from 14.14 million tons at the end of 2005 to 12.73 million tons by the end of 2010. The specific control measures include the following: Control at Entry MEP requires that any proposed project will not be approved if it discharges heavy metals and persistent organic pollutants (POPs) into a key lake or nitrogen and phosphorus into a closed or semi-closed water body. The environmental requirements for iron and steel, iron alloy, coking, calcium carbide, copper refinery and automobile industries will be strengthened such that any proposed project will be rejected if it does not confirm to the national industrial policy and environmental protection requirements. Conditional approval will be given to a proposed project if the region or proposing enterprise has any of the following problems: i) not meeting the prescribed discharge targets; ii) not meeting exceeded the total pollutant discharges control limits; iii) having salient environmental violations; iv) state-level monitoring stations violating ambient water quality standards; v) not completing the target of eliminating production capacities with outdated technologies. In the meantime, newly constructed projects that do not comply with “three simultaneousnesses” will be shut down. Strategic EIA is required for plans on economic development, urban and rural development, resource development, tourism development, cultivation and breeding, and navigational development. Strengthening Industrial Pollution Control One of the policy measures is to enforce water pollutant discharge standards and total pollutant discharges control and to expand the use of pollution discharge permits. Since 2008, all enterprises have been required to possess a valid pollutant discharge permit. Those without a permit will not be allowed to operate. Others exceeding the permitted discharges will be order to suspend or cease operation. The

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priority is to strengthen supervision of the key enterprises, who account for 65% of the COD of the industrial sector, for meeting the discharge standards and for reducing their discharges. Small-scale pulp and paper, brewery, chemical, textile and dying factories (nicknames “five small’s”) have been phased out or closed down. Enterprises that cannot meet the discharge standards of the prescribed key pollutants within a specified period are ordered to cease operation for immediate rectification. Enterprises are required to adopt measures to conserve, recycle and reuse water. Thresholds of wastewater discharge volumes for high-water-consuming enterprises are released. Pollution abatement and technological transformation is promoted for pulp and paper, brewing, chemical, textile and dying industries. Wastewater reuse and recycling is encouraged for iron and steel, power, chemical and coal industries. Stringent monitoring of the quantity and quality of industrial wastewater that is discharged into urban wastewater treatment plants is carried out, in order to ensure that proper operation of the urban wastewater treatment plants. Inspections are conducted of chemical enterprises located along waterways for discharges of toxic and hazardous wastes. The monitoring data are published on a regular basis, with the aim to supervise the operation of the wastewater treatment facilities, prevent pollution accidents and improve emergency preparedness and response. Speeding Up Construction of Urban Wastewater Treatment Plants According to a mandatory target of the 11th FYP for environmental protection, all cities are required to have operational sewage treatment plants by 2010 with a minimum rate of 70% for centralized sewage treatment. By then, the total sewage treatment capacity for the country as a whole will reach 100 million tons/day. Supervision of urban wastewater treatment plants has been strengthened to ensure that their discharges will meet the applicable standards. Sludge from sewage treatment plants is required to be properly disposed in centrally planned facilities, including the implementation of stabilization and detoxication measures. Water-short cities are ordered to achieve a minimum of 20% for water reuse and recycling. All cities within a watershed will begin the collection of wastewater tariffs if they have not done so. All sewage treatment plants are required to have facilities to remove nitrogen and phosphorus. All operational sewage treatment plants in the Tai Lake basin were ordered to retrofit nitrogen and phosphorus removal by the end of June 2008. The deadline for sewage treatment plants in other watersheds is set for the end of 2010. Controlling Rural Sewage and Non-Point Source Pollution Organic and green agriculture will be promoted, along with balanced fertilizer application and integrated pest management, to reduce the use of chemical fertilizers and pesticides. Areas are delineated for banning livestock and poultry breeding. Livestock and poultry farms that cannot meet the discharge standards

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within a specified timeframe will be closed. All urban centers and concentrated rural settlements were required to put in place sewage treatment facilities by the end of June 2008. Ensuring Safety of Drinking Water The environmental conditions of the water supply source areas will be investigated. Drinking water safety plans and management guidelines as well as environmental protection plans for drinking water supply source areas will be prepared. Soil erosion, water resource restoration and non-point-source pollution control will be strengthened. Construction of enterprises causing heavy water pollution, including chemical, pulp and paper and dying, will be prohibited in drinking water supply source areas. Wastewater discharge outlets into drinking water supply source with class one protection will be eliminated. A deadline will be given to the closure of projects newly built or expanded within drinking water supply source areas with class two protection since 2000. No ports that load and unload toxic and hazardous substances will be allowed within drinking water supply source areas with class two protection. Drinking water supply safeguard and emergency response system and interagency coordination mechanism will be established, along with increasing the frequency of monitoring. Groundwater pollution survey will be carried out; groundwater protection plan if used as drinking water supply source will be formulated. Attention will be paid to the research and prevention of water pollution by persistent organic pollutants (POPs). B) Pollution Control for Key Watersheds During the 11th FYP, pollution control for key watersheds has progressed steadily. With the approval by the State Council, the 11th FYPs for water pollution for “three rivers”, “three lakes”, Songhua, Three Gorges Reservoir on the Yangtze and its upper reaches, and Xiolangdi Reservoir on the Yellow River and its upper reaches are under active implementation. Land clearing for the Three Gorges Reservoir area was completed for maintaining the water quality of the mainstream Yangtze in time for reaching the 156-m storage level. In January 2008, the then State Environmental Protection Administration (SEPA) and National Development and Reform Commission (NDRC) jointly issued the “Pollution Control Plan for Three Gorges Reservoir and Its Upper Reaches” (Revised)”. In April 2008, MEP, NDRC, MWR and MHURD jointly released the “Water Pollution Control Plan for Huai, Hai, Liao, Chao Lake, Dianchi Lake and Upper and Middle Yellow (2006-2010)”. MEP, together with NDRC, formulated the “Master Plan for Comprehensive Rehabilitation of Tai Lake Basin”, which was approved by the State Council in May 2008. C) Special Campaign for Water Pollution Control

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Since July 2008, a new round of “environmental protection storm” was initiated. It has involved the joint action of eight central agencies, including the MEP, NDRC, Ministry of Supervision, Ministry of Justice, MHURD, State Administration for Industry and Commerce (SAIC), State Administration of Work Safety (SAWS) and State Electricity Regulatory Bureau (SERB). The eight ministries issued a joint announcement on “environmental protection campaign to deepen violating enterprises and protect public health”. The priority is to rectify pollution to the water quality of drinking water supply sources to ensure the quality of all drinking water supply sources meeting applicable standards. Inspection was carried out for 113 key cities for environmental protection. The long-term violating pulp and paper enterprises will be closed down permanently. Outdated technologies and equipment will be phased out and destroyed to prevent pollution migration. An urban WWTP that cannot reach 60% of its design capacity more than one year after completion will be given a probationary to rectify. During the probationary period, approval of EIAs will be suspended for the project region. 1.3 1.3.1 Pressures and Trends of China’s Water Environment Water Environment Still Facing Salient Challenges A) Growing Non-Point-Source Pollution The structure of water pollution loadings in China is changing, with increasing percentage shares of residential and non-point sources. For some water bodies, non-point sources have replaced point sources to become the major threat to water quality. The present water pollution control laws and regulations are targeted primarily at point sources. The government has not incorporated non-point-source pollution into its water pollution control plan. The lack of laws and regulations has to a large extent discounted the water pollution control efforts. The accelerated urbanization has resulted in a rapid increase in the discharges and pollutant loadings of urban sewage. For some large-size and mega-size cities, sewage has become a major challenge to water pollution control. The construction and operation of urban sewage collection and treatment facilities cannot keep pace with the rapid growth of sewage volume. This has caused the discharge of untreated sewage and increasing contribution to pollutant loadings. In addition to urban sewage, rural sewage has also become another growing source of water pollution. Due to lack of management and restrictions, rural sewage and garbage are disposed of at will, causing increasing degradation of water quality of streams, rivers and groundwater in rural areas and posing a risk of epidemic diseases. In general, the situation is worse in southern than northern PRC. About 85% of China’s lakes suffer from serious eutrification. Non-point sources

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account for more than 50% of the pollution loadings for lakes in eastern PRC. About 60% of the chemical fertilizers and pesticides go to soils and water bodies as pollutants, because of overuse and/or misuse, resulting in the accumulation of nitrogen and phosphorus in water bodies and hence eutrofication. Moreover, widespread use of surfactant-based detergents has also contributed to the escalation of the coverage and magnitude of non-point-source pollution. This type of pollution is expected to worsen in the foreseeable future. Due to limitations of the present environmental statistical system, agricultural non-point-source discharges have not been included in the national water pollution statistics. B) NH3-N, TN and TP Pollution Although COD is a major indicator for organic pollution, the Class V- water quality for many of the monitoring stations is attributable far more often to NH3-N, TN and coliform than COD. This points to the need for technologies and financing to control other major pollutants. TN and TP are major indicators for nutrient-related pollution. In 2008, the average concentration of TN for water quality monitoring stations across the country reached 3.44 mg/l which is 172% of the Class V standard for lakes; the number of monitoring stations with Class V water quality for lakes or worse accounted for 55.2%. The average concentration of TP was 0.19 mg/l or Class III standard for rivers (equivalent to Class V lake water quality standard), with the number of monitoring stations exceeding Class V lake water quality standard accounting for 29%. NH3-N pollution is particularly pronounced for rivers. The average concentration of NH3-N reached 1.9 mg/l which is equivalent to Class V. The number of monitoring stations with Class V- water quality accounted for 19.2%. In addition, heavy metal and POP pollution is serious for some watersheds and regions. Arsenic (As), mercury (Hg) and cadmium (Cd) pollution has had a long existence in the Xiangjiang River. Carcinogenic, teratogenic and mutagenic organic pollutants have been detected in the groundwater in Beijing-Tianjin area, Yangtze River delta and Pearl River delta. The detection rates for pesticides, halo hydrocarbons and monocyclic aromatics ranged from 10% to 20%, and even 30% to 40% for some regions. For the old industrial base of north-eastern China, pollution from “five toxins” (volatile phonel, cyanide, arsenic, mercury and hexavalent chromium) and organic pollution are salient. C) Problems with Wastewater Treatment Plants The status of sewage treatment varies widely amongst different regions and between urban and rural areas. Since the start of the 11th FYP, governments at various levels have paid great attention to the reduction of COD discharges. Many sewage treatment plants have been built. According to the national 11th FYP for environmental protection, the sewage treatment rate for all cities should reach 70% by 2010 (the mandatory target is 80% for provincial capital cities; 60% for

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prefecture-level cities and 60% for county-level cities). The target for sewage treatment for county seats is 30%. The target for the total capacity for urban sewage treatment for a country as a whole is 100 million tons/day. The operating capacity for an urban sewage treatment plant is required to reach at least 60% of the design capacity within the first year of operation and at least 75% within first three years of operation. By the first half of 2008, there were 327 operating sewage treatment plants for the 31 provincial capital cities across the country with a total design capacity of 31.0 million tons/day and the total operational capacity of 24.1 million tons/day. Only 9 or 29% of the 31 cities reached the prescribed treatment rate of 80%. There were 632 sewage treatment plants for 333 prefecture-level cities with a total design capacity of 35.3 million tons/day and a total actual operating capacity of 24.3 million tons/day. Only 100 or 30% of the cities met the target treatment rate of 60%. The 310 sewage treatment plants for 369 county-level cities has a total design capacity of 9.1 million tons/day and the total actual operating capacity of 6.4 million tons/day. Only 121 or 33% of the cities achieved the target rate of 50%. The 373 sewage treatment plants for 1,635 county-seat towns had a total design capacity of 6.2 million tons/day and the total actual operating capacity of 3.7 million tons/day. Only less than one quarter of the county-seat towns had operational sewage treatment plants, and about 1,260 of them had not sewage treatment facility at all. Details are provided in Figure 1-8 and Figure 1-9. In 2007, the urban sewage treatment rate stayed at above 70% for Beijing, Tianjin, Shanghai and Shandong, whereas less than 20% for Guangxi. Jilin, Jiangxi, Hunan, Guizhou and Qinghai provinces had the urban sewage treatment rate at below 30%. As can be seen from the above statistics, the lower the administrative level, the lower the number of sewage treatment plants, design treatment capacity and operating capacity. Therefore the construction of sewage treatment plants and related sewerage networks and improving their actual operational capacity should be accorded priority for the next phase of water pollution control.

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Figure 1-6: Actual Sewage Treatment Rates by Province in 2007

Figure 1-7: Number of Urban Sewage Treatment Plants at Different Administrative Levels by First Half of 2008

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Figure 1-9: Actual Urban Sewage Treatment Rate at Different Administrative Levels by First Half of 2008

Although the total design capacity has witnessed rapid growth, the operational rate has not shown much improvement. Between 1998 and the first half of 2008, the number of urban sewage treatment plants grew from 266 to 1,642; the design treatment capacity increased by more than 7 fold from 11.4 million tons/day to 81.6 million tons/day; and the actual operational capacity also increased by more than 7 fold from 8.0 million tons/day to 58.8 million tons/day (Table 1-7 and Figure 1-8). Between 1998 and the first half of 2008, the construction of urban sewage treatment plants has slowed down, with only 245 being built. But between 2005 and the first half of 2008, the number jumped to 1,005 or an average of 288 per year, making the design capacity to increase by 91.8% from 42.6 million tons/day to 81.6 million tons/day which was 18.4 million tons/day short of the 11th FYP target of 100 million tons/day. If this speed would continue, no problem is anticipated to achieve the target within the remaining two years of the 11th FYP. In recent years, the actual operational capacity has displayed an upward trend to 71.6% by the first half of 2008 although with some fluctuations (Table 1-7). Table 1-7: Sewage Treatment Capacity between 1998 and First Half of 2008
Year 1998 1999 2000 2001 2002 2003 No. of Plants 266 283 315 319 418 511 Design Capacity (10,000 tons/day) 1136 1191 1659 2022 2544 3231 Actual Operational Capacity (10,000 tons/day) 802 894 1201 1404 1734 2123 Ratio of Operational over Design Capacity (%) 70.60 75.06 72.39 69.41 68.15 65.72

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2004 2005 2006 2007 1st Half of 2008

637 764 939 1178 1642

4255 5220 6370 7243 8163

2779 3526 4469 5320 5848

65.32 67.55 70.16 73.45 71.63

Figure 1-9: Changes in Sewage Treatment Capacities between 1996 and 2008 Another bottleneck is the inadequacy of sewage collection pipelines and networks. During the first half of 2007, about 7 million tons/day was added to the urban sewage treatment capacity, of which approximately 4 million tons/day was coupled with fully connected sewerage networks. Take Dianchi Lake as an example, the 11th FYP has set the target at 60% (dry season) for urban sewage treatment, but field visits have revealed a different situation. In fact, the sewerage network for Kunming city has not yet been built such that sewage flows into nearby rivers directly or via storm sewers. The four completed sewage treatment plants treat water from the rivers. The figure of 60% is derived by dividing the total volume of generated sewage by the operational capacity of the sewage treatment plants. Taking into the dilution by natural runoff, the actual average treatment rate may only be about 10%. The main cause for this situation is the emphasis on the construction of sewerage treatment plants but neglects the construction of matching sewerage collection networks. By the end of the 10th FYP, the investment in the construction of sewage treatment plants exceeded CNY 1 billion whereas the investment in the construction of sewerage networks amounted to only CNY 1.5 billion, compared to the international average of 1:3 ~ 1:5. An additional 48,966 km of sewerage pipelines were newly constructed by 2008 since 2005; they accounted for only 30.1% of the 11th FYP target of 160,000 km. The reuse of urban sewage in the PRC is still in its infancy, and the progress has

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been slow. As can be seen from Figure 1-10, the volume of urban sewage reuse showed an upward trend between 2003 and 2006. There was a notable growth of 200 million tons in 2006 compared to 2005. However, the growth in urban sewage reuse at 5% per annum in the past 4 years was much slow compared to that for the growth in urban sewage treatment capacity for the same period. If no effective policies are introduced, water resources will face mounting pressure as both the urban population and per-capita water use increase.

Figure 1-10: Urban Sewage Reuse between 2003 and 2006

Of the 31 provinces, Yunnan, Xinjiang, Shanxi, Liaoning and Beijing rank from first to the fifth in urban sewage reuse, with a respective rate of 34.7%, 21.6%, 19.2%, 15.5% and 14.8%. Chongqing, Fujian, Zhejiang, Guangdong and Tibet have a rate of zero. D) Need for Long-Term Effective Mechanism There is an urgent need for strengthening sewage tariff collection and the support from financing institutions, and for strengthening the role of industrial pollution abatement and structural measures for discharge reduction. Urban sewage tariffs vary widely between regions. By the end of 2008, most cities had introduced sewage tariff collection system. But a common problem is low tariff and low collection rate. In 2007, a total of CNY 11 billion was collected in 35 large cities, with an average tariff rate of CNY 0.77/m3. Most of the urban sewage treatment plants operate with a low profit margin or with subsidies from the government. Therefore, the healthy operation of urban sewage treatment plants requires lowering the operating costs on the one hand and raising the sewage treatment tariff on the other hand.

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处理单位城市污水费用(元/吨)

3.0 2.5 2.0 1.5 1.0 0.5 0.0 2.5

1.7 1.3 1.1 0.9 0.9 0.9 0.8 0.8 0.8 0.9 0.9 0.8 0.8 0.8 0.7 0.7 0.7 0.6 0.5 0.5 0.7 0.6 0.4 0.3 0.6 0.5 0.5 0.2 0.3 甘 浙吉 宁福 江四 陕山 天河 北广 安重 贵内 黑广 江河 辽湖 山新 云上 海湖 青 肃 江林 夏建 苏川 西东 津北 京东 徽庆 州蒙 龙西 西南 宁南 西疆 南海 南北 海 古江

Figure 1-11: Urban Sewage Treatment Cost in 2006 (With the national average being CNY 0.78; Tibet is not shown as it has no sewage treatment plant) It has proven difficult for small and medium enterprises (SMEs) to secure financing for pollution control. The support from financing institutions to the abatement of water pollutants is weak. SMEs are a major source of pollution for the water environment. They account for approximately 50% of the industrial pollution loadings. Yet SMEs face two major difficulties in raising financing. First, financing institutions are not willing to lend to industrial enterprises, especially SMEs, for the purpose of pollution control. Second, environmental protection industrial enterprises neither have good support from the capital market nor by preferential policies for listing in the stock market. According to the polluters’ pay principle, enterprises should shoulder the cost of pollution abatement. But in reality, lack of financing is a major constraint for the SMEs. The shortage of funds makes it difficult for SMEs to put in place or properly operate pollution control facilities. Given that SMEs play an important role in socioeconomic development and in employment creation, it is not quite feasible to simply shut them down for the sake of environmental protection. Therefore, it is necessary to explore financing mechanisms for pollution control for SMEs. The potential of industrial pollution abatement and structural reduction of discharges has not been fully realized. Abatement with engineering measures (sewage treatment and industrial abatement), discharge reduction through structural adjustment and discharge reduction through strengthened supervision are considered three major instruments. At present, discharge reduction through supervision is still quite weak. Therefore the other two instruments have become primary means to control pollution. The COD reductions for the first half of 2008 were achieved through sewage treatment, industrial abatement and structural adjustment. Of these, sewage treatment accounted for 56.70% of the total COD reductions, industrial abatement 25.40% and structural adjustment 17.80%. The construction of sewage treatment plants is therefore the primary means of achieving

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pollution reduction, as is shown in Figure 1-12. As the construction and operation of sewage treatment plants narrows the supply and demand gap, structural adjustment and supervision will become more and more important.

Figure 1-12: Contributions of Different Pollution Reduction Instruments for First Half of 2008

1.3.2

Future Pressures on Water Environment A) Fast Economic Growth and Population Expansion

The fast economic growth and a large population base, along with improved standards of living and escalating consumption level, are the major driving forces for water pollution in China. Experiences from developed countries have shown that a 1% increase in GDP will trigger an increase of 0.26% in the volume of wastewater discharge, and that a 10% growth in industrial output value will lead to an increase of 0.17% in industrial wastewater discharge. Fast economic development, large population base and rapid rate of population growth have combined to continue to mount pressure on the environment and natural resources; they have become a major factor that continues to upset the environmental-economic harmony. Take the Tai Lake basin as an example, the total population has grown to more than 40 million, with the population density reaching 1,000 persons/km2. In the past ten years, the industrial output value of the Tai Lake basin, especially that of the township and village enterprises has grown by nearly 700%. The volumes of industrial wastewater and sewage have also increased tremendously. Between 1970s and 1990s, the quality of water bodies in the basin downgraded 2 to 3 classes. For the country as a whole, most river sections downstream of cities and suburban industrial zones are heavily polluted.

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B) Water Shortage and Irrational Use China’s water environment is faced with three intertwined problems of shortage, pollution and waste. In spite of the painstaking effort, the trend of water environment degradation has not been arrested since 1970. The water quality of many rivers, lakes and reservoirs continues to degrade. Much of this has to do with water shortage, irrational use and waste. As a water-short country with an average per-capita water resources accounting for only 1/6 of the world average, China ranks the 109th in terms of water availability on a per-capita basis. About half of China’s more than 600 cities are short of water. The uneven geographic distribution of precipitation exacerbates the water shortage situation of arid areas as well as water pollution. In the meantime, there is considerable wastage of water resources as a result of low awareness and low tariff. Accounting for 70%~80% of the total water use, the agricultural sector has an average water use efficiency of approximately 30%, compared to 70%~80% for developed countries. The rate of water reuse for China’s industrial sector is no more than 50% compared to more than 80% for developed countries. The water consumption per unit of industrial output value in China is nearly 7 times that for developed countries. For residential water supply, aged distribution networks and outdated technologies have resulted in low rate of effective supply. C) Unsustainable Mode of Socioeconomic Development As a developing country, China has a predominantly rudimentary mode of economic growth with irrational industrial and agricultural structures, outdated technologies and low rates of utilization of energy and natural resources, high material and energy consumption and low efficiency. This outdated and unsustainable mode of production is the root cause of the serious water pollution in China. Take the Huai River basin as an example, in the past ten years there has been a mushrooming growth of pulp and paper, brewery, chemical, tannery and electroplating enterprises with high water consumption, heavy pollution and low economic efficiency. In particular, the pulp and paper enterprises account for more than 50% of the industrial pollution loadings. Their small scale and outdated technologies and equipment make it very difficult for pollution control. The water consumption and pollutant discharges per unit of production are often tens or more than 100 times higher than those of overseas advanced enterprises. In the vast countryside of the PRC, the widespread use of chemical fertilizers and pesticides has lifted agricultural production but at the same time generated severe agricultural non-point-source pollution from a loss rate as high as 50%~70% for chemical fertilizers. Moreover, pollution from sewage of villages and towns, especially small village and township enterprises, has caused severe degradation of the rural water environment. Aside from industrial wastewater and urban sewage, wastewater from animal and poultry farms and agricultural non-point-sources have become another contributing factor to water pollution.

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D) Changing Face of Water Pollution Water pollution in China results from several major sources, including industrial wastewater, urban sewage, loss of chemical and organic fertilizers and pesticides from the agricultural sector, and leachate from solid wastes. It is estimated that 80% of urban sewage is directly discharged into water bodies without any form of treatment. In 2007, the total wastewater discharge for the country as a whole amounted to 55.68 billion tons, of which industrial wastewater accounted for 24.66 billion tons and urban sewage 31.02 billion tons. In recent years, the patterns and sources of water pollution have changed quite significantly. The percentage shares of the agricultural non-point source have experienced a gradual increase, while those for the industrial sources have witnessed a decline. Sewage from cities and towns is being more pronounced. The changing shares of the different pollution sources are related to the improved the standards of living and adjusted modes of production. These changes have posed a new challenge to the task of water pollution control. Moreover, while conventional organic pollution has not been put under control, a number of new issues, including nitrogen and phosphorus pollution of rivers and lakes, pollution of POPs, ecological degradation of the water environment, sediment pollution and pollution of drinking water supply sources, have emerged to become new challenges to water pollution control. E) Future Challenges of Controlling Water Pollution Discharges According to forecasts by the Chinese Academy of Environmental Planning, the GDP growth rate in China will be maintained at above 8% for the 12th FYP (2011-2015) and the urbanization rate will grow by 4 percentage points. If fundamental adjustments to industrial structures would not take place, industrial and residential water uses would increase year by year, and such heavy water-polluting industries as pulp and paper, chemical, textile, iron and steel, food and brewing industries will continue to be the drivers of industrial output value (more than 60% in 2007, and expected to remain at 50% by 2015). For the 12th FYP, assuming a natural rate population growth at 0.5% per annum and an average rate of urbanization at 1%, the annual COD discharge from urban sewage will increase by 2.20 million tons per year; and the discharge of NH3-N will have an incremental of 270,000 tons during the 12th FYP. The discharge of COD and NH3-N from industrial sources will reach a respective 1.49 million tons/year and 100,000 tons/year. Detailed estimates are provided in Table 1-8. As can be seen from the table, China is faced with mounting pressures in the foreseeable future for controlling water pollution. Table 1-8: Forecasted Industrial Pollutant Discharges during the 12th FYP
Forecasting Method Based on Trend of Wastewater Discharge Incremental Industrial Discharge of COD (Million Tons) 1.49 Incremental Industrial Discharge of NH3-N (‘000 Tons) 110

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(Assuming Annual Average Increase of Industrial Wastewater at 5%) Based on Industrial COD Discharge 2.4 180 Intensity per Unit of GDP (Annual Average Rate of GDP Growth at 9%) Based on 2010 Discharge 1.79 Not estimated Based on Incremental Discharge 3.57 Reduction Source: Compiled from unpublished reports of the Chinese Academy of Environmental Planning.

1.4 1.4.1

Water Pollution Control Policy Needs Market-Based Policy Framework for Water Pollution Control

With more than 30 years of effort, water pollution control policies have improved considerably. A policy framework for water pollution control based on regulatory and administrative measures supplemented by economic instruments has taken shape. The accomplishment during the 11th FYP has much to do with the implementation of the “total pollutant discharges control” policy, especially the adoption of COD discharge reduction as a mandatory national policy objective. The discharge reduction-oriented responsibility and penalty system has prompted the local governments to pay attention to environmental protection, such that urban sewage treatment plants have been built and outdated production capacity has been shedded. Market-based water pollution control policies, except for pollution charges, are still in the experimental stage in China, and their role is still limited. There is a need for a unified market-based water pollution control policy framework that will make coordinated use of the instruments. 1.4.2 Catering to Different Pollution Types

The accelerated economic growth and urbanization has brought about a great deal of complexity to the water pollution situation in the PRC. While industrial pollution has not been put under effective control, sewage has become the primary source of water pollution and agricultural non-point-source pollution, especially as it relates to lake eutrofication, has emerged as a significant concern. This invites the need for reform of the existing pollution control policies that have targeted industrial wastewater discharges and for the need to devise environmental-economic policies that will cover the different pollution types from the variety of economic and social activities. For instance, pollution charges and pollution trading can be used for industrial pollution sources; wastewater treatment tariffs can be applied to sewage; pollution fees can also be introduced to livestock and poultry breeding farms; pollution levies can be also adopted for chemical fertilizers and pesticides that cause agricultural non-point-source pollution; and finally the use of clean development mechanism (CDM) for industrial and agricultural non-point sources. 1.4.3 Promoting Use of Market-Based Economic Policies

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Water pollution discharge trading is an important environmental-economic policy instrument that has been widely used in other countries with good results. In China, the environmental-economic policies have focused on pollution charges, wastewater treatment tariffs. The use of market-based pollution rights trading and emissions trading is slow. Only several pilots are under way, but they have demonstrated great potential. The next step is to extract the success and lessons learned from these pilot programs for replication. There is also a need for formulating laws and regulations on the purchase of tradeable pollution rights and the trading of these rights, and for an effective administration system. 1.4.4 Establishing a Financing Mechanism Water Pollution Control

China has entered a peak period for the construction of urban sewage treatment facilities. According to preliminary estimates by the Chinese Academy of Environmental Planning, the water pollution investment in the 12th FYP will amount to CNY 440 billion. The investment priorities will include protection of drinking water supply source areas, construction of sewage treatment plants and sewerage networks, technological upgrading for sewage treatment plants, technological upgrading for industrial enterprises to meet more stringent discharge standards, control of non-point-source pollution and so on. Projected investment in desulfurization and denitration will reach CNY 50 billion. The tremendous investment requirements necessitate diversified, innovative financing mechanisms. On the one hand, public fiscal policies on environmental protection should be improved to increase government investment. On the other hand, indirect financing mechanisms should be broadened to make use of the guiding role of loans and credits. Moreover, both supervision and incentive measures should be used to encourage investment by enterprises. Finally, an enabling policy environment and market should be established to attract social investment.

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2.

INTERNATIONAL EXPERIENCES ON MARKET BASED INSTRUMENTS FOR WATER POLLUTION CONTROL

Market-based instruments (MBIs) have now been increasingly used world-wide in water pollution control. Generally speaking, MBIs are more effective than the traditional coercive measures for environmental management. According to OECD and World Bank studies, the commonly used MBIs around the world include water quality trading, water environment taxes and levies, PPP and marketization, wastewater charges, etc. This chapter will focus on an assessment of international experiences in the use of MBIs with special reference to China. 2.1 Water Quality Trading

In terms of water quality trading, the United States has the most experience in the world but it is still under experimentation. In theory, water pollution rights trading has many advantages but putting theories into practice is not as easy. The number of pollutants under trading at present is limited in most cases. Success is confined to water nutrients, with the assistance of government interventions. In general, the scale of the market is quite small, such that fully-fledged market-based pollution trading is non-existent. Pollution rights trading is still limited to countries with well-developed market economies such as the United States, Germany, Australia, Canada and the UK. Germany, Canada and the UK have built to a large extent on the US pollution rights trading system. For example, New South Wales, Victor and South Australia states are participating in salt reduction credit trading program, promoted by the Murray-Darling Basin Authority, to curb salinization in the basin. Canada has introduced SO2, NOx and CFCs trading, with the aim to control acid rain and reduce the emission of ozone-depleting substances (ODSs). Pollution rights trading has become an important instrument for controlling pollution discharges for developed countries. 2.1.1 Water Quality Trading in United Stated

The United States is the birth place for pollution rights trading. Pollution rights trading policies were introduced as early as 1976, for promoting the accelerated technological innovation for the power industry to reduce their SO2 emissions. Water quality trading was later established by building on the experiences in air pollutants trading, especially SO2. The use of the pollution rights trading in the US can be divided into two stages. The period between the mid-1970s and the early 1990s was an exploratory stage whereby trading was initiated in some areas under government coordination. The pollution rights trading system was established on the basis of emission reduction credits (ERCs), and it consisted of four policy pillars, including “bubble”, “offset”, “banking” and “netting”. Generally speaking, the amount of trading 25

during this period was small but it demonstrated the potential of emission trading policies in reducing SO2 emissions from the power industry and accumulated precious experience. The second stage began with the amendment to the Clean Air Act and the implementation of the Acid Rain Control Plan till today. The 1990 amendment to the Clean Air Act made pollution rights trading into a regulatory requirement. The PRT was based on total pollutant discharges control. The PRT policy was successfully applied, such that a nation-wide market-based pollution rights trading system was established. The initial allocation of the PRT consisted of three forms, including open sale, auction and award, with open sale being the primary form of transaction. Moreover, the use of the PRT policy was expanded to include SO2, NOx, mercury and ODS. To date, the air pollution rights trading in the US is the most comprehensive and successful application in the world. The PRT policy helped to improve air quality in the US and reduce the social cost of air pollution control. Statistical information showed that between 1990 and 2006, the US power industry was able to reduce SO2 emissions by 40% and NOx emissions by 48% while the power generation grew by 37%. The reduction of air emissions resulted in a decline of sulphate precipitation in western and most part of north-eastern US by 25%~40%. It is predicted that by 2010 the annual return in terms of ecological and health benefits associated with the emission reductions from the acid rain control plan will reach $142 billion. On the basis of the experiences and success with air emission trading, the US began experimenting with water quality trading, including point source and point source trading, point source and non-point-source trading and non-point source and non-point source trading. These cases are located in the coastal and Great Lake areas. In the eastern coast, water quality trading involves ammonia credit trading (Connecticut), sewage pre-treatment program of the Passaic County Basin Commission (New Jersey), management policy for nutrient-sensitive watersheds in the Neuse River basin (North Carolina) and nutrient credit trading program in Virginia (Virginia). In the western coast, water quality trading involves primarily pollution trading between dairy farmers (California), pollution trading in the Boise River basin (Idaho), Truckee River (Nevada), clean water service (Oregon). In the Great Lakes region, major trading activities include Rahr Maltose Co. permit (Minnesota), south Minnesota cooperative permit (Minnesota), Great Miami River basin trading pilot (Ohio), Red Cedar River basin nutrient trading pilot program (Wisconsin). Details can be found in Appendix 2. These water quality trading cases have involved 12 parameters. The point sources included TN, TP, Ca, Cu, Pb, Hg, Mo and Zn. The non-point sources covered Se, BOD, TSS, temperature (heat). Many pilot programs have been implemented in the US; and several states have also proclaimed relevant laws and regulations. However, water quality trading in the US is still in its exploratory stage. The volume of trading for many of the programs is still limited; and the market scale is small. Moreover,

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most of the programs have been implemented with heavy government promotion, rather than by the market. Only nutrient trading has been relatively successful. US EPA-sponsored studies have shown that nutrient discharge trading has good potential in the US in the near future. From a long-term perspective, pathogen and chloride have the potential for trading, but the potential for trading of toxic substances is weak. In summary, five factors propelled the application of water quality trading in the US: (1) The success of SO2 emission trading in the US. Under the guidance of the 1990 amendment to the Clean Air Act, the pollution rights trading was used successfully to reduce the emission of SO2, and hence the control of acid rain. The SO2 emission trading served to reduce the potential cost to the government in achieving environmental objectives. Establishment of quotas for nutrient discharges. In the late 1990s, the Clean Water Act required the implementation of the total maximum daily loads (TMDL). TMDL determines the pollutant discharge threshold at the level of a small watershed for preventing the damage to water quality. The regulatory requirement propelled a rapid increase in the use of TMDL for nutrients control across the country, including the adoption of nutrient discharge permits. The TMDL requirement has created the need for discharge quotas for a given watershed, and promoted the accelerated application of water quality trading. Federal support to water quality trading. In 2003, US EPA published a water quality trading policy which encourages the wide use of water quality trading, with a view to achieve watershed water quality objectives. The policy proposed support to pollution rights trading for the purpose of promoting the implementation of the TMDL, reducing the cost of complying with the Clean Water Act. It served as a incentive for voluntary pollution abatement for watershed-based water quality protection. In addition, the US Department of Agriculture (USDA) is very supportive of the water quality trading policy. In October 2006, the USDA and EPA signed an MOU in support the development and implementation of water quality trading. Funding from government to market-based water quality trading. USEPA and USDA have provided financial assistance to support water quality trading. The financing comes from two major sources: a) USEPA’s grant program for target watersheds; ii) USDA’s conservation innovation grants program. Grant funding was provided by the USDA Natural Resource Conservation Service (NRCS) under the 2002 US Farm Act. The grant programs have provided the initial funding for water quality trading. Many of the state environmental protection agencies in the US are also very supportive of water quality trading. There are 13 states that have already proclaimed or are contemplating water quality trading guidelines or policies. A regional water quality trading guideline also exists; the guideline was used

(2)

(3)

(4)

(5)

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in the 2001 trans-state Chesapeake Bay Program. These guidelines guided the water quality trading among the Chesapeake Bay states (e.g., Virginia, Pennsylvania, Delaware and Maryland). The USEPA has delegated to the states the administrative authority over wastewater discharge under the Clean Water Act (Chapter 402). Therefore, the state government is responsible for managing the wastewater discharge permits under the National Pollutant Discharge Elimination System (NPDES). Support from the state to water quality trading becomes more important. Although the USEPA has the authority to inspect or reconsider various decisions, the most important administrative authority remains with the state government. Therefore, water quality trading policy at the state level contains more details and pays more attention to the practicality of implementation than the 2003 USEPA policy. As the interest in environmental trading grows, the application of water quality trading in water pollution control becomes widespread. Water quality trading should not be considered as a replacement for water quality legislation; rather it is a supplementary measure that will improve the efficiency. Its successful implementation should be built on the solid foundation of water quality regulations, including water quality standards, pollution loading quotas and a scientific understanding of the water system and watershed dynamics. 2.2.1 Water Quality Trading in Other Countries A) Canada The phosphorus trading program in the southern watersheds of Lake Ontario is a good example of water quality trading experiment in Canada. In 1998, the provincial government banned any phosphorus discharge into the southern watersheds, due to phosphorus violating the standard. There are 15 cities in the Lake Ontario basin. But studies concluded that 90% of the phosphorus loading came from agriculture production. As such, the Ministry of Environment formulated and implemented a phosphorus trading program under the total phosphorus control. Under the program, the newly-built or expanded phosphorus-discharging enterprises can acquire phosphorus discharge rights if they can help reduce the non-point phosphorus loading. The program covered all types of trading associated with urban point sources and rural non-point sources. The southern environmental protection bureau as the local environmental protection authority played the role of credit agent. B) Australia In Australia, the federal government promotes the use of market-based instruments for water pollution control, including water quality trading. At present, there is a national pilot funded by the Australian government on market-based instruments –

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national salt and water quality action plan. In particular, the Murray–Darling and Hunter River basins are experimenting with innovative water quality trading methods. The salinity trading program for Murray-Darling Basin is the first innovative water quality trading initiative in Australia. The program was established in 1988. It is administered by the Murray-Darling Basin Commission which is also responsible for managing water entitlement trading and water allocations for the river system. The participants include four states, South Wales, South Australia, Victoria and Queensland. In order to control the discharge of salt loads, a target was established on maximum amount of salt entering the river – the discharge should not exceed the 1988 level. The salt discharge trading credit takes the form of ERCs (emission reduction credits). The four states must keep their salt discharges below the 1988 level. Otherwise, they will have to obtain credits through emission reductions. There is also a salt trading program in the Hunter River basin in New South Wales. In the Hunter River basin, high salinity in the soils has resulted in a large volume of salts into the river system. Thermal power plants and coal mines are the major sources of salt discharge. High salinity has had adverse impacts on agricultural production, especially grapes and dairy products. The salt trading program was set up in the basin in 1996. The program was developed on the basis of broad stakeholder participation and scientific analysis of river characteristics. The Hunter River basin program is different from the ERCs-based trading. It has adopted the form of cap-and-trade whereby credits can be traded among the discharge permit holders. But the discharge permits can be adjusted from time to time. As the salinity varies with river flow changes, the rules for governing salt discharges change according to the river flow. That is, all salt discharges will be disallowed during the low-flow period. During the medium-flow season, salt discharge credits will be required. During the flood season, no credits will be needed. Each credit is a portion of the total allowable discharge which varies with fluctuations in river flow. The total allowable discharge is calculated on the basis of real-time monitoring data collected through remote sensing. Data on river flow and total allowable discharge are posted on the internet. Credits can be traded real-time on the internet. The Hunter River salt trading has adopted a number of modalities and rules. The initial tradable credits are allocated to those who hold discharge permits on the basis of needs, environmental performance and community contribution. For every two years, 20% of the credit will be bought back through auction and re-distributed. The earnings from the auction will be put back into the trading program. The credits will be valid for 10 years. Agents, non-governmental organizations (NGOs) or other third parties can become owners. A performance assessment has shown that the program has accomplished the planned target of controlling salinity in the river.

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2.2

Water Pollution Levies

To date, the environmental taxes in use in the world are mostly taxes and charges related to environmental resources and pollution. Environmental taxes mainly include: i) direct pollution taxes based on pollutant discharge volumes such as NOx and SO2 emission taxes; ii) indirect pollution taxes, often in the form of product taxes; iii) preferential tax policies intended to encourage environment-friendly behaviour, such as reduced or discounted income tax, value added tax and consumption tax. In addition, certain developed countries are reforming their taxation policies from the perspective of environmental protection, i.e., greening of taxation policies. Greening refers to increasing the proportions of environment-friendly taxes or reducing the proportions of environmentally-unfriendly taxes. A closer look at the environmental taxes in developed countries can reveal that such taxes are fairly broad. For OECD countries, the environmental taxes cover all sectors that produce pollution, but also natural resource sectors: energy products, transportation equipment and services, water pollution discharges, air pollution emissions, ozone depleting substances, non-point-source pollution, waste management, noise pollution, as well as water, land, soil, forest, biodiversity, wild fauna and flora, fishery and so on. Germany, Holland, Singapore, New York, Moscow, Japan and Sweden have begun to collect water pollution taxes, with a view to protect the water resources. Moreover, the collected environmental taxes have been earmarked for environmental protection and development of the environmental industry. In addition, many countries have put in place tax reductions and rebates to encourage enterprises to conserve resources and control pollution and to assist research institutions with the R&D in energy conservation and pollution control. This will serve to minimize environmental damage from economic activities, improve the efficiency of natural resource use, and turn wastes into resources. The coverage of water environment taxes for different countries is shown in Table 2-1. Table 2-1: Water Environmental Taxes and Levies of Selected OECD Countries Water Resource Water Discharge Country Fee Wastewater Fee Fee Australia Austria Belgium Canada Denmark Finland France

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Germany Greece Iceland Ireland Italy Japan Luxemburg Mexico Netherlands New Zealand Norway Portugal Spain Sweden Switzerland Turkey United Kingdom United States Source: OECD.

Entering the 1980s, environmental taxes have attracted great attention in developed countries. They evolved gradually from scattered, individual taxes to a coordinated environmental taxation system. The many varieties of environmental taxes are targeted at pollutants or pollution activities. Because water pollution is caused by wastewater discharges from industrial, residential and agricultural wastewater, many countries have imposed “water pollution tax” on wastewater discharge. 2.2.1 Water Resource Extraction Tax and Fee

Water resource extraction tax/fee is one kind of resource tax/fee. Widespread water resource shortage and waste have forced many countries to take action on water conservation. As a lever for economic adjustment, taxes have been used as an important instrument for controlling water resource extraction and utilization. Worldwide practices have shown that the collection of water resource tax/fee is an effective means of preventing water pollution and waste. Water resource taxes/fees serve to improve water resource extraction and utilization efficiency, increase public awareness about water resource protection and optimize water resource allocation. Water resource tax/fee applies to the extraction or withdrawal of all natural water, including surface water, ground water, mineral water, geothermal water and so on. Processed water, such as purified water, will not be taxed. Water resource tax/fee is collected on the basis of the volume in cubic meters of 31

sales (or self-use). The collection covers urban residential water supply and industrial agricultural and fishery water uses. The collection rates for selected countries are shown in Table 2-2. Table 2-2: Water Resource Tax and Fee Rates for Selected Countries
Country UK Netherlands Germany Hungary Slovenia Tax/Fee Water resource development fee Groundwater extraction tax Water resource extraction fee Water resource extraction fee Water resource extraction fee Justification Water resource management Groundwater management Water resource management Water resource management Surface water/ground water extraction (for municipal water supply) Ground water extraction (household) Ground water extraction (industry) Surface water extraction (industrial and agricultural uses) Surface water extraction (cooling and fishery) Surface water extraction (cooling for nuclear power station) Mineral water extraction Surface water extraction Ground water extraction Mineral water extraction Geothermal water extraction Surface water extraction Ground water extraction (water supply) Ground water extraction (other) Water resource extraction (water supply) Water resource extraction (hydropower station) Water resource extraction (thermal power station) Water resource extraction (fish pond) Rate (Euro) 0.0064/m3 (average) 0.1682/m3 0.0051-0.2046 /m3 0.0000 - 0.0390/m3 (Varies with water sources and regions) 0.03/m3 0.01/m
3

0.024/m3 0.0016/m
3

Lithuania

Water resource extraction fee

0.0002/m3 0.0004/m3 1.46/m3 0.004/m3 0.009-0.018/m3 0.18-0.36 /m3 0.089/m3 3 0.0588/m 0.0588/m3 0.0881/m
3

Latvia

Water resource extraction fee Water resource extraction fee

Czech

Specified in agreement 1% of power tariff 0.5% of power tariff 3% of fish sales

Macedonia

Water resource extraction fee

The Netherlands is situated in the Rhine, Meuse and Scheldt delta. It is low-lying land with about 1/3 of the national territory being below the sea level, concentrated population and being vulnerable to floods, waterlogging and tidal waves. Ground

32

water level is an important factor to the social stability and ecological safety of the country. Ground water management in the Netherlands is supported by high taxes with the aim to ensure the rational extraction. The status of taxation on ground water extraction in the Netherlands is presented in Figure 2-1.
百万美元 250 200 150 100 50 0 1995 1996 1997 1998 1999 2000 2001 年份

Figure 2-1: Ground Water Extraction Tax in the Netherlands

2.2.2

Wastewater Tax and Fee

Water pollution tax is a tax on activities that cause water pollution. The water pollution tax adopted in some industrialized countries takes two major forms. The first form is a tax on the volume of wastewater discharge. The rate is determined on the basis of the discharge volume. The tax rate for industrial wastewater is usually higher than that for residential sewage. The form is a tax on the contents of pollutants in the wastewater discharge. The rate is determined on the basis of “pollutant units” in the wastewater discharge, such as concentration of oxygen consumption substances and heavy metals. The wastewater tax/fee rates for selected countries are provided in Table 2-3, Table 2-4, Figure 2-2 and Figure 2-3.
Table 2-3: Wastewater Discharge Tax/Fee Fee Rates for Selected Countries Country Tax/Fee Justification Tax Rate (Euro) Denmark Wastewater Water resource consumption 1.7451/m3 discharge fee (average) Spanish Wastewater Residential sewage discharge 0.08/m3 (weighted discharge fee average) Industrial wastewater discharge 0.11/m3 (weighted Average) Slovenia Wastewater Sewage discharged to sewerage 0.09/m3 treatment tariff network linked to WWTP (weighted Average) Sewage discharged to sewerage 0.14/m3 network linked to WWTP (weighted Average) Romania Wastewater Water resources management 0.012/m3 treatment tariff (average) Latvia Wastewater Residential sewage discharge 0.2-0.52 /m3 treatment tariff Industrial wastewater discharge 0.43-2.04/m3

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Croatia

Wastewater treatment tariff

Residential sewage discharge Industrial wastewater discharge

0.32/m3 (average) 0.59/m3 (average)

百万美元 50 40 30 20 10 0 1994 1995 1996 1997 1998 1999 2000 2001 年份

Figure 2-2: Spanish Wastewater Tax/Fee by Discharge Volume

Table 2-4: Tax Collection/Charge on Pollutant Amounts in Selected Countries
Country Denmark Holland Germany Tax/Fee Wastewater tax Surface water pollution tax Wastewater fee Justification Nitrate content in wastewater Phosphate content in wastewater Organic substance content in wastewater BOD, COD contents in wastewater Hazard substance pollution load BOD5 discharged by chemical, energy, iron and steel, textile industries BOD5 discharged by paper making industries BOD5 discharged by food industry BOD5 discharged by public institutions, including municipal sewage, health institutions, orphanages and prisons COD discharged by chemical, energy, iron and steel, textile industries COD discharged by paper making industries BOD5/COD discharged by food industry COD discharged by public institutions, including municipal sewage, health institutions, orphanages and prisons Volatile phenol Chloride, sulphate Suspended substances Heavy metals BOD Phosphorus Suspended substances Tax Rate (Euro) 2.6848/kg 14.7663/kg 1.4766/kg 31.76/unit pollutant 35.8068/ unit hazard substance 2.2247/kg 0.9461/kg 0.5562/kg 0.2236/kg 1.554/kg 0.5589/kg 0.3735/kg 0.1254/kg 4.1686/kg 0.0079 - 0.0619/kg 0.0954/kg 11.1264/kg 8.68/ton 2.12/ton 34.8/ton

Poland

Wastewater fee

Romania

Wastewater fee

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Lithuania

Wastewater fee

Three nitrogen group BOD Suspended substances Oil products Phosphorus Three nitrogen groups

34.8/ton 160/ ton 59/ ton 8,261/ ton 413/ ton 121/ ton

百万美元 70 60 50 40

丹麦

荷兰

罗马尼亚

匈牙利 3 2.5 2 1.5

30 20 10 0 1994 1995 1996 1997 1998 1999 2000 2001 1 0.5 0 年份

Figure 2-3: Wastewater Tax/Fee for Selected Countries (Pollutant Contents)

2.3

PPP and Marketization

PPP (Public and Private Partnership) is an approach by which the private sector and the public sector establish a long-term contractual relationship for the former to produce and deliver public services. In this partnership relationship, each party will assume its status and responsibilities. The resources of the public sector and the private sector are re-organized in accordance to the tasks and risks. The public sector is faced with many issues in regard to the construction and operation of urban environmental infrastructure facilities. They include shortage of funds, high cost of operation and low return, resulting in low operational efficiency, waste of human and technological resources, bureaucracy and political interventions. Modern PPP began in the early 1990s and grew under the promotion of the UK government. Other European countries, US, Australia and some developing countries have adopted this model for the provision of public goods and services. Of reference to the future development of PPP in China are the role of the government in successful application in the UK and the active participation of local governments and civil society organizations in the US. Long-term economic growth will strengthen the financial strength of both the public

35

and private sectors. Thus, there is need for government agencies to come up with long-term economic projections for the formulation of their financing and investment plans. Two options can be considered. First, widening the channels of financing under the leadership of the public sector and preparing debt repayment plans from a long-term perspective. Infrastructure investment should not be limited to the use of existing revenues, but should be broadened to a wide variety of financing sources, such as state bonds, local bonds, bilateral and multilateral lending, and government-backed policy loans. The repayment of principal and interest must be consistent with national economic development. Second, opening the market to the private sector. Within this regime, government agencies are responsible for providing public infrastructure services with the participation of the private sector. The financing sources will mainly come from loans from commercial banks, the stock market and enterprise bonds. In short, PPP aims improve the efficiency of government agencies and the quality public services. It serves to reduce the burden on government and to transfer to the private sector the responsibility of the design, construction, operation and financing. The risks that the private sector will face with in the various phases of the project should be duly considered. The respective responsibilities should be clearly specified in the contractual agreement. Tariff is an important condition for implementing PPP. It is therefore essential to put in place a functional tariff setting and collection system well in advance or early stages of construction. A rational tariff system uses the pricing lever to encourage water savings and prevent wastes. This facilitates environment-friendly consumption and thus sustainable development. 2.3.1 France

In France, private sector participation in infrastructure construction began in mid-1890s. Therefore, local governments have built a long-term partnership relationship with the private sector, under the two main forms of licensing agreements and management contracts. The private sector helped build the water supply system in the late 1890s. At that time, neither the municipal nor provincial nor national government has adequate strength. One of the greatest challenges was to collect adequate revenues from the consumers to build the water supply network. Since the 1940s, the construction of wastewater treatment facilities, primarily under the form of licensing agreements, has witnessed rapid growth. A licensing agreement, after expiration, led naturally to a management agreement. Now, public infrastructures have been put in place and are owned by local governments. The private sector has thus assumed the role of operation. The public and private sectors have formed a good partnership relationship. As of today, the private sector provides water supply services to 80% of the

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population and sewage treatment services to 55% of the population in the form of management contracts. In order to improve transparency and increase competition, the French government proclaimed a series of regulations, requiring local governments to put up the contract for open competition once every 12 years and to disclose information on transactions and service quality on an annual basis. For both the public and private sector, they will have to face the new supervisory system for facility operation. They have to manage the infrastructure services with the use of technology and financing and within the confines of the law. Whereas, the local government exercises supervision to the best of its ability from the standpoint of consumers. 2.3.2 United Kingdom

The UK government did not proclaim PPP-targeted laws, but instead release a variety of policy directives to guide the use of PPP in the delivery of public infrastructure services. For example, “Private Finance Initiative: Meeting the Investment Challenge”, released by the HM Treasury in 2003, can be considered an important milestone policy document on PPP. Since the initial operation of the PPP/PFI program in the UK, contracts for more than 500 projects with a total value of 20 billion pounds have been signed, and more than 200 of them have started operation. A February 2003 assessment delivered by the National Audit Office (NAO) entitled “PFI: Construction Performance” reported less delays and lower cost overruns for hospitals, schools and prisons built under the PFI compared to traditional methods. NAO audited 37 projects under the PFI and discovered only 22 cases of cost overruns, compared to 73% before the adoption of PFI. Delays in construction were lowered to 24% of the projects with the PFI from 70% before the PFI. The water supply and wastewater treatment sectors in England and Wales have been privatized since 1997. They are now managed by 10 private companies. The UK government has played an important role in the development of PPP. In 1997, the UK government set up three special units to promote and serve PPP. The rapid expansion of PPP in the country is inseparatable from the special units. The roles and responsibilities of the three units are summarized below: First, HM Treasury Operational Taskforce: The Taskforce was set up in 1997. It is led by prominent persons of the project financing and legal sectors, and comprises representatives from relevant public and private agencies. Two additional institutions, Office of Government Commerce and Partnership UK, were established, to serve the procurement services under PFI and PPP. Second, Office of Government Commerce (OGC). The Office was set up at the end

37

of 1999 as a public institution under the Treasury. It is charged with the responsibility for overseeing civil procurement (excluding military, health, local government and other special sectors). Its mandate also extends to traditional procurement and various forms of procurement with private sector financing. OGC exerts its influence on policies and projects through intervening at the points of entry for the above-mentioned projects. Third, Partnership UK (PUK). After 1999, most of the responsibilities of the Taskforce were transferred to PUK. PUK in itself is a PPP, as the private sector owns 51% of the initial shares while the public sector owns the remaining 49%. The main mandates of the PUK include: taking over most of the responsibilities assigned to the Taskforce, supervising on-going projects, assisting with development of sectoral PPP strategies and in partnership with OGC, formulating future PPP policies. It works with public sector agencies and external consultants in project development. The services it provides are billable, so as to pay for about 50% of the transaction costs borne by the public sector agencies. PUK is also a provider of venture capital to finance the gap between traditional equity and senior debt during the research and development stage of an IT system, for example. PUK may also provide risk guaranty to the private sector, for example, guaranty to private sector projects financed by the World Bank group. 2.3.3 United States

The federal government has not issued any official regulations or documents, but certain state and federal agencies have proclaimed PPP guidelines. For example, in 1997 the US Department of Health released “A Guide to Developing Public Private Partnerships in Child Support Enforcement”. PPP projects with local governments have witnessed a rapid growth. In terms of the number of projects and the scale of financing, water supply and wastewater treatment rank first. Application is growing rapidly in urban development, housing, public school and transportation sectors, including airports, railway stations, private sector-operated toll highways and navigational waterways, as well as public security systems such as traffic control and video surveillance of vehicle speeding and traffic light violations. In some regions, the private sector will provide only O&M services to publicly owned facilities. When new technologies and large capital needs are required, the private sector is usually responsible for investment, design, construction and operation and maintenance. Under the United States federal system, the states have autonomy, especially in procurement methods and contracting approaches. Therefore, in the lack of a unified guidance from the federal government there are many varieties of PPP. The lack of standardization increases the cost of transaction, and serves to constrain the harmonized development of PPP in the country. Thus, a group of public and private

38

sector institutions jointly established the National Council for Public Private Partnerships) in 1985. Situated in Washington DC, the NCPPP is a non-profit organization, with the mandates to promote PPP to governments, enterprises and the general public and to support and assist with the establishment of collaborative relationships between local governments and enterprises, with a view to provide the public with sustainable, low-cost and high-quality goods, facilities and services. The council members include government officials, enterprise leaders and NGO leaders with rich experiences in arranging public-private cooperation of various forms. 2.3.4 Other Countries and Regions

The new economic five-year plan of South Korea (1993-1998) included clear directions on expanding environmental infrastructure development and encouraging private investment in the environmental sector. The year of 1996 witnessed a large increase in environmental financing. Proclaimed in April 1999, the Act on Private Investment in Social Overhead Capital Facilities promotes the adoption of BOT in infrastructure development. The BOT has been viewed not only as helping Korean construction companies in participating in domestic infrastructure facilities but also as in winning large overseas contracts. In recent years, the private sector has accounted for 40% of the infrastructure investment or 10% higher than the target. Moreover, between 2001 and 2005, 319 sewage treatment plants were built with a total capacity of 11.6 million t/d were built, making the sewage treatment rate to reach 80% for the country as a whole. Private sector participation has played a key role in accomplishing this objective. Chile introduced PPP in 1994 against the background of an urgent need for balancing public infrastructure requirements and budgetary constraints. PPP helped increase the level of modernization and raise financing for social development programs. As of today, 36 projects with a total investment of US$6 billion have been completed. Of these, 24 are in the transportation sector, 9 airports, 2 prisons and 1 reservoir. The scale of investment grew from $300 million before the adoption of PPP to $1.7 billion after. Portugal launched PPP in 1997. In the 10 years between 1997 and 2006, PPP achieved remarkable results in the construction of the highway network, doubling its mileage. On-going PPP projects include the construction and operation of hospitals and the construction of railways and urban subways. In Brazil, the Brazilian PPP Federal Act was passed in December 2004. The Act defines the tendering and contracting requirements for projects implemented by national agencies under PPP. According to Brazilian planning authorities, 23 highways, railways, ports and irrigation projects, with a total investment of R$13 billion, listed in the four-year development plan (2004-2007) would be the initial package for PPP.

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International experiences have shown that the successful introduction of PPP would not be possible without the strong promotion by the government and the active participation of the private sector. The two sides can be motivated only if a PPP project is within the ability of the public institution and a reasonable financial return to the private sector participant. This is a principle worth noting for China to adopt PPP. International experiences have pointed to a number of factors that contribute to the success of PPP projects. First, public institutions should put in place a standardized, transparent PPP procurement procedure. Such a procedure will bring competitive mechanisms into play and provide motivation to private enterprises by improving the efficiency of procurement and reducing the cost of transaction. Second, project using PPP can effectively transfer management risks. The PPP procedure begins with an identification and assessment of various possible risks that the project may involve. It will allocate the risks to whoever can best control the risk, so as to ensure the maximum return for the investment. Third, outputs are clearly defined. It is important to determine the outputs at the initial stage of the project. This will help the private institution to understand its responsibilities and provide for effective government supervision, so as to best protect public interest. Fourth, the financing requirement for any PPP project must be within the affordability of the participating public institution. The commonly used method is to assess the ability of the public institution to fulfill the funding obligation within the specified contract period. Fifth, there should be guaranty for reasonable return to the private sector institution. When government has the monopoly to allocate the financial return of a PPP project, the private sector institution must be assured of adequate profit for bearing the risks. This will help attract private capital to participate in PPP projects. Sixth, there should be public involvement and information disclosure. Information should be disclosed to the general public via various means so that it can supervise both the government and the private sector participants. 2.4 Water Tariff and Sewage Treatment Plant Construction and Charge

Construction of sewage treatment plants has proven to be an effective means of resolving urban water pollution. In the US, there is a STP per 10,000 persons; in Sweden and France, one STP serves a population of 5,000 on average; and in the UK and Germany, the ratio is 1:7,000~8,000. Whereas in China, there are 1,500 STPs that serve a population of 1.3 billion, translating into one STP for 800,000~900,000 people. On top of this, there is a low rate of operation and the violation of effluent standards. There is a considerable gap between China and developed countries in the construction of STPs. As far as water tariff is concerned, there exists a well-functioning, science-based tariff-setting procedure in the UK which was established by the Water Services Regulation Authority (OFWAT) through researches and discussions by many

40

scientists over a period of more than 10 years. Price control is one of the most important tasks among OFWAT’s duties of economic supervision. The tariff adjustment methodology in the UK has high credibility. OFWAT requires each water enterprise to submit information on corporate operation, service and financing. OFWAT sets and publishes the upper tariff limit for each enterprise for a period of five years based on its specific circumstances. The setting of the upper tariff limit takes into consideration a reasonable return for the enterprise to ensure that it will have adequate funding and investment capacity, and at the same time the affordability and interest of the consumers. Under special circumstances, OFWAT may adjust the upper tariff limit at any time when necessary. OFWAT does not place restrictions on the profit and dividend of the enterprise. If the enterprise performs better than the OFWAT standard, it will gain higher profit. From a long-term perspective, the improved enterprise performance will lead to a lower water tariff, which will benefit the consumers. The enterprise will decide on its own if a lower than OFWAT-set tariff would be charged for sharing with the consumers the profit of improved efficiency. OFWAT uses performance to determine the upper limit of water tariff. This approach encourages low-performing enterprises to improve efficiency. By comparing the various performance indicators, low-performing enterprises can identify areas needing improvement. Through supervision, OFWAT causes the enterprises to lower the costs of O&M. The returns from cost reductions will belong to the enterprise. OFWAT requires the enterprise to submit semi-annual reports that also contain information on the previous year. The comprehensive information includes service level, additional consumers and leakage. The enterprise will consent OFWAT to compare its performance with other enterprises. This form of supervision allows OFWAT to take advance action when necessary. Each year OFWAT publishes four reports on enterprise performance, including the service level, water supply safety, water use efficiency, financing and outlays, unit cost and so on. In general, the bill to the consumer should reflect the cost associated with the impact of receiving clean water, treating and discharging wastewater on the water supply and wastewater treatment system. The enterprise’s tariff plan needs to be sanctioned by the OFWAT. The plan should include the tariff level, applicable period and billing method. In the UK, the water tariff has witnessed a slow increase in more than 10 years under the tariff control mechanism. The effective tariff control has brought about reasonable profit to the water enterprises, which has enabled them to expand investment, maintain and upgrade the infrastructures and improve the water quality and the environment.

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2.5

Summary of Experiences with Market-Based Policies

First, market-based water pollution control policies and instruments have been widely adopted around the world. The main rationale for the use of market-based instruments to control water pollution is, its efficiency is higher than the use of traditional government command and control. Economic instruments are more flexible than the command and control approach. By placing a value on environmental goods and services, economic instruments induce innovation, and help lower costs and increase benefits. By taking advantage of the forces of the market to guide the individuals and the general public to take an interest in the environment, they help achieve the objective of providing environmental goods and services. Second, pollution rights trading is an important market-based pollution control policy instrument. The long-term prospect is promising, although its application in water pollution control still needs considerable improvement. As far as water quality trading is concerned, the US has rich experiences but it is still experimental. In theory, water pollution rights trading has many advantages, yet these theoretical advantages have not been turned into practical advantages. The volumes of trading under many schemes are still limited and the market is quite small, with heavy dependence on government promotion rather than market-driven. Most of the successful cases can be found in nutrients trading. In addition to the US, countries with market economies such as Germany, Australia, Canada and the UK have also been experimenting. Judging from the experiences of existing water quality trading schemes, trading contributes, to a certain extent, to water quality improvement, but it is difficult to determine. Overall, pollution rights trading has become an important measure for developed countries to control pollutant discharges. Third, pollution levies or taxes are a common practice for water environment protection and pollution control. Environmental taxes (fees) provide a price signal to producers and consumers in their decisions on production that consumes environmental resources and generates pollution. They help raise funds for pollution control, and at the same time serve as an incentive for technological innovations by enterprises. Therefore, environmental taxes (fees) are an effective economic instrument. Entering the late 1980s, environmental taxes (fees) have attracted the attention of developed countries. They have evolved from scattered, individual environmental protection charges to a systematic scheme. Environmental taxes (fees) target pollutants and pollution behaviour. Since water pollutants are contained in industrial, residential and agricultural wastewater, many countries impose “water pollution taxes (fees)” on wastewater. Fourth, PPP has been widely adopted in countries where the fiscal capacity is weak and the shares of fiscal revenues in GDP are low. There it has a long history, rich practical experiences and good results. The prerequisite for implementing PPP in the

42

water supply and wastewater treatment sectors is the determination of an appropriate water and wastewater tariffs. The determining the tariff, consideration should be given to a decent rate of return to the enterprise so as to enable its adequate financing and investment capacity and at the same time the affordability and interests of the consumer.

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3.

ASSESSMENT OF ECONOMIC POLICIES FOR WATER POLLUTION CONTROL IN CHINA

In China, the market-based instruments for environmental protection are implemented through and reflected in the environmental-economic policies. At present, China has established a comprehensive water environmental-economic policy system that entails discharge fees, sewage treatment levies, pollution rights trading, PPP and marketization, and public finance. In order for policy recommendations to better respond to Chinese circumstances, this chapter will evaluate the experiences in the use of environmental-economic instruments, with a view to identify problems and propose recommendations for improvement. It also provides a review of China’s water pollution laws, water management system and policies on water pollution control technologies, and attempts to propose policy recommendations. 3.1 3.1.1 Overview Continued Improvement of Environmental-Economic Policy System

Environmental-economic policies represent one of the many types of environmental policies. Their rise is closely related to the realization that the traditional command-and-control environmental policies can no longer meet the need of environmental protection. The environmental-economic policies achieve the objective of environmental protection by making use of economic incentives and disincentives to change the environmental behaviour of the economic entities. What distinguishes them from the command-and-control policies is, the targeted entity will respond to the stimulus in a way that it believes best serves its interests. As a beneficial supplement to the command-and-control approach, environmental-economic policies have five major advantages. First, they serve as an additional stimulus to reduce pollution. Environmental-economic policies can help generate funds for wastewater treatment and pollution control, improving the effectiveness of command-and-control. Second, they have flexibility and wide applicability. Economic instruments cover many varieties such as fees, taxes, subsidies, deposit-refund, market (pollution rights trading), and incentives. They can be applied in end-of-pipe pollution abatement or cleaner production. According to an OECD survey, about 150 economic instruments are being used in its 14 member countries. Third, their efficiency is high. The use of economic instruments can help achieve the pollution control target with the least cost, and encourage innovation. Fourth, they are politically acceptable. They have been widely introduced in developed countries because of their high degree of transparency and the ability to make market forces into full play, In China, water pollution control began in the 1970s. Over the past 30 years, environmental-economic policy instruments have witnessed an increasing 45

application in watershed environmental management. Before the 1990s, watershed pollution control targeted industrial pollution sources. In 1990, the Chinese government put forth the so-called “three rivers and three lakes” pollution control program. In 1996, the PRC Water Pollution Control Law was amended, and the implementation guidelines were proclaimed. The “crime of damaging the protection of the environment and natural resources” was added to the Criminal Law. As of today, watershed pollution control is experiencing two important transformations: first, from industrial point source pollution control to urban and integrated watershed pollution control; second, from the use of purely command-and-control to integrated management with regulatory and economic instruments. The role of economic instruments in water pollution control has been strengthened. But at present, environmental-economic policies are still play a supplementary role to direct government control; they have not developed into an independent system. The environmental-economic policies in use in China today (Table 3-1) cover the following: 1) environmental taxes, primarily pollution levies and wastewater treatment tariffs; 2) markets, for example, water pollutant discharge rights trading, watershed water rights trading and ecological and environmental compensation; 3) guaranties-deposits; and 4) subsidies and incentives, such as special subsidies for irrigation water, special subsidies enterprises for pollution abatement and special subsidies for the construction and operation of urban sewage treatment plants. Table 3-1: Use of Environmental-Economic Policies in Water Pollution Control in China
Type of Economic Policy Pollution compensation, fines Pollution discharge fees Direct investment Pollution permits trading Pollution liability insurance Sewage treatment fee Implementing Agency Environmental protection Environmental protection Planning, finance, environmental protection, banking Environmental protection Banking, environmental protection Urban construction Year of Start 1979 1982 1984 1987 Geographical Coverage Nation-wide Nation-wide Nation-wide Regions where total pollutant amount controls are implemented Dalian, Shenyang Qingdao, Tai’an, Hefei, Shanghai, Beijing, Shenzhen and Huai River basin, Tai Lake basin Nation-wide Unknown Tai Lake basin Nation-wide

1987 1994

Urban residential solid waste Environment and natural resource accounting Pilot programs on water pollution rights paid use and trading New pollution discharge fees

Urban construction, environmental protection Planning, environmental protection, finance Environmental protection Environmental protection

2002 2002 2002 2003

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Pilot programs on ecological and environmental compensation

Environmental protection

2008

Jiangsu

Note: Wang Jinnan, Li Kang and Yang Jintian (2001). Environmental Policy Formulation. Beijing: China Science Press.

As can be seen from Table 3-1 and Figure 3-1, the water pollution control policy instruments used in China before 2000 were mostly taxes and fees. Moreover, the policy instruments focused on post-pollution management. After 2000, market-based instruments such as pollution rights trading and ecological compensation (in fact as a government-led water pollutant trading) attracted growing attention. This demonstrates that China’s reform toward a market economy has expanded into environment and natural resources management. Second, the use of economic instruments is still ad hoc, unsystematic. In actual practice, the existing policies stress post-pollution management, rather than ex-ante abatement and water environment protection. Third, when participating in the formulation of environmental-economic policies, certain agencies have paid more attention to their own self-interests but neglected the linkages between the role of macroeconomic control of environmental-economic policies and the other relevant policies. This has resulted in environmental-economic policy chaos that has turned environmental-economic policies into micro means for environmental management and reduced the effectiveness of policy implementation.
Urban sewage treatment fees (1994) Paid use of wastewater discharge facilities (1993) Pollution liability insurance (1991) Pollution permits trading (1987) Direct investment (1984) Discharge fees (1982) Pollution compensation, fines (1979) Ecological compensation pilots (2008) New discharge fee schemes (2003) Water pollution rights trading (2002) Environmental and resource accounting (2002)

1980

1985

1990

1995

2000

2005

2010

Figure 3-1: Evolution of Economic Instruments for Water Pollution Control in China

3.1.2

Social Acceptance of Market-Based Instruments

The general public in China foresees the growing importance of environmental-economic policies. In the meantime, they are supportive of the use of market-based instruments for water pollution control, but have reservations about opportune timing, operability and lack of supportive policies. The questionnaire surveys under this study have shown that the general public consider discharge levies to be the most effective means of pollution control, with a supporting rate of 43%. As can be seen from Figure 3-2, the new market-based instruments for water

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pollution control, such as environmental taxes and pollutant discharge trading, have not yet demonstrated their effective role. But from a long-term perspective, such traditional approaches as discharge levies, subsidies to pollution control projects and taxation for pollution control facilities are least important in the views of the general public, whereas market-based water pollution control policy instruments, for example, environmental taxes and pollution rights trading will gain prominence, with 55% being supportive of “water pollutant discharge trading” and 13% against. As is shown in Figure 3-3, the market-based pollution control instruments, with further improvement and demonstration, have social recognition for wide application.

Figure 3-2: Most Important Environmental-Economic Policies as Perceived by Respondents

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Figure 3-3: Responses to Introduction of Pollution Discharge Trading

3.2 3.2.1

Ex-Post Evaluation of Major Economic Instruments Wastewater Tariff A) History

In China, the use of “pollutant discharge fee system” was first proposed in December 1078. The PRC Environmental Protection Law (1979) (Trial Implementation) required the imposition of pollution levies in accordance to pollutant discharge volume and concentration. The Interim Guideline on Collection of Pollution Discharge Levies, proclaimed in February 1982, signified the launch of the pollution discharge levy system in China. Thereafter, the Management Guideline on the Collection and Use of Pollution Levies became effective on 1 July 2003 after several rounds of amendments. This guideline put in place a country-wide system of imposing levy on any discharge, and a fine on any violation of the permissible standard. It is applicable to multiple pollutants, rather than just one single parameter as was used in the past. B) Outcome To date, the pollution levy system is the most comprehensive environmental-economic instrument used in China, as it has had wide coverage and greatest effect. It serves to encourage and stimulate enterprises to cut down pollution. On the other hand, the collected revenues provide financing for the construction of pollution control facilities for the enterprises, pollution control for key pollution sources and the operation of environmental management agencies. The total volume of collected revenues for the country as a whole has grown on an annual basis, from CNY 1.19 billion in 1986, to CNY 3.10 billion in 1994, and further to CNY 17.8 billion in 2007 (647,335 enterprises). Research has shown that the effectiveness of pollution levies is greater than other pollution control measures such as pollution abatement subsidies and tradable pollution permits, in terms of stimulating enterprises to adopt environment-friendly technologies, promoting environment-friendly R&D and facilitating government agencies to adjust environmental-economic policies. In the past 30 years, the use of the collected revenues has made significant contribution to environmental protection in China, by strengthening pollution control capacity and building the environmental management institutions. C) Performance Assessment

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Significant Increase in Revenue Historical data have indicated that the volume of collected revenues has increased year by year, even if during the 9th FYP when the total pollutant discharge decreased. Starting from the new pollution levy policy, the volume grew drastically in 2004, reaching CNY 12.3 billion by 2005, and CNY 17.7 billion by 2008 or an increase of 43.8% over 2005. Increase in Pollution Abatement Financing The guideline requires all revenues from pollution levy collection to be earmarked for environmental protection. This has led to an increase in pollution abatement funds. Moreover, the use of the collected revenues as subsidies has attracted other sources of financing, including state funds and local counterpart financing. Finally, pollution levies have placed a direct or indirect cost to the enterprise, encouraging it to invest in pollution abatement. Development of Environmental Protection Fiscal System The guideline stipulates that the collection and use of the collected revenues will be managed separately. The collected revenues will be remitted to the public finance and will be put in an earmarked environmental protection special fund exclusively for pollution control. Environmental enforcement will be funded separately by public finance, which has prevented the misappropriation and diversion of pollution levies. In 2006, the 211 environmental protection account was set up in the national finance to provide operational funds for environmental agencies, thus rectifying the problem of using pollution levies to finance the operation of environmental protection agencies. Lessons Learned The collection ratio is an important indicator for implementation of the pollution levy policy. It is defined as the ratio of the revenues actually collected over the revenues that should be collected. However, there is a vast difference between the estimates by different sources. For example, the ratio calculated on the basis of data reported from enterprises and verified by environmental management authorities differ greatly from that estimated by scientists on the basis of environmental statistics. According to environmental statistical data, 511,912 enterprises were fined for a total of CNY 18.5 billion, whereas 496,506 enterprises paid a total fine of CNY 17.7 billion, translating into a collection ratio of 95.5%. For such enterprises with high energy consumption and heavy pollution as thermal power, chemical, iron and steel, food and beverages, pulp and paper and cement, there is not much difference in levy collection before and after the guideline. In 2005, CNY 3.1 billion of pollution levies were collected from the power industry, and they accounted for 25.9% of the total levy collection, while the chemical industry and the iron and steel industry accounted for a respective 5.8% and 5.0%.

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In terms of the environmental media, pollution levies collected on noise and solid wastes are small, with minor changes along the years. The percentage shares of levies on wastewater and air emissions changed greatly. The percentage shares of wastewater levies have declined from 60% in 2003 to 17.0% in 2008, whereas the percentage shares of air emission levies jumped to 79.9% by 2008. The reason for the decrease in the shares of wastewater levies arose from the differences in implementing the levy collection policy by local authorities. Some regions will waive pollution levies and violation fines if the wastewater is discharged into the central wastewater treatment plant and if wastewater treatment tariff is paid; other regions will continue to collect violation fines. There are also differences in collecting levies on NOx. In terms of pollutants, the collection of levies on NOx is still partial. For example, one province collect levies only on SO2 for 290 thermal power plants with a capacity greater than 300 kW, yet on NOx for 144 of them. Some regions have not yet started collecting sewage treatment fees. Levies on certain special pollutants have not been collected because of lack of monitoring capacity. Existing Problems Low Levies and Inadequate Management: Although enterprises have felt the pressure from the new guideline, the levies are still lower than the costs of abatement and too low to deter the polluters. Meanwhile, fines on violations are not high enough such that it is economical for polluters to pay fines than to reduce pollution. Compared to the recommended pollution levy reform plan, the new levy level under the new guideline is only half the abatement cost1. According to the guideline, pollution levies should be collected on a monthly or quarterly basis. But in many regions, pollution discharge applications have not yet been managed in a dynamic fashion; pollution levies are collected on an annual basis or by a set quota; for some regions, the levies remain unadjusted for many years. Moreover, the collection targets and methods for “violation fines” are not yet well defined. In practice, discretionary and bargained payments are not uncommon. In particular, the collection of levies by drop-in visits increases administrative costs and the risk of irregularities. Non-Collection: Environmental authorities at various levels have focused pollution collection effort on industrial enterprises, but neglected animal and poultry breeding and the third industry. More attention is paid to large enterprises but less to small enterprises. Moreover, the pollution source inventory contains false reporting and under-reporting. In some cases, the collection of levies is constrained by the lack of monitoring technologies and capacity.

1

Yang Jintian, et al. 1998. Reform and Design of China’s Pollution Levy System. China Environmental Science Press.

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Low Collection Capacity: The environmental supervision departments in charge of levy collection are under-staffed. The shortage in staff and equipment severely affects levy collection. In the relatively underdeveloped regions, the collected revenues may be used to finance the operation of environmental management agencies because of funding shortfalls, thus affecting law enforcement. 3.2.2 Sewage Treatment Fee A) History During the era of planned economy (1949-1978), urban drainage and sewage treatment facilities were financed through direct government investment. These services were provided free of charge. The operational costs were borne by local finance. The economic reform in 1978 dismantled the system. In 1984, paid use of drainage facilities were introduced following regulations and ordinances issued by the State Council and relevant ministries. The initial rate was CNY 0.1 per ton. The collection of sewage treatment fee began in 1996 when the PRC Water Pollution Control Law was proclaimed. It was piloted in cities in the key watersheds of “three rivers and three lakes”, and replicated nation-wide after 2000. B) Outcome The proper collection of sewage treatment fee is a prerequisite for attracting private investment for the construction of urban environmental protection infrastructures. It can not only serve as a collateral for enterprises to obtain financing from banks and other sources of financing, but also a guarantee for enterprises to make a profit. According to provisions of the Water Pollution Control Law (amended in 2008), the operating entity of an urban sewage treatment facility provides sewage treatment services on a fee basis, collect sewage treatment fees and ensure the proper operation of the facility. Those who pay the sewage treatment fee for discharging into the municipal sewage treatment facility will not pay additional pollution charges. The collected sewage treatment fees must be used for the exclusive use of building and operating municipal sewage treatment facilities. C) Performance Assessment The collection of sewage treatment fee in China began since 2002. It is done according to a universal rate set by the government. The collected revenues are remitted to the public finance, and certain portion is given to the sewage treatment plant as sewage treatment service fee. The establishment and implementation of sewage treatment fee system has ensured the implementation of the fundamental principle of “polluter pays”. This represents a major step forward compared to the approach of direct government investment. According to statistics, by the end of 2008 most cities in China are collecting sewage treatment fees. A total of 1,521

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STPs are in operation with a total design capacity of 90.9 million t/d and operational capacity of 66.8 million t/d. The rate of centralized sewage treatment reached 66%. In 2007, the 35 provincial capital cities (excluding Lhasa) collected CNY 11.0 billion of sewage treatment fees, with an average rate of CNY 0.77/m3. D) Existing Problems In summary, in spite of the progress, there is considerable room for improvement with the collection of sewage treatment fees. Existing problems include vast regional differences, improper coverage, lower rate, difficulties in collection, lack of flexibility with STP operation, heavy command-and-control in fee collection and inappropriate measurement. Low Rate The fee-setting mechanism needs to be improved. According to relevant regulations, the general principle for setting the sewage treatment fee is “cost recovery with narrow margin of profit”. But there is no clear definition of what elements the wastewater treat cost should constitute. As both the number and capacity of sewage treatment plants increase, the volume of sludge grows drastically. It is unclear whether or not sludge treatment and disposal costs should also be added to the wastewater treatment tariff. In recent years, as the need for phosphorus and nitrogen removal arises, many biological treatment technologies have been developed. As in regard to sludge treatment and disposal, the normal design uses dewatering and reuse. These items are usually not included in the investment and operating costs. This may cause the neglect of sludge treatment and disposal, leading to secondary pollution. A significant barrier to the safe treatment and disposal of sludge is high cost. According to a report in the China Environment News, the sludge treatment and disposal cost ranges from a low of CNY 100 to CNY 500 per ton. Assuming 5 to 8 tons of sludge will be produced from treating 10,000 tons of sewage, the additional cost of sludge treatment and disposal will translate into CNY 0.1 to CNY 0.5 for each ton of treated sewage. Therefore the next step is to incorporate the cost of sludge treatment and disposal into the sewage treatment fee. At present, many cities suffer from low sewage treatment fee and low ratio of collection. According to data provided by NDRC’s pricing department, the average rate of sewage treatment fee was CNY 0.5 per m3 in May 2005 and it gradually rose to CNY 0.77 per m3 in 2007. But there was still a considerable gap between the fee rate and the cost. The fee rate is approximately 67% of the treatment cost. Some cities have not even started to collect the sewage treatment fee. Today, only seven cities charge a fee rate higher that CNY 0.70 per m3, with the highest being CNY 1.0 per m3. There are 10 cities that charge a fee higher than CNY 1.0 per m3 for industrial wastewater treatment, including Hangzhou where the rate is CNY 1.8 per m3. Overall, the sewage treatment fee rates, between CNY 0.2 and CNY 1.0 per m3 for most cities in China, are low, and cannot cover the treatment cost, thus affecting

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the proper operation of the STP. Without adequate funds to operate, recover cost and repay the loan, many STPs end up with the situation of “having money to build but no funds to operate and maintain”. Lack of Sense of Competition and Operational Incentive For historical reasons, most of the STPs in China, whether completed or under construction, are “public enterprises” that suffer from the lack of clear separation of public and private sector mandates, overstaffing and low efficiency. These constrain the growth of the sector. Diversification of investment entities, privatization of operational entities and marketization of operation and management have not yet taken place. The process of commercialization has been slow. Moreover, the collection of treatment fees has not yet done according to market principles. The operational principle of “cost recovery with narrow margin of profit” renders STPs to remain dependent on public finance to guarantee the operation of the STPs. STP enterprises are assured of a fixed profit without operational risk, thus lacking the incentive to improve efficiency. Lack of Fairness The treatment fee is charged on the basis of quantity rather than quality. This affects the principle of fairness. The design capacity and selection of treatment technologies of a WWTP are determined on the basis of the quantity and quality of the wastewater the WWTP receives. However, the operational and management cost of a STP does not only depend on the quantity of the wastewater that the enterprise discharges but also the quality. Therefore it is fair to determine the fee rate on both the volume of the wastewater and the amounts of the pollutants the wastewater contains. Presently in China wastewater treatment tariff is determined purely on wastewater volume; no consideration is given to pollutant loadings. This practice affects the fairness to all enterprises and lowers the initiative of the enterprises to abate pollution. Illegimate Charges The wastewater treatment tariff is a service-based charge. Therefore polluters that are not covered by a WWTP (including the sewerage network) should not be charged. However, the 1999 regulation on strengthening wastewater treatment tariff collection to ensure the proper construction and operation of urban WWTPs requires the treatment fee to be collected universally in the form of a combined water tariff. An enterprise, if connected to the urban sewerage network, does not pay a pollution levy. Another enterprise, if not connected to the urban sewerage network, will have to bear the cost of wastewater treatment but is also charged the pollution levy. Yet, the sewerage connection depends, to a large extent, on the progress of urban infrastructure development; it is the responsibility of neither the enterprise nor the environmental protection authority. Weak Enforcement Weak enforcement leads to regulatory violations and failure to achieve the

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environmental protection objective. According to country-wide inspections by environmental supervision authorities, some WWTPs discharge effluent in violation of standards and dump sludge at will. Improperly treated and disposed sludge contains pathogens, heavy metals, toxic substances and odour-emitting substances that cause secondary pollution. 3.2.3 Pollution Rights Trading A) Status of Application Experimental Phase (1986-2000) The national environment protection bureau first started to experiment pollution rights trading in Shanghai and got a few useful experiences. The national EPB and Shanghai EPB determined the total discharge amount based on the analysis about upper reaches of Huangpu River water capacity. In 1986, the total indices were allocated to 404 companies in the target area with the issuance of relevant discharge permit. In 1987, the first case on transfer of discharge index with compensation happened in Minhang district. On March 20th, 1988, the national EPB implemented the ‘Interim Measures on Management of Water Pollutant discharge Permits’ and it says on chapter 4 and article 21 that the control index on total amount of water pollution discharge could be transferred among the regional sewage units. In 1996, the state council approved “national major pollutant discharge control program”. From now on, the discharge permit system was implemented among the whole country. The pollution discharge amount control and permit system have laid the basis for implementation of pollution rights trading. Pilot Phase (2001-2006) During the tenth five-year plan period, the focus of environmental protection work in China has transferred to the control of total amount of pollutant discharge. In order to satisfy the economic development, the former national EPB established pollution trading polices to improve the total amount control works. In this context, China has undertaken a number of pollution rights trading experiments on water pollution. For example, in 2001, Xiuzhou district in Zhejiang Province issued "Interim measures on water pollutant discharge control and pollution rights trading" to realize the paid use of water pollution rights. In June 2002, Xiuzhou district began to implement the paid use of pollution discharge rights and pollution rights trading system among companies. Until the end of 2005, the fee of pollution rights trading on water pollutant in Xiuzhou district was more than 7 million RMB. The pollution right trading during this period was still arranged by government. However, it has been well known that pollution rights trading system carries dramatic implication on energy-saving and emission reduction. Development Phase (2007-Present) During this period, government has paid more attention on the fundamental role of

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market on the allocation of environment resources and the implementation of environmental economic policies. The characteristics of pollution rights trading in this
stage include diverse trading patterns, broad trading targets, the establishment of different level of policies and the appearance of companies specializing in pollution rights trading. On December 13, 2007, the Ministry of Finance and National EPB approved to experiment the paid use of pollution discharge rights and trading in Taihu Lake in Jiangsu Province. On August 14, 2008, the Ministry of Finance, National Environmental Protection Bureau and Jiangsu provincial government jointly held the opening ceremony in Wuxi on the experiment about paid use of pollution discharge right and rights trading among Taihu lake regions. On that day, five companies coming from Suzhou, Wuxi, Changzhou, Nanjing, and Zhenjiang signed the purchase contract on 817 tons of COD discharge targets with relevant municipal EPB.

“Water pollution control regulations on Taihu Lake in Jiangsu province” stipulates that it is necessary to promote the water pollution rights trading and paid-use system. On August 13th, 2007, Zhuji government issued "Interim regulations on total amount of pollutant emissions targets with compensation”. On August 29, 2007, Zhuji government introduced the supporting regulations. In 2007, Jiaxing government formulated "Measures on the main pollutant rights trading (trial)” and set up a reserve center for pollution rights trading. On January 1, 2008, "Measures on paid-use of water pollutant discharge indicators in Taihu Lake” was put into effect. As for the business opportunities in pollution rights trading, there are more and more commercial enterprises taking part in this field. Governments in local area also actively provide supports to create a trading platform. The trading subject is varied, even including subject with environmental right and interest. On March 2008, Wuhan Guanggu Property Exchange plans to establish pollution rights trading platform to introduce it into property rights trading market. On August 5, 2008, Beijing Environment Exchange and Shanghai Environment and Energy Exchange were set up. The exchange objects cover wide range. On September 24, 2008, Tianjin Pollution Rights Trading Exchange was set up. The exchange subjects not only include SO2, COD and other traditional pollutants, but also greenhouse gas emission right, mechanism technology on economic production and other trading products that can be standardized. Although the operational platform still needs to be tested, it was a dramatic progress for pilot of pollution rights trading. The main events and cases for water pollution rights trading in China can be seen in Table 3-2. Table 3-2. Main Milestones and Cases for Water Pollution Rights Trading in China Time Activities From 1987 till now Shanghai minhang district launches water pollutants emission trading, totalled to 37 deals. The transfer of COD pollution-discharge right reach1100 kg per day and the accumulative total amount reach to 1,391 Yuan March in 1988 The state environmental protection administration issued “the license of water pollution discharge tentative administrative procedures” June in 1988 The state environmental protection administration determined 18 pilot cities to

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July in 1989 1995 Sep. in 1996 1997

Mar.2000 Jun,2002 Oct.2002 Dec.2005 Jul.1st,2007 Aug.13th,2007 Aug.29,2007 Sep.2007

Sep.27th,2007 Dec.10th,2007 Dec.13,2007 Jua.1st,2008 April,2008 May.2008 Aug.5th,2008 Aug.5th,2008 Aug.14th,2008

carry out wastewater discharge license, such as shanghai, Beijing, Tianjin, Shenyang, Xuzhou and Changzhou. Article 9 of “The water pollution prevention regulations “: carry out license management to the enterprises discharge pollutant to the river area. Article 19 of “huaihe water pollution control “Promulgated by the state council: the companies carried the license can not discharge more pollutant than formulated by the license. The State council proposed total amount control of main pollutant as an environmental policy in China, in the plan of total amount control in the ninth five-year plan period. It provided the foundation for the emission trading system. “Tentative Measures on the water pollutants emission control and paid-use of the discharge right “jointly issue by environmental protection departments, price control authorities and the financial sector in yuexiu district, jiaxing city. The state-owned assets management company - xiuzhou district sewage disposal limited liability company undertakes the right of collecting pollution-discharge fees. The fees are used to build Sewage treatment plant. article 10 of revised “The water pollution prevention regulations “: the local environmental protection department issued water pollutants emission permits according to the total amount control scheme xiuzhou district in jiaxing city lead pilot pollution-discharge right trade. All enterprises must buy "original" pollution-discharge right then they can be traded afterward. 11 companies from honghe town and wangdian town in the xiuzhou district mainly concentrated in woollen sweater dyeing attended the Start ceremony of paid-use of the discharge rights. The contract amount reached 143.59 Yuan. “Decisions on strengthen environment protection based on scientific development conception” proposed that it is necessary to implement pollution control system and pollution discharge permit system and began pollution rights trading pilot. Ministry of Finance and SEPA decided to conduct pilot emissions trading on electricity industry and the Taihu Lake Zhuji city introduced the "Interim regulations on the paid-use of pollution discharge targets " Zhuji City issued " Interim Rules for paid use of pollutant emission targets " Standing committee of Jiangsu province issued “Ordinance on Taihu lake water pollution control in Jiangsu province (Amendment)”. It says that government will implement the first distribution and trading system on water pollution discharge targets. Jiaxing Municipal Government issued " Rules on major pollutants emissions trading approach (Trial)" Jiaxing City established the first domestic emissions trading institutions – the reserve trading center of emission targets Ministry of Finance, State Environmental Protection Administration approved paid-use and trading of pollution rights in Taihu Lake in Jiangsu Province. "Measures on paid-use of major water pollution discharge targets in Taihu Lake in Jiangsu Province” went into effect. Wuhan Guanggu Property Exchange plans to establish pollution rights trading platform to introduce rights trading into property rights trading market Tianjin pollution rights trading exchange center was established by Tianjin Property Rights Exchange Center, CNPC Assets Management Co., Ltd., and CCX. The establishment of Beijing Environment Exchange The establishment of Shanghai Environment and Energy Exchange Ministry of Finance, Department of Environmental Protection and Jiangsu provincial government jointly held launch on paid-use and trading of major

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Sep.10the,2008 Sep,24th,2008

pollutant discharge rights in Taihu Lake in Wuxi City. The SO2 trading platform was set up in Heilongjiang province. The pollution rights trading Exchange was established in Tianjin and traded SO2 indicators.

A) Existing Problems Although pollution rights trading is a good market economic policy and China has got lots of experiences on how to establish trading management system and its operational mechanism, we still face problems coming from administration, company and environmental consciousness and other aspects . These issues include the following five aspects: Inadequate Laws, Regulations and Operational Guidelines Though the current “Air pollution control law” and “Water pollution control law” contains provisions on pollution discharge control and discharge permits system, there are still no laws and regulations on pollution rights trading with national level in China. Problems such as the definition of pollution rights, rules on how to trade pollution rights, interest of trading parties, how to settle the transaction disputes, incentive measures, depreciation and collateral of pollution rights and law liability and so on are not been resolved yet. At present, the regulations approving the exploration of pollution rights trading system include “Scientific concept of development on the implementation of decisions to strengthen environmental protection” issued by state council in December 2005, “A comprehensive program of energy conservation and emission reduction” issued by state council in 2007 and “Eleventh Five-Year environmental protection planning” in 2007. Based on the implementation experiences in different provinces, we come to conclusion that the legal basis for pollution rights trading in Zhejiang and Shanghai is weak, especially for the paid use of pollution rights. In details, Jiangsu province has the most adequate legal basis for paid use of pollution rights to some extent (“Jiangsu Taihu Lake water pollution control ordinance (Amendment)”). Xiuzhou district in Jiaxing City of Zhejiang province regulates its paid use of sewage rights by “The pilot scheme on water pollution discharge control and paid use of pollution rights”. The water pollution rights trading in Shanghai is based on “Shanghai Huangpu River water resources protection ordinance”. B) Weak Discharge Measurement, Monitoring and Supervision Accurate measurement and strict monitoring of pollution discharge with strong supervision system are an important guarantee for obtaining the pollution rights with compensation. At present, the current level of pollution sources monitoring in China is relatively backward. Because of lack of enough automatic monitoring equipment in relevant companies, it is difficult for environmental departments to grasp real sewage 58

discharge data what could directly affect the establishment of pollution rights trading market and effectively implementation of policies. As for Jiangsu province, the two pilot cases are key enterprises with on-line automatic monitoring equipment. However, the environment department did not fully track and verify the trading transaction records. Xiuzhou district in Zhejiang province issued “Interim regulations on Xiuzhou water pollutant emission control and paid use of pollution rights” which mentions that “Xiuzhou pollutant discharge license management approach” will regulate the discharge by dynamic management. However, it has not yet been implemented. Besides, “regulation” of Huangpu river protection area in Shanghai does not mention the supervision measures on pollutants from trading companies. The government should focus on how to use the pollution with compensation, the sewage permit issuance and timely tracking and supervision the pollution rights trading. C) Lack of Pollution Rights Trading Market Until now, all pollution trading was done under the coordination of local environmental protection bureau. Environmental sector is the rule-maker and intermediary during the trading process. The real perfect trading market has not yet formed. So, most of the cases just happened in primary market. The key part to establish pollution rights trading market and maintain its development is to make sure policies could inspire a sufficient flow of remaining pollution indicator. Otherwise, there will be “zero supply” diploma in the trading market. At present, the “reluctant sellers” are most popular in Chinese trading market. Enterprises want to set aside for their future development after getting pollution permits. Reasons for why there is no seller in trading market are as followings: a) Government implements strict emission reduction policies among the whole country. Therefore, most of enterprises face reduction mission, it is hard for them to make flexible market selection; b) with the rapid growth of energy demand, the medium, and long-term energy reduction targets are not clear. Consequently, companies are reluctant to sell the pollution discharge indicator, but leave it to the future; c) There is serious segmentation among regional market. For example, there will be difficult for individual city and province to establish trading platform for cross-regional trading indicators such as sulphur dioxide. D) Weak Techniques Although we got many experiences on quota allocation of enterprise discharge, there are still some problems on allocation, such as unclear access to discharge quota on new energy and inadequate access criteria and other issues. All these problems will hinder the implementation of pollution rights trading.

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Emissions trading are also lack of scientific pricing mechanism for the initial emission rights. The two emission trading transactions in Jiangsu Province completed because the price was set by the environmental protection department. What the two sides of the tractions have to do is to approve the price, with a strong administrative intervention "guidance price" color. The price of the waste water discharge right in Yuexiu of Zhejiang and the price of pollutants discharge to Huangpu River in shanghai are calculated from a fixed formula released by the environmental protection department. These pricing mechanisms are scientific somewhat, but prices are not linked with the market mechanism. There is no "highest bidder" mechanism and cannot reflect the balance between market supply and demand, making it difficult to reflect the scarcity of resources and environmental capacity. There are also many controversies in how to determine compensation for the use of emission rights, the initial prices of resources and environmental resources. It cannot reflect the scarcity of resources in practice. If the initial price is too low, it cannot constrain the behaviours of emissions units. If the initial price is too high, it will bring too much burden to the enterprises in the pilot areas with a high possibility to bring government rent-seeking behaviour. E) Weak Policy Coordination There are many environment policies for pollution sources management such as sewage charges, environment impact assessment, discharge volume control and discharge permits and so on. To introduce the pollution rights trading policies into current environment policies system, it is necessary to clarify the relationship among different policies. Until now, government has not evaluated the status and function of trading policies from the perspective of environment policy system. Therefore, it is important to clarify the relationship between pollution rights trading and current environment management system from the theoretical and operational level. 3.2.4 PPP and Marketization A) Status of Application PPP (Public-Private-Partnership) is a cooperation model between public sector and private enterprise. It is a modern financing model based on “win-win” idea and developed from public infrastructure construction. The typical structure of this model is that government signs contract with winning units through government procurement model. The winning units are organized into a company with special purpose. This company will take responsibility for financing, construction and operation. In PPP model, the private partners will operate and maintain public infrastructures what is beneficial for improvement of service quality and efficiency. Moreover, the role of government can transfer from public service provider into supervisory by PPP model and there will be less pressure on budget. Besides, it will

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be benefit for private companies to introduce advanced technology and management experiences from the beginning. At the same time, there will less investment risk for private enterprises by government intervention. The PPP model includes BOT, TOT and PFI and so on. According to changes of main investors in urban sewage treatment plant for decades, the STP construction in China can be divided into three stages: a) The first stage (early 1990s to 1997): during this period, most of funding for STP construction comes from foreign government or international financial institutions. Many programs regard the purchase of foreign equipment and international tender as additional conditions; b) the second stage (from 1997 to 2001): Since the outbreak of financial crisis, exports in China has been seriously hit. Therefore, the central government enlarged investment to stimulate domestic demand. During this period, the STP constructions mostly were financed by national debt; c) After the tenth five-year period, the STP construction based on BOT model is popular in the whole society because of less national debt investment, the market-oriented reform in state-owned department and requirement of state council. In addition, the large scale of STP construction began from now on. According to statistics, by the end of May 2008, the whole number of constructed STP in China is 1408, among which there are 448 operated on PPP model, almost 31.8%. National authorities has always put more attentions on the market-oriented reform on wastewater treatment and gradually introduced some guidance, regulation and laws that have laid a good foundation for the reform. The representative documents were listed in Table 3-3. In June 1997, the ministry of finance, state planning commission, ministry of construction and national EPB jointly issued “Problems about charges of river sewage treatment”. After that, some eastern cities began the market-oriented reform on sewage treatment. With the issuance of national policies about sewage charges, water price reform, urban sewage treatment and garbage disposal, many cities has made important progress on the STP construction and operation. In September 2002, “Views on industrial development of city sewage and waste treatment” was issued by state development planning commission, ministry of construction and SEPA. It requires that we should change conception that only government or state-owned units could operate the construction of sewage and garbage treatment facilities. It is important to promote the market-oriented reform on the construction and operation in these facilities. On the other words, we should encourage all kinds of economic sectors to participate in the investment and operation. In May 2004, ministry of construction implemented “Measures for the franchise of municipal public utility”. This is the first time that china government provides clear

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regulations on franchise of municipal public utility in form of departmental rules and regulations. In addition, it carries great implication to the development of public facilities. Table 3-3: Policies on Market-Oriented Reform on Sewage Treament Year Documents Issuance units 1995 "Notification for BOT approach to appeal foreign Ministry of Foreign Trade and investment " Economic Cooperation August1995 “Notification on approval management of BOT National Planning project” Commission, Ministry of Electric Power, Ministry of Transportation April1997 "Interim Measures on Overseas project financing" National Planning Commission and Foreign Exchange Bureau June1997 Jointly issued " Notification on urban sewage Ministry of Finance, National treatment charges “ Planning Commission, National Environmental Protection Administration September 1998 "Management Measures on Urban Water Price " National Planning Commission, Ministry of Construction 1999 "Notification on Strengthening the wastewater State Planning Commission, treatment charges and setting up good mechanism Ministry of Construction, on urban wastewater discharges and treatment National Environmental Protection Administration December 2001 "Opinions on promoting and guiding private National Planning investment " Commission December 2001 ""Measures and Views on promoting service industry National Planning Commission during “the tenth five-year” period " April 2002 "Notification on promoting the reform of water supply National Planning price " Commission, Ministry of Finance, Ministry of Water Resource, National Environmental Protection Administration. April,2002 "Guidance Catalogue on Foreign Investment Industry National Planning " Commission, National Economic and Trade Commission September 2002 "Opinions on promoting industrial development of National Planning urban sewage and garbage treatment " Commission, Ministry of Construction, National Environmental Protection Administration December 2002 "Views on speeding up the market-oriented process Ministry of construction of public service industry " 2004 "Decisions on Reform of Investment System" State council May 2004 "Measures for municipal public utilities franchise" Ministry of construction

From the above policies, we can see Chinese government’s determination on

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strengthening the confidence of domestic and foreign investors to the sewage treatment market. All the policies provide legal basis for the implementation of PPP projects. However, we should clearly see that factors affecting public utilities development are different. On point of environment aspect, there is still no effective management system and price adjustment mechanism considering lacking of supporting policies and implementation details on franchise reform. All these problems will hinder implementation of PPP. B) Advantages of PPP Expanding Financing Channels The expansion of financing channels can help resolve problems of long-term lack of investment in water pollution control in China. There is a serious shortage of sewage treatment facilities in China for a long time. One of the most important reasons for the shortage is that treatment utilities only rely on government funding to construct and operate. This model has made government overburdened and shortage of inputs. However, PPP model can resolve the inadequate investment problems. Through PPP, enterprise can make assets and incomes as collateral for financing what is suitable for sewage treatment project. As for government, PPP model can reduce its pressure on finance and invest more social capitals into infrastructure construction. Government can pay investors in instalments by transfer of franchise rights and sewage treatment fee (and a small amount of budget). Meanwhile, adoption of PPP can help government to reduce its liability on debt because it can transfer all responsibilities for project financing to social partners. For enterprises, BOT project has the advantage of low-risk and steady return of investment because there is sewage treatment fee as warranties. Cost Savings In PPP model, the project company as main part takes full responsibility for financing, project construction and operational management on sewage treatment. The model makes project investor and operator be the same one. Therefore, there will be no “agent cost” problems during construction process. Compared with other construction methods, PPP model can help to coordinate the conflict between low-price competition and high-quality project. Moreover, PPP model can reduce risk resulted from “information asymmetry” and make investor and operator be the same party. Government only take responsibility for supervision of project construction results what greatly reduce supervision cost and transfer quality risks to project company. PPP model is benefit for project efficiency improvement. Because of strict loans control in PPP, private companies will take the initiative to strengthen management and control costs to obtain more benefits and less risk. These activities can prevent phenomenon of public funds overruns and owners can get valuable management experience.

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Improving Operational Efficiency Due to historical reasons, the existing and under constructed STPs in China owned by. This kind of mechanism has hindered industry development. BOT model can clarify and improve the owner structure on water resource usage project. Moreover, it can help government, project sponsor and operating company to clarify their responsibilities. BOT model also can promote government function transformation. Companies on water resources usage can promote technological innovation and scientific management by BOT to reduce their operational cost. According to American EPB, the investment fees and operational costs in private enterprises are lower than public sectors by 10-20%. In 2001, after the Longtian and Shatian STP were contracted to private companies in Shenzhen, government can save more than 1.2 million Yuan every year and reduce its operating costs by 20%. C) Existing Problems With rapid development of PPP model in China, there are still many problems on policies, institutions and ideas which seriously restrict PPP development. Low Fees and No Guarantee on Operating Funds Good pay system is a prerequisite for PPP development. It is not only the mortgage for bank, but also the profits guarantee. At present, phenomenon of low standard treatment fees and low rate of fee collection exists in relevant cities. According to NDRC, the average of treatment fees in 2007 was 0.67 yuan/m3. However, there is a big gap between sewage treatment fees and treatment costs. The treatment fee only equal to 67% of treatment cost. Therefore, without government subsidies, there will be little attraction for private enterprises to treatment fees standard. This situation mainly is due to that some residents and governments cannot keep up the knowledge of charging system and weak penalties to non-payment ones. Weak Government Supervision The sewage treatment industry belongs to category of public production involving public interests and safety. Therefore, government should take responsibility for supervision to safeguard public interest. Some local government ideas are affected by planned system and various interest relationship and just deal with public productions in simple ways, such as just selling it. Government gives up its supervision responsibility what leads to disorderly market competition and loss of state assets. Lack of Supporting Policies and Measures The existing market and franchise policies are only the guidance framework, lacking of appropriate legal basis. Besides, there is no operational implementation methods and clear definition of government permission rights. There are still misunderstandings on the role of market. Some places just regard

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STP as burdens and want to remove burdens by PPP. Some other places treat STP as public service. Therefore, government should take responsibility for this service what exerts little motivation in promoting PPP. Currently it is the municipal administrations who are responsible for oversight and management of sewage treatment (or the water sector and environmental sector), but explicitly authorized duties in the departments lead to unclear responsibilities and management chaos. In the operation of BOT, TOT and PPP projects, there is a problem that which department can take representatives of government and sign contracts with private enterprises. Under existing law, the city government has the legitimate authority to build the environmental infrastructure, but it is not authorized to finance from the social capital. Moreover, it is formulated that the government cannot engage in business activities and the local governments cannot enter into a commercial contract with the enterprises. So the governmental legal person does not exist to make cooperation with private enterprise. Currently, the contract in some BOT projects, some are signed by the government authorities, or the investment companies affiliated with the government authorities. The legality and the dependence of the contract depend on the trust to the leaderships in the government, not the legal effect of the contract itself. 3.2.5 Public Finance Policy A) Status of Public Finance Policy Environmental protection investment is the key method to resolve environment pollution and improve ecological system. Chinese government has already fully understood the important role of investment on environment protection and economic development. Since early 1980, the investment in environment protection has increased year by year. In 2007, the total investment on environment protection reached 338.43 billion Yuan which accounted for 1.36% of GDP. Among them, the investment on urban environment infrastructure construction is 146.78 billion Yuan; investment on “three simultaneous” project is 136.74 billion Yuan; investment on industrial pollution treatment is 54.91 billion Yuan. In 2008, the environmental protection investment from central government has reached 34 billion Yuan, increasing by 10 billion Yuan compared with last year. Based on different investors, the environmental protection financial policies can be divided into three fields, including policies on public finance, bank finance and enterprise and social finance. During the period of “the tenth five-year”, investment on pollution sources treatment was 135.1 billion Yuan. Among them, state budgetary fund was 11.855 billion Yuan, special fund for environment protection was 5.922 billion Yuan, enterprise self-financing was 74.651 billion Yuan, bank loans and usage of foreign investment was 23.671 billion Yuan. The government investment

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accounted for 13%, 72% from enterprise self-financing and 15% from bank loans. The public financing and investment policies on environmental protection mainly include “211 environment protection” budget expenditure subject, environmental protection special fund, environment and ecological compensation payments and environment-friendly tax policies and so on. 211 Environment Protection Account In 2006, the Ministry of Finance issued “Government revenue and expenditure classification reform program” and “Government revenue and expenditure classification account”. Among them, environment protection was included as class-level account. It is the first time that state budget sets up “211 environment protection account. On January 1st, 2007, the account was put into full operation. "211 Environmental Protection Account" is the 11th subject according to spending functional classification, including expenditure on environmental protection management services, environmental monitoring expenditure, expenditure on pollution control, ecological protection expenditure, expenditure on natural forest protection, reforestation expenditure, desert sand control spending and pasture expenses, expenses grassland restoration of cultivated grassland. It includes 10 categories or 50 items. It is the first time that "211 Environmental Protection Account" exists in the form of categories. The environmental protection expenditure then has its own account in the governmental fiscal budget. It integrates the environmental fiscal expenditures to its own category. While in the past they can be scattered in the "capital expenditure", "Technology Promotion", "industrial and transportation operating expenses", "administrative fees", "sewage expenses" and other different subjects. It also details the budget to the subjects; more comprehensively reflects the environmental protection expenditures of the Government. "211 Environmental Protection Account" is a basic system of the financial system. It is also important to increase government investment in environmental protection, besides it is also the basic guarantee for the local government to strengthen building environmental protection capacity and for the environmental protection agency to raise fund and support. According to our survey, the outcome of the implementation of "211 Environmental Protection Account" is not so obvious if there is no further financial guarantee mechanism. Some local "211 Environmental Protection Account" budget is still uncommon. The situation highlighted in that the growth rate of fiscal environmental budget excluding sewage fee funding is lower than the growth of other industries over the same period. Some expenditure is not all right while the others are still in the blank. Environmental spending increases somewhat, but it mainly due to the faster growth

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in sewage charges and the corresponding rise in fiscal revenue and has little to do with the establishment of the subject. The local environmental protection expenditure was 19.913 billion Yuan in 2006; it grew to 25.862 billion Yuan in 2007, at an increase of 5.949 billion Yuan. Sewage charges Increased by 3.052 billion Yuan, accounting for 51.3% of the total increase. The remaining amount of budget expenditures increased 2.897 billion Yuan, accounting for 0.31% of the 935.8 billion Yuan additional financial expenditure. It increased by 14.5% compared to 2006 expenditure, far below the 23.2% fiscal expenditure growth rate. Special Environmental Protection Funds The so-called "special environmental protection fund" refers to the budget for sewage charges and other funds collected by the environmental protection department shall charge and it is important for the departments to carry out ecological compensation. The special funds for environmental protection include the central environmental protection special fund, the central government special funds for major pollutants emission reduction, the special funds for water pollution control of "three rivers and three lakes" and Songhua River, the bonus funds to encourage construction of the urban sewage treatment facilities, the special fund for law enforcement in the western places, the special funds for nature reserves and the special funds for pollution prevention and to control of livestock and poultry farming pollution. Central Environmental Protection Fund was 27.7 billion Yuan in 2008, excluding the new investment in the fourth quarter. Of which the central government special funds were 16.4 billion Yuan, including 5 billion Yuan of special subsidies for the three rivers and three lakes and the Songhua River Basin Water Pollution Control, 6.5 billion for the Midwest town sewage treatment facilities and the pipe network, 2.5 billion special funds for major pollutants emission reduction, the 1.8 billion central environmental protection special fund, 15 million Yuan special fund to control livestock pollution prevention, 50 million Yuan for the building of the State Nature Reserve capacity , and the newly established 500 million Yuan special funds for rural environmental protection. In 2007, the financial support form for the special environmental fund reformed. The form of bonus funds was added in the basis of the original way of appropriation in aid, interest subsidies, in order to play the multiplication effect of the central special funds. Encourage and give priority to the form of loan interest subsidy and the way of replacing subsidies with awards and minimize the form of the free funds. If the pollution control projects have passed the acceptance inspection and fit certain conditions, they can get discount loans and bonus support. The central government promulgated the "interim measures of using bonus funs to encourage the building of urban sewage treatment facilities and the pipe network “.

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The funds should be uniformly managed to support the construction of urban sewage pipe network and the sewage treatment facilities in the western regions, provided by the central transfer payment. In addition, the central government newly established special funds for environmental protection in rural areas, to award and support the environmental projects. Environmental protection special funds provide strong financial support for environmental protection, but for now, they are mainly special environmental fund to the contingency. Because the lack of long-term overall consideration and effective integration, their join forces are not so obvious. State Bonds Central Government issued bonds to finance environmental protection. It has become an important new funding source for environmental protection. Since 1998, the state environment regards the infrastructure construction as the focus of treasury bond investment and brings a lot of social investment. From 1998 to 2005, China's treasury bonds for investment in municipal wastewater treatment totalled to 61.6 billion Yuan, and brought 42.9 billion local investments. However, since the "Eleventh Five-Year", the debt for investment in environmental protection declined. Bond for environmental protection projects include the Huaihe River, Songhua River and other key industrial pollution control projects, chromium slag pollution control projects, and energy-saving projects. Fiscal Transfers and Ecological Compensation Since the reform of tax distribution system in 1994, the financial transfer payment has become an important way to balance the local development from the central government. Since 1998, the central government increased the budget for ecological protection and the scale of transfer payments in order to prohibit development zones in the form of ecological construction project and natural forest protection. In 2005, the government issued "further improve the ecological compensation mechanism several opinions". Through the government transfer payment, it integrated the problems of ecological restoration and environmental compensation. At present, the central government is actively carrying out pilot ecological compensation policy. In 2008, financial transfer payment arrangements from the central government was 14.8 billion Yuan, as the ecological compensation funds to pay for local government in the center South-to-North Water Diversion Project. Overall, however, the financial transfer payments lack comprehensive consideration of environmental factors. Environmental factors did not become the focus of fiscal transfers; the proportion is still low. The financial transfer payments between districts, basins and industries are still at a blank state. Financial Subsidy Financial subsidy is a more hidden form of subsidy provided by government. The government pays part or all of loan interest for company. It is important for regional development by providing local loan companies with subsidies on their interest. In

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2006 and 2007, there was special fund from central government on environment protection, which was used for providing interest subsidies for power plants. B) Problems on Public Finance Policy Unclear Responsibilities and Inadequate Supporting Policies With the gradual establishment of market economy and the switches in enterprise management mechanisms, the independent powers of environmental protection originally undertaken by the central government should be redistricted in the government, enterprises and individuals. But it is not yet in place. Government has yet to exit production investment and operating decisions. "The polluter pays principle" is not a sound institutional basis. Production costs of negative externalities on the environment have not been fully internalized. China's economic incentive system is also not a perfect system. The incentive measures are plenty, but mainly in the form of tax measures, the charging system and the financial means. Because supporting measures are not in place, the overall effect is not evident. Unclear Division of Powers and Incompatibility Clear rights and duties is the cornerstone for the design of environmental financing policy. The tax distribution system goes great contrast with the environmental duties between the central and the local governments. The profits of state-owned enterprises turned over to the central government, while the pollution controlling duties are left to the local governments. The local government should undertake many environmental problems left over by history and post-bankruptcy pollution problems. In some poverty-stricken areas and underdeveloped areas, the local governments are difficult to undertake pollution control financial investment. The environmental responsibility and the financial support for the local government are asymmetrical. Lack of Government Investment Channels In recent years, a substantial increase in government expenditure is mainly emergency-type investment, lacking of continuity protection. Specifically, the problems are in the following aspects: First, no legislative system is established for the steady growth of financial investment. It is difficult to ensure the rigidity of government investment in environmental protection. Second, the policy of financing system in environmental protection is absent. Most of the tax items, tax base, tax rates in China's current tax system are not really the choice of environmental protection and sustainable development, or only part of the consideration of environmental issues. In addition, there are only environment-related taxes which are not real environmental taxes. That is, resource tax, consumption tax, urban construction tax, land tax, vehicle and vessel use tax and land use tax. Although these taxes provide some funding to reduce pollution and protect the environment, but it is difficult to form a stable source of support to the

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environment protection. Third, after tax sharing system reform, the local government undertakes environmental protection investment while they can carry little environment fund. Fourth, the difference development levels in the local places make the difference in the environmental input while the central government's capacity macro-regulations are limited. 3.3 3.3.1 Economic Policies, Laws, Regulations and Institutions Economic Laws, Regulations and Instruments A) Economic Instruments in Water Environment Legislation Overall Situation China began its legislation work on water pollution control for decades. During this period, the legislation work has made great progress by experience accumulation and introduction of advanced foreign experiences. In the central government and local levels, the systematic laws and regulations have been established laying a sound legal foundation for solving water pollution problems. The laws about water environment protection include: ”water pollution control law ”and its implementation details, “water law”, “soil and water conservation law”, “Flood prevention law” and “Fishery Law” and so on. The regulations include “The people’s republic of china river regulation” and “The people’s republic of china flood control ordinance” and son. Water Law: In 2002, the NPC standing committee adopted amendment of “water law 1988”. Although it had made great progress on guidelines, contents, measures and methods, it only mainly focus on water resource management, not water pollution prevention. Water Pollution Control Law: It was first implemented on November 1st 1984 and amended on May 1996. The amended law went into effect on June 1st 2008. After twice amendments, “Water pollution control law” has improved a lot. Article VII says that national government takes responsibility for establishment of water ecological compensation mechanism for rivers, reservoirs and lakes by method of financial transfer and other ways. Moreover, the Act also puts emphasis on key pollutant discharge control system in article 15th, 18th and 19th. The Act lays legal foundation for implementation of pollution permit system and pollutant reduction. Besides, the new Act made innovation on field of sewage permit system including the standard for discharge outlet locations. Article 44th in “water pollution control law” make detailed provisions on urban sewage

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centralized treatment. The economic measure becomes an important component. It says that the local government above country level should construct urban sewage treatment facilities and supporting pipe network by financial budget and other channels. It is benefit for the improvement of urban sewage collection and treatment rate. Units who discharge sewage into urban centralized treatment facilities do not have to pay for discharge fees. The sewage treatment fees should be used to construct treatment facilities without any other purposes. Regulations on Sewage Fee Collection and Use: The sewage charging system is an important part of Chinese environment protection law. In 1982 and 1988, government has issued “Interim measures on sewage charges” and” Measures on usage of special fund for Pollution sources treatment”. However, as development of environment protection industry and financial management system reform, there are some new problems during the implementation process. We should charge the pollution discharge fee and excessive discharge fee at the same time. Besides, the targets that pay for the pollution discharge should include individual business. In order to resolve above problems, Chinese government issued “Sewage discharge fee collection and usage regulation” which went into effect on July 1st 2003. The regulation has some important provisions: a) According to “Air pollution prevention law”, ”Water pollution control law” and “Marine environment protection law”, the charges on pollution will include pollution discharge fees and excessive pollution discharge fees; b) Based on different pollution elements, sewage charges will be collected based on multi-factors. According to changes on charge institution, we should stress to separate charge collection from expenditure. Besides, it is important to include the sewage charges into budget and strengthen auditing and supervision; d) we should strengthen the law violation activities. “Sewage charges collection and usage regulation” plays an important role in promoting the charge behaviour in China. Water Pollution Control Law Implementation Guideline 2000: The guideline is a set of implementation details based on “water pollution control law 1996”. The guideline contains details about relevant problems on water pollution control and prevention. Considering the amendment of “water pollution control law”, the guideline should also be revised to accommodate requirements of water pollution control work. B) Existing Problems with Implementation of Economic Measures With rapid development of water environment legislation in China, there is still a long way for system construction and operation. The main problems are as followings: Inadequate Legal Support for Development of Water Pollution Market The system design is the core of laws and regulations on water pollution control. It

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has been proved that economic measures based on market mechanism are the most effective methods to control water pollution. Among existing laws and regulations, there are some institutional arrangements, but quantity is insufficient. For example, current law is lack of regulations on ecological compensation and pollution rights trading and so on. Therefore, it is imperative to develop or improve the laws and regulations on ecological compensation, sewage charges, pollution rights trading, public finance and tax policies on water pollution control and sewage charges. Lack of Coordination and Cooperation The coordination is not perfect between water protection legislation, water pollution control legislation, soil conservation legislation, agriculture, forestry legislation, and nature protection legislation. Many contents in above laws are repeated and even conflict between each other. Next we will compare the differences between “Water pollution control law” and” Water law” from the point of agency, monitoring, dispute resolution, public participation and accountability. Institutional Arrangements: Reasonable institutional arrangement is the key prerequisite for effective implementation of economic instruments. However, current laws and regulations do not have clear definition on sector’s management responsibility, information sharing and so on. This situation leads to low efficiency and conflicts among different departments. At present, the management systems in water pollution and water resource are different. According to “water pollution control law”, environment protection government above country level should put unified supervision and management on water pollution control. The ministry of water, land resource, health, construction, agriculture, fishery and other protection agencies should exert supervision and management on water pollution control. However, according to new “water law”, the management system will combine the regional management system on water resources with administrative regional management. There are inconsistencies between these two management systems. Although some other sectors such as ministry of forest, urban construction and agriculture play an important role in regional integrated management, there is still inconsistency between environment protection department and water resource department. Monitoring: With the use of different economic instruments, requirements on environment monitoring are also increasing. But current laws do not have detailed regulations on how to coordinate the water monitoring work among different departments. Repeated monitoring can not only lead to conflicts between environment protection department and regional sectors, but also the waste of human resources, material, monitoring equipments and investments. The new “water pollution control law” stipulates that national government sets up monitoring system on water quality monitoring and water pollution discharge monitoring. The environment protection department in state council takes responsibility for establishment of water environment monitoring standards and issuance of water

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environment information. The new “water law” stipulates that the water management department and regional management department in local government above country level should monitor the water quality in functional areas. Dispute Resolution: Because water pollution problems involve many departments, individuals and regions with different interests, there must be conflicts and contradictions among them. But the relevant law is still lack of systemic and clear provisions on how to deal with disputes on water pollution. The new “water pollution control law” stipulates that disputes on water pollution should resolve through coordination and consultation by local government. Besides, the new “water law” stipulates that if the consultation fails, the higher-level government will make the final decisions and all parties must agree with the decision. Accountability: In aspect to government responsibility, the “environment protection law” stipulates that local government should be responsible for the water quality in this area and take measures to improve environment quality. Moreover, units that make pollutions should be shut down by local government if they cannot finish treatment at certain time. Obviously, pollutions will decrease if government can strictly implement its environment monitoring functions and polluted units can fulfill their responsibility on environment protection. The new “water pollution control law” article 5 stipulates that status of environment protection will be used to evaluate local government. Public Participation: Good public participation is the basic condition for the fulfillment of responsibility and obligation of stakeholders. Although there are many progresses on public participation, the local legislation mechanism still is lack of public participation. The reason for above problems is that Chinese law is established by “sector”. Every sector sets up regulation on its own interest. Therefore, there is no coordination among sectors. Figure 3-4 displays the legislation structure on water resource management and water pollution control.
Administrative management system on water resource

Water Law

Supporting laws and regulations

Local supporting laws and regulations and local regulations

Administrative management system on water pollution

Water Pollution Control Law

Supporting laws and regulations

Local supporting laws and regulations and local regulations

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Figure 3-4: Regulatory Framework Water Resource Management and Water Pollution Control (Wang Fengchun, 2007)

Lack of Integrated Approach: Many economic instruments involve operating problems among inter-related administration and department. There are no specific policies on how to deal with water pollutions in cross-area river and lake. Therefore, different areas in one watershed take their own pollution treatment measures what lead to low policy efficiency. At present, China does not have integrated laws and regulations on water resource usage, water pollution prevention and ecological protection. On one hand, these laws and regulations lay good legal foundation for watershed management. But one the other hand, they also restrict watershed integrated management. C) Recommendations Environmental economic measure based on market is a key method to control water pollution. As we all know, implementation of economic measures should be supported by legal system. Lacking of legal measures, the implementation cannot get positive results to some extent. Legislative Planning The adoption and implementation of economic measures based on market mechanism should be an important part of legislative planning. During the planning process, it is necessary to include economic measures such as ecological compensation, pollution right trading and sewage treatment charges into planning. Meanwhile, the planning should include water pollution control work and other relevant problems such as water demand, water supply, and point source pollution and so on. Strengthening Regulatory Enforcement Legal measures need good enforcement mechanism. The inadequate involvement of executive department is a common problem in China. Reasons for this situation are unclear law and regulation, lack of appropriate punishment and enough public participation. Therefore, we should provide clear procedural provisions on the implementation of market measures. Moreover, we should enhance accountability sense of authorities and punish law violation activities. Reallocate watershed agencies’ organization and responsibilities. The watershed agencies have been set up for a long time. During this period, it has accumulated a large number of related equipment, personnel, technology and information to effectively implement economic measures on watershed environment management. However, the organization and responsibilities of these agencies are not clear what has limited its development. Therefore, it is important to consider about these

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problems during the system adjustment on legal system and management. Focus on public participation and supervision rights. We suggest that there be detailed regulations in national law such as “Water Law” and “Water Pollution Control Law” about detailed procedures for public participation. Moreover, if the relevant departments do not fulfill its law enforcement responsibilities, public can promote dereliction of their duties through judicial process. Strengthening Regulatory Coordination We should eliminate contradictions among different laws, especial the “Water pollution control law" and the "Water Law". The "Pollution Prevention" and "resource protection" are two sides of one coin. But they are artificially divided into two conceptions of "water environment" and "water resource". This legal system is not benefit for the water resources protection and has exerted serious effects on legal constructions of water environment resources protection. Therefore, it is important to combine these two systems. In the legislation process, we should make clear legal status definition of different integrated plans and special plans and their application scope and executive departments. As for the potential conflicts among plans, it is necessary to regulate reasonable solution. In particular, it is important to make clear definitions of watershed pollution control plans and watershed resources protection plans to clarify their relationships. Problems on the application scope, content, organization sectors, approval procedure and implementation of water pollution control plan should be clear prepared. To coordinate relationship between “Water pollution control law” and “Water law” is benefit for clarifying different monitoring functions of departments and eliminating overlapping problems. 3.3.2 Economic Instruments and Water Pollution Control Management A) Current Situation of Management Framework The current water pollution control management system is mainly based on "Environmental Protection Law," "The People's Republic of China Water Pollution Control Law" (2008 Amendment), "Water Law" (2002 Amendment) and "The People's Republic of China Regulations on Hydrology" and so on. After 20 years development, the system has been established. In general, the existing water pollution control management system still needs to be reformed and improved in order to meet the requirements of environment and resources management. National Management System for Water Pollution Control In aspect to institutional settings in China, all levels of government will set up corresponding agencies with higher level of government in order to ensure the enforcement of laws and regulations from central government. As for water pollution

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control authority, the Environmental Protection Department of state Council takes responsibility for organizing the implementation of water pollution control and coordination with Ministry of Water Resources, Ministry of Construction, Ministry of Agriculture and other departments on water environment management. The management structure in water pollution control agencies from province, country/city/district is the same as central departments. (Figure 3-5). To sum up, the current water pollution control management system is led by environment protection department and many other agencies participate in the management. In the system, the coordination agencies include watershed pollution control conference, leading groups and offices set up by government for certain purpose. In respect to coordination mechanism in central government, there are three kinds of coordinated agencies including watershed resources leading group, joint conference for water pollution control and watershed pollution control leading group. The most important forms are last two. In respect to water pollution control in local government, the coordination agencies include watershed resource protection leading group, watershed pollution control leading group and environment protection committee and so on.

Governments on all levels

L e a d e r s h i p

Supervision and management departments

Participating departments

Country level

National EPB

Department on Water resource, urban construction, agriculture, Marine bureau Department on Water resource, construction, agriculture and forestry urban

Provincial level

Provincial EPB

Municipal level City level

Municipal EPB City level EPB

Department of water resource, urban construction, agriculture Department of water resource, urban construction, agriculture

Figure 3-5: Water Pollution Control Agencies in China

Environment Protection Authority as Primary Administrative Agency: Article VII in the new “Water Pollution Control Law" stipulates that environment protection administrative departments above country level should take responsibility for

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supervision and management on water pollution control. According to the new act, governments at all levels should work water protection into the national economic and social development planning, take measures on water pollution control and take responsibility on water environment quality on their administrative regions. Local governments have to public the status of completion to society. The new Water Pollution Control Law gives a more rigid law enforcement power to environmental protection department. The Environmental protection departments have the administrative punishment rights to the excessive discharge of pollution. During the specified period, they can stop the pollution unit production and discharge. In respect to water pollution control management system, there has been laws on responsibility system on water protection and assessment system, ecological compensation system, pollution discharge permit system and legal aid system on water pollution. Because it is necessary to coordinate the supervision and management of many cross-area river and watershed, the environment protection department plays an important role in water pollution control. Involvement of Different Departments in Water Pollution Control: In addition to environment protection departments, government agencies which are related to water pollution control include: Ministry of Water Resources, Ministry of Construction, Ministry of Agriculture, Ministry of Land Resources, Ministry of Communications, State Forestry Administration and so on. The integrated sectors include National Account Commission, Ministry of Finance, State Economic and Trade Commission and their local counterparts. Moreover, the NPC and local people's congresses at all levels can affect watershed environment management from the point of laws and regulations enforcement and supervision. The State Council and local government are not only responsible for watershed environment management, but also the coordination among local governments. "Water pollution control law" stipulates that governments on water administration, land resource, health, construction, agriculture, fisheries and other agencies on water resource protection are responsible for supervision and management on water pollution control. The traffic administrative departments take responsibility for supervision and management on water pollution control caused by ships. One head department and many participation agencies is the characteristic of water pollution control system in China. The system has exerted active effects on water pollution control. Although there are differences between water environment management and water resource management, they still have common management issues.

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The responsibility of EPB, Ministry of Rural and Urban Construction and water resource department has changed according to the recent “standing” program. In details, EPB will take full responsibility for water pollution control and information release. Water resource department is responsible for urban groundwater resources management. Rural and Urban Construction Ministry will remain its guiding rights on urban facilities construction. The local water management has been managed by regional government. Moreover, the local environment protection department is also responsible for the approval of water pollution discharge permits. B) Watershed Pollution Control Management System Water environment management system is an important component of water pollution control management system. With large-scale water pollution treatment in China, how to create water environment management system is becoming an important issue. In China, watershed management system is not a new conception. After the founding of China, government has set up management committee in seven watersheds including Yangtze River, Yellow River, Pearl River and Huaihe River. The management committee was under control of administrative department on water management. It also included watershed management bureau for lakes (such as Taihu Lake) and water resource protection bureau. At that time, their main duties are flood prevention, water project construction. Water quality supervision and management are not their primary responsibility and focus. With more water pollution in 1980, watershed management agencies have also began to manage water quality. In 1983, the Ministry of Water Resources and environment protection department in Urban and Rural Construction Ministry set up water resource protection bureau led by Water resource department and national EPB according to "Decisions on the dual leadership on watershed resources protection agencies". The national EPB takes responsibility for guidance of water environment management and water pollution control for watershed sectors. According to "Water pollution control law," the environmental protection department with water administration department in State Council and relevant provinces, autonomous regions and municipal government can provide their own water environment quality standard for river and lake based on the regional economic and technological conditions. The planning on water pollution control should be integrated prepared. EPB in state council, economic comprehensive macro-control department and relevant provincial, autonomous regional and municipal government are responsible for Water pollution control planning on major river and lake and submit it to sate council for approval. Other water control planning on cross-province, autonomous and municipal river and

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lake is prepared by relevant environment protection department in local government and submitted to state council for approval. Water pollution control planning on cross-municipal river and lake should be prepared by environment protection department on provincial, autonomous and municipal government and water administrative sectors. These agencies should submit planning to local government for approval and report to state council. Water resource protection departments on major rivers and lakes take responsibility for monitoring water environment quality in their provincial boundaries and reporting findings to environment protection departments in state council and water administrative sectors. The lead agency on watershed resource protection approved by state council should report the monitoring results to the central agency. The system of combining the administrative division with watershed management is helpful to overcome disadvantages of cross-border water resource management. Management System for Urban Water Pollution Control At present, the main problems concerning water pollution control system include: i) the urban water environment management system. It is mainly responsible for management of urban water quality; and ii) urban water management system. In recent years, some cities began to explore and implement the urban water management system. Urban Water Environment Management System: Management of urban water environment is an important component in urban environmental management. From the point of local environmental protection sectors, urban water environment management is responsible by the Department of Environmental Pollution Control (Division) in EPB and main duties include water function zoning, sewage permit release, drinking water source protection and pollution supervision and management. In general, only two or three personnel are responsible for water management. Environmental Monitoring Station (Center) is responsible for water quality supervision. Sectors who take participations in water pollution control include local economic management department, urban construction department and water sectors. The coordination between departments is relatively easy because the local chief executive is directly responsible for the system. Urban water management is usually guided by provincial administrative sectors and coordinated with water protection bureau. The urban water environmental management should supervise water protection works in urban and rural areas. The system reform should coordinate with reform of local EPB and water resource department. If we cannot coordinate urban water environment management system with urban water resource management system, there will be function-overlapping problems on water protection.

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Urban Water Management System: Water management is a new management system that can be used to prevent and treat water pollution from the point of water resources unified utilization, deployment and management. Applying integrated management method to urban and rural water supply is useful to ease situation of water resource shortage and water environment deterioration (Wu Jisong, 2001). Since 2000, Shenzhen has established a management sector in charge of urban and rural water. Until the end of 2007, there have been 1492 administrative zones above country level establishing water department or regional unified management system on water management. National Water Authority has been established or implemented the unified management of regional water above the county level a total of 1,492 administrative, accounting for more than the county level for 61.2% of the total administrative. Among them, the provincial Water Resources Bureaus are three, sub-provincial Water Resources Bureaus are six, ground-level water management Bureaus are 178 and county-level Water Resource Bureaus are 1305. There are 2804 water plants in these regions and a total length of 187,000 km of water supply pipelines. The water supply capacity is 113,254,000 cubic meters / day, of which surface water supply capacity is 69,737,000 cubic meters / day, groundwater supply is 43.517 million cubic meters / day with total 17.82 billion cubic meters of water supply per year. The water supply system has 565 sewage treatment plants with sewage treatment capacity of 30.357 million tons / day. However, some departments have different views on water management which is useful for the improvement of water management system. Water supplies department has been set up in Ministry of Construction in 2002 which is responsible for water management system reform. Obviously, there are some contradictions between it and the national level reform approved by central government. In 2008, the Environmental Protection Department and Rural, urban construction Ministry and Water Resources Department announced their "Sanding" programs. The water resource department has new responsibility on urban groundwater resources management what is helpful to manage urban water resources and price. As for groundwater resources development and protection, the responsibility has been removed from Ministry of urban and rural construction to water resource department. The change is conducive to the unified management of water resources, and helpful to solve overlapping functions among departments. At the same time, Ministry of Urban and Rural Construction and Water Resources Department have given their responsibility to city government on water management. Government takes responsibility for management on water supply, water conservation, drainage, sewage treatment and other aspects. To some extent, it is helpful to solve controversies between ministry of urban and rural construction and water resources department on water system reform.

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Water Pollution Control in Rural Areas Environmental pollution control in rural areas at present is responsible for Department of Ecology Division. Agricultural departments in local government above the county level and other department shall take measures to guide the rational usage of chemical fertilizers and pesticides to prevent water pollution. The old management system lead to interest conflicts between different administrative departments on water regulation and soil conservation. Besides, it also exerts bad influence on flood prevention and urban water supply. The relevant departments are difficult to communicate with each other. In 2008, Ministry of Urban and Rural Construction and Water Resources Department have given their management rights to local government on water management. It is helpful to break barriers among regions and sectors. For example, the urban drainage company should pay for rural water resources. Besides, the rural sewage should also be included into urban sewage treatment pipe network. Meanwhile, urban can also green city through the reused water and provide water to rural areas in order to reduce its extent of groundwater extraction B) Economic Policy Management Department Since 1970s, Chinese water pollution control work has been carried out for 30 years. The application of environmental economic measures has been used more widely year by year. Departments relevant with environment economic policy establishment involve environment protection bureau, development and reform commission, financial bureau and tax bureau and so on (see Box 3-1). From the point of department responsibility, environment protection bureau takes a limited role in establishment of environmental economic policies. The development and reform commission and financial bureau are the key decision-makers. Box 3-1 Departments on Establishment of Environmental-Economic Policies Department of environment protection takes part in the establishment of environmental economic policies concerning field of finance, tax, trade, credit, insurance, price and fee and so on. The function of development and reform commission involves: collect information on finance, take part in establishment of fiscal, monetary and land policy and price policy, promote the adjustment of economic structure, organize the formulation of comprehensive industrial policy, coordinate major plans and policies concerning industry development. On aspect of environmental economic policy formulation, it is in charge of policy establishment on price and charge about environment protection. Ministry of finance is responsible for establishment and implementation of development strategy, policy, mid-term and long-term plan, reform program and others on finance and tax, taking part in macro-economic policy formulation, giving suggestions on fiscal balance and so on. In respect to environmental economic policy formulation, it is in charge of policies on environment taxation and its

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incentives, fund management and charges usage. Administration of Taxation is responsible for the drafting of tax laws and regulations and their implement rules, making tax policy recommendations, developing implementation measures, participating in the study of macroeconomic policy and central and local tax revenue-sharing rights, making researches on the overall level of tax burden. In respect to environmental economic policy formulation, it is in charge of environment tax and relevant incentives establishment.

C) Existing Problems with Water Pollution Control System Unclear Responsibility and Overlapped Sector Function Due to historical reasons, several departments are responsible for water resource utilization and water environment protection. Therefore, there are overlapped duties among different departments. Among these departments, functions of EPB and water departments overlap most. The national EPB regulates that EPB is the administrative department on water environment management and in charge of supervision. But water department only takes responsibility for water resources integrated management. However, water environment and water resources related with each other. Therefore, functions of two above department are not clear. In fact, there are different definitions on “supervision management” and “integrated management”. “Supervision management” means supervision on operation of national laws and regulations on water. “Integrated management” means use the integrated method on water resource operating which is a method of resource industry management. If the “integrated management” was replaced by “supervision management”, the phenomenon of “both player and referee” will appear. The overlapping functions between EPB and water department also include: the relationship between watershed management department and EPB is unclear; the relationship between water environment protection planning department, water pollution control department and water resource protection planning department is unclear. According to new “water law”, water environment protection seems to be part of water resource protection plan. But based on “water pollution control law”, EPB should take responsibility for water pollution control planning. the relationship between water environment functional division in EPB and water functional division in water department is unclear. there are some overlapping works on water environment quality monitoring (no overlapping between hydrological station and environment monitoring station). Besides, there is also overlapping information release on water environment quality monitoring. The overlapping functions between EPB and marine management department also include: i) there are two different EPB in charge of environment protection on land

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and ocean; ii) relationship between marine environment functional division in EPB and marine domestic division in marine department is unclear; and iii) there are two different versions of marine environment quality report from above two departments. There are overlapping functions of EPB and construction department on STP construction and management. According to construction department regulations, its responsibility is to guide the STP construction and urban water supply and conservation. However, the construction of STP cannot keep up with requirements of water pollution control. Therefore, EPB should take an active part in STP planning and construction, especially on the STP layout and operating supervision. Besides, construction department is in charge of urban STP. So EPB’s supervision responsibility is not clear enough. During the actual operating process, there are coordination problems among these departments: i) lacking of communication between each other; ii) lacking of integrated management measures because the overlapping functions between different departments. Besides, departments can provide some harmful management policies on their own interests; iii) lacking of integrated coordination mechanism on water resource management, usage and protection; iv) some other departments except EPB has actually been involved in water pollution control. Therefore, it is difficult to set up unified management system on water pollution control. For example, water resource department is responsible for water management while urban construction department is responsible for urban sewage, urban sewage treatment plant construction and underground water resources protection. Control on water amount can affect water quality, For example, excessive usage of water in Huaihe river exerted bad effects on water self-purification ability and water quality. Weak Management and Regulation At present, there is no specific watershed environment management agency in China. The current watershed resource protection bureau is managed by water department. Therefore, its legal and administrative status is not clear and it plays a limited role on water resource management. The water pollution control is supervised and managed by EPB. The water management department and health administration department, geological and mining department and other agencies only support the role of EPB. Lacking of inter-department communication, it is harm for the integrated management of whole watershed. It is necessary to strengthen management ability on watershed environment, such as environment protection planning, operating, supervision and monitoring abilities. The relevant departments should improve the supervision ability on watershed environment, such as installation of online monitoring equipments, emergency

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response capability, research level and professional qualities. The monitoring system on water environment quality is uniformed. The evaluation standard on water quality is different in EPB and water resource department. Therefore, they should coordinate the inconsistent monitoring system as soon as possible. We suggest that the national environment monitoring station establishes general implementation programs on water environment quality monitoring. The environment protection bureau and water resource department are responsible for monitoring and evaluation according to standards and regulations. The watershed protection bureau and national environment monitoring station take responsibility for water monitoring on disputed areas and inter-city water sections. D) Recommendations Clarify Government Functions and Strengthen Coordination In accordance with principle of “water resource usage and water protection are separated”, we suggest to clarify department functions of EPB, water department, urban construction department and marine bureau. EPB should further strengthen its supervision and law enforcement function. Water department should organize the water resource protection according to “water law” and “water pollution control law” and participate in water pollution planning. Besides, water department should also strengthen its management ability on water resources and water projects. Construction ministry is responsible for STP construction and planning. But the planning should communicate with EPB and STP construction should be under the supervision of EPB. The agriculture sector takes responsibility for non-point sources treatment works and is in charge of rural drinking water quality protection. Marin management department should transfer its marine environment protection function into EPB. Strengthen inter-departmental coordination and communication mechanism. As the water pollution control involves many departments, it is necessary for inter-departmental coordination based on clarifying responsibilities of various departments on water pollution control (including water quality management and monitoring, water environmental function zoning, water function zoning, marine function zoning, marine environment function zoning, etc.) Strengthen capacity building and management of water quality monitoring. EPB should take responsibility for planning and making same standard for water quality monitoring project. It should make full use of existing monitoring equipment and personnel. Combined with water resource management information system, it is necessary to establish water information management system based on region and watershed to provide data support for water pollution control and management.

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Improving Water Environment Management System Clarify watershed department responsibilities according to “water law”. The new ”water law” stipulates responsibilities of watershed management department that is as followings: caring out laws and regulations on water resource protection and control; establishment of watershed protection regulations and standards; organizing water resource protection planning and supervising implementation; responsible for supervision and review on water resources project; preparing the water function zoning with EPB and reviewing the environment capacity; taking responsibility for dealing with pollution disputes and water monitoring on cross-province section; preparing ecological flow planning with EPB. The EPB or leading groups on water pollution control are responsible for decisions on watershed pollution control. To promote conference mechanism on water pollution control. The conference mechanism is proved to be a more effective coordination system for water pollution control. The members in conference should include personnel from water resources protection bureau and local EPB except for governors. The conference office is suggested to establish in EPB directly. The main task of conference is to coordinate works on water environment comprehensive management; monitor treatment programs and related special programs; detail division of functions, decompose tasks and policy measures; assess implementation of governance programs on a regular basis; coordinate and solve major issues and inter-provincial disputes; promote management ability and establish a long-term mechanism. The major problems that cannot be coordinated should report to sate council. The conference should make their regulations and set up joint advisory committee to provide scientific base. The main responsibility is to assess the implementation of treatment programs and related special plan; submit annual evaluation report; conduct research and consultation and provide special advisory report; collect and report public views and suggestions on Taihu environment treatment. Strengthen watershed environment monitoring coordination. EPB should take full responsibility for water quality monitoring, such as unified planning and making same standards. It is necessary to make full use of existing monitoring team and equipment in EPB and water department. The River Water Conservation Bureau and China Environmental Monitoring General Station are responsible for monitoring on water pollution with disputes and water quality on inter-provincial section. The water quality monitoring report can be made by EPB and Water Department. 3.3.3 Economic Measures and Technological Policy A) Water Pollution Control Technologies The water pollution control technology mainly includes end treatment, cleaner production, recycling economy, point source pollution and ecological restoration.

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End of Pipe Technology End treatment technology refers to methods to deal with pollutions with physical, chemical or biological ways. Based on different mechanism, the end treatment technology can be divided into three methods including physical, chemical and biological treatment. The physical treatment means to separate suspended solid pollutants in wastewater. The treatment measures include sieve interception, gravity separation, flotation and others. The chemical treatment means to separate and recycle pollutants by chemical reaction. The treatment measures include neutralization, oxidation and reduction, electrolysis, coagulation and others. The biological treatment means to change the dissolved and colloidal organic pollutants into stability and harmless substances. The treatment measures can be divided into two categories—aerobic and anaerobic oxidation-reduction. Because pollutants in urban sewage are varied, it is necessary to combine different treatment methods to deal with certain sewage in order to achieve purification and emission standard. The treatment methods depend on water quality, quantity of water, the possibility for recycling and certain conditions on water bodies. Role and Application Criteria: The end treatment technology is the main guideline in China to deal with industrial pollution. For the past 20 years, end treatment technology has successfully help to reduce the pollution extent in China. According to environment statistical yearbook 2007, there are 60879 STPs in seven watersheds including Liaohe river, Haihe river, Huaihe river, Yangtze river, Yellow river, Songhua river and Pearl river. The total annual running cost is 33.62 billion Yuan and they have removed COD with 9.841 million tons, 392 thousand tons of ammonia, 232,000 tons of oil and 75 thousand tons of volatile phenol. The total volume of industrial wastewater treatment is 40.56 billion tons and the compliance rate of wastewater discharge is 92.7%. The end treatment technology is not only used in industrial wastewater treatment, but also used in urban sewage treatment. The urban sewage is collected through sewage pipe network and treated in STP then. After the sewage reaches discharge standards, it will be discharged into near river, lake or ocean. According to statistics, until 2008, there are 1521 urban STPS in China with sewage treatment capacity of 90.92 million t/d and 66% sewage treatment rate. Environmental and Social Impact and Economic Analysis: The end treatment technology is a key method to control pollution and protect environment. Through reasonable sewage treatment methods, it will be easy to reduce the pollutant concentration and eliminate a series of social and environmental problems caused by pollution. The pesticide wastewater treatment is a good example. At present, there are more than 600 pesticide manufactures in China and they discharge about 0.15 billion tons of pesticide per year. The untreated pesticide wastewater will exert

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bad influences on soil and water bodies as well as ecological balance. Therefore, it is necessary to use advanced waste incineration technology. The burning device has been listed as environment protection facility. However, the investment and operating cost of end treatment technology is very high and the economic efficiency is low. According to U.S. EPA, the environment media pollution control on air, water and soil costs about 120 billion dollars in 1989. Another example is DuPont company whose cost on waste treatment increased by 20-30% per year. If the emphasis only is put on end treatment technology, some of resources and energy will not be fully used. Limitations: The limitations of end treatment technology are: it cannot completely eliminate pollution because it only can transfer the pollutants between different media. The transfer always leads to vicious circle. Cleaner Production Technology Cleaner production is a preventive, company-specific environmental protection initiative. It intends to minimize waste and emissions and maximize product output. The main production options includes product design, materials choosing, produce technology innovation, reuse of resources and evaluation of life circle. By analyzing the flow of materials and energy in a company, one tries to identify options to minimize waste and emissions out of industrial processes through source reduction strategies. Improvements of organization and technology help to reduce or suggest better choices in use of materials and energy, and to avoid waste, waste water generation, and gaseous emissions, and also waste heat and noise. Cleaner production is a new prevention strategy to overcome the shortcomings of end treatment technology. In recent years, the ecological environment in China keeps deteriorating and pollution treatment cost continues to increase. The basic reason for deteriorating ecology in China is its extensive model of economic growth and unreasonable economic structure. These systemic problems lead to high consumption of energy and low energy use efficiency. To resolve these problems, we should vigorously promote and implement cleaner production, improve resource utilization and prevent pollution discharge. Role and Application Criteria: Since 1989 when the cleaner production conception was first provided in UNEP, America, Denmark, Netherland, Britain, Canada , Australia and other countries have vigorously promoted cleaner production technology. The Netherlands carried out PRISMA in the field of food processing, chemical industry and public transportation as well as chemical industry and so on. The results showed that the waste can be reduced by 25-30% only through strengthening internal management. The reduction extent could be 30-80% by improving technology. In Poland between 1992 and 1993, the solid waste, wastewater, waste gas and fresh water consumption have decreased by 22%, 18%,

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24% and 22% respectively after the implementation of cleaner production technology. Cleaner production model is widely used in industry production process, especially t hoes high energy consumption and polluted enterprises, such as coal, power, metallurgy , chemicals, machinery, textiles, paper and others. Set the fertilizer industry for example, in 2006, national EPB issued “nitrogen fertilizer production standard”(HJ/T188-2006. After that, nitrogenous fertilizer industry takes an actively part in cleaner production. Parts of companies have achieved zero effluent discharge. Environmental and Social Impact and Economic Analysis: Cleaner production technology can not only control pollution and improve environment, but also can get well economic benefit. In this model, it is required to make full use of resources and eliminate pollution during the production process. Therefore, it is helpful to improve environment and reduce production costs. National development and reform commission, former national EPB and state environmental protection administration jointly issued an evaluation index system on circular economy including 24 cleaner production index systems on thermal power, phosphate, lead, zinc, tires, and packaging and 25 cleaner production standards. Researches on circular economy development model have been organized in Tianjin, Suzhou and Mengxi among fields of iron and steel, nonferrous metals, coal, chloral-alkali and cement. Advanced technology on waste heat power generation, dry method to produce cement carbide, blast furnace rotary disposal of garbage have been widely used in China. The green remade technology invented by China has reached international advance level that is widely used in automotive part remanufacturing. Local governments strengthen their supervision on cleaner production on key enterprises according to “Interim measures for cleaner production supervision” issued by EPB and DRC. In 2007, there are over 1,519 enterprises that started cleaner production review. They provided more than 50,000 cleaner production programs and invested nearly 14 billion Yuan to reduce 95,000 tons of chemical oxygen demand, 71,000 tons of sulphur dioxide and save water 380 million tons, 3.7 billion degrees power, coal 7.04 million tons. Relationship between End of Pipe Treatment and Cleaner Production: Both of them are the important methods to control pollution. End treatment is based on principle of “pollution first, treatment later, while cleaner production puts emphasis on how to prevent pollution.” Both of these two methods are needed during pollution treatment process. Only with great effort on implementation of cleaner production and pollution treatment can we achieve environmental goals. Circular Economy

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The circular economy is a kind of economic growth model which could processes used materials into new production factors. Through this way, it can make full use of energy and resources in order to increase the energy efficiency. The main characteristic of circular economy is to “reduce, reuse and recycling” waste compared with the traditional model of “mass production, mass consumption and mass abandoned”. At first, “reduction” means effective use of resources during production process in order to reduce resources input. Second, “reuse” means, comprehensive utilization of waste based on principle of recycling and reuse. At last,” recycling” means harmless treatment of waste that cannot be recycled. It is important for China to maintain sustainable development by developing circular economy. Role and Application Criteria: After the conception of the recycling economy was first raised in the early of 1980s by environment scientists, many countries have made it the strategy of sustainable development of their countries, including Japan, Germany, America, France and England. Besides they have made great progress in the exploration and practice. According to incomplete statistics, the world's total value of the renewable resources in the major developed countries has reached 250 billion U.S. dollars / year and increased at an annual growth rate of 15-20%. 45% of world steel, 62% of copper, 22% of aluminum, 40% of lead, 30% of zinc, 35% of all paper products come from the renewable resources. Take the paper recycling as an example, every 1 ton of waste paper, can create 800 kg new paper, while saving three cubic meters of wood, 300 kg of caustic soda, 300 degrees of electricity. You can also reduce the discharge of wastewater which is hard to degrade. The mode of the Circular Economy has been widely used in the daily production and lives. For example, we can generate electricity by burning garbage, and the sludge from sewage treatment processes can be used to produce biogas. The waste incineration plants which are subsidiaries of Renovo in Sweden can incinerate 460,000 t per year in dealing with waste, while the electricity generated can meet the need of 60 000 households, another 12 million families could heat and provide hot water. Swedish Rya sewage treatment plant produces 5,000 cubic meters of surplus sludge per day, after concentrated treatment, they can be used to produce 25,000 cubic meters biogas every day. Environmental and Social Impact and Economic Analysis: China has long followed the extensive economic growth pattern, as a result, the resources shortage and environment pollution has become serious restraint to the Social and Economic Development. The development of recycling economy not only save the resources and reduce environmental pollution, but also help reduce the economic cost and promote social progress. According to China's "Eleventh Five-Year Plan", China has the following objectives in the development of circular economy. By 2010, the unit GDP energy consumption decrease by 20%, water consumption per unit of industrial added value decrease by 30%, the increase in value of output rate of 15 kinds of

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important resources such as iron ore, nonferrous metals crease by 25%; in the "reuse", the recycling use of steel and other major renewable resource grow by 65%, the proportion of recycled non-ferrous metals up to 30%; in the "resources , "we need comprehensive utilization of mineral resources increased by 5 percentage points, comprehensive utilization of industrial solid waste to 60%; in the" harmless ", the total discharge of major pollutants by 10%. Development of circular economy has great importance to the implementation of the "Eleventh Five-Year" plan, the completion of energy saving and pollution reduction and to achieve sound and rapid economic and social development. Non-Point Source Pollution Control and Ecological Restoration Strategy End treatment, cleaner production and recycling of economic policy are mainly aimed at industrial and urban domestic pollution control methods, their clients are mainly point source pollutants. In addition to point source pollution, the non-point source pollution in China is also very serious, especially in agricultural pollution. According to statistics, the agricultural pollution has accounted for a half of the total amount of pollution. Take the Taihu Lake Basin as an example, currently in Taihu Lake’s total external pollution, agricultural non-point source pollution has accounted to 50% of the total pollution and the percentage is still rising. Agricultural non-point source pollution has been a serious threat to China's lakes, rivers, the overall water environment, and also have seriously restricted agriculture economy and impede the sustainable development of rural the economy. As the socialist "new rural communities construction," the control agricultural non-point source pollution has become an important economic development work, and become the focus of attention. Agricultural non-point source pollution caused by many reasons, including: too much fertilizer, pesticide used, the low efficiency of irrigation water use, low efficiency in processing and utilization of farming organic waste, lack of agricultural extension services and public environmental awareness and so on. Because the difference in agricultural non-point source pollution and economic development levels, establishing agricultural non-point source pollution control measures face great challenges. We should develop different control measures and strategies according to different agricultural climate, farming systems and farmers income levels, In general, non-point source pollution control strategy includes: Green Agricultural Engineering, Livestock Waste Treatment and Utilization Project, Fisheries clean farming projects. Specific measures of green agriculture project include: reduction of chemical fertilizers and pesticides applied, the loss of agricultural nitrogen and phosphorus, and pesticide alternatives such as eco-block; the specific measures of Livestock Waste Treatment and Utilization Project of include: implementation of the streaming wet and dry manure, the construction of straw, manure , garbage and other solid waste fermentation tank, biogas and organic fertilizer production, etc.; concrete implementation of fish clean aquaculture projects include: the promotion of

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aquaculture pond water circulation technology, to build "the pond - wetland" systems, to promote ecological farming. In addition to non-point source pollution control strategies, for river basin water pollution, it is also necessary to develop a corresponding strategy for ecological restoration and construction, including: wetland conservation and restoration, ecological forest construction, aquatic ecosystem restoration, lake dredging and improving the water environment capacity. Ecological forest construction means the construction of river Forest, Lake Forest, farmland, water conservation forest and other ecological buffer zone; aquatic ecosystem restoration is defined as water conditions, the selective delivery herbivorous fauna, planting floating, emergent and submerged plants improve the water ecosystems; lake dredging is to dredge in the places where the lakes are serious silted up and lack of aquatic biodiversity based on scientific verifications and pilot project. To increase water environment capacity, we should carry out inter-basin water diversion. It can increase the basin's water supply, accelerate the water cycle, and improve water pollutant carrying capacity. Role and Application Criteria: The research of agricultural non-point source pollution began in the early 60s of the 20th century, the United States, Japan, Britain and some other developed countries, carried out the researches of the classifications of non-point source pollution, the migration and transformation of "rainfall - runoff" pollutants, and the models of non-point source pollution dispersion. China began the research in 1980s. After that, some investigation and researches about agricultural non-point source pollution in the Pearl River, Liaohe River, Taihu Lake, Dianchi Lake Basin and other areas have been carried out. On July in 2003, Dingshu town of Wuxi City, Jiangsu Province, established the first rural non-point source pollution controlling pilot project in Taihu Lake. The total investment is 5,000 million; the implementation of pollution control range is 20 square kilometres. The strategies of pollution control including : rural sewage treatment, the control of nitrogen phosphorus use in agriculture, to strengthen water purification and water body restoration in river networks, pollution control and ecological restoration in estuary area and so on. There are seven measures in all. On the other hand, in order to control the eutrophication of Taihu Lake, special lake inlet gate was built; it has effectively control the nitrogen and phosphorus content of the river into the lake. At the same time, the specialists guide the farmers how to manure scientifically. They also unified using pesticides to reduce the nitrogen fertilizer. The amount of nitrogen fertilizer used per hectare of farmland decreased from the past 270-300 kg to 200 kg. After 3 years of unremitting efforts, pollution control and ecological protection in rural areas of Dingshu town has achieved positive results, changing the local environment of rural life dramatically. The point pollution control and ecological restoration are widely used in rural area. Because of their complicated management mechanism, we should continue to

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enhance the public environment awareness in order to coordinate the pollution control. In May 2007, Meiliang Lake and Gong Lake were hit by a large scale of algae which exerts bad effects on residents’ daily life. The central government has attached great importance on this situation and organized relevant department to prepare “Comprehensive management of overall environment in Taihu Lake”. The program stipulates pollution control goals in Taihu Lake, control measures and cooperation mechanisms on water resource protection, water monitoring and so on. In May 2008, the program was officially approved by State Council. Environmental and Social Impact and Economic Analysis: Implementation of point source pollution control and ecological restoration are important strategies for sustainable development of rural environment. Environment protection carries a dramatic implication for rural development. At present, the point source pollution control has not formed standards there and there is still a long way for the development of ecological restoration. B) Problems with Economic Policies Inadequate Support to Technological Development R & D investment is low; the efficiency in the use of funds should to be improved. Compared to foreign governments’ R & D input, the proportion of government’s R & D input in the total R & D input in china was remarkable lower for quite a long time. The same happened in the proportion of R & D finance expenditure in the total budget. The state also did not have enough support to the public research institutions. The result is china has a long way to go in the index of capital investment, human resources, technical equipment, production and other indicators compared with the foreign countries. Weak Technological Innovation China's water pollution control research capacity is relatively weak, research institutes are generally small, professional advantage is not obvious, and experts with professional knowledge are rare. All these leading to weak capacity of independent innovation in water pollution control technology in China. China's major water pollution technology of technological progress is achieved mostly from the introduction of foreign advanced technology and management experience gained. The introduction of technology and equipment has played an important role in promoting water pollution control in China, but the digesting and absorbing technology and innovations are ineffective. Then repeated introduction of the technology is not fundamentally resolved. In particular, the introduction of technology does not improve with self-innovation and industrial competitiveness together. C) Use of Economic Policy to Promote Technological Progress In Western countries, fiscal policy to support the progress of the Water Pollution

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Control is achieved by projects. The governments use financial investment and financing policy, to guide venture capitals, establishing a research fund, tax concessions and other fiscal and taxation policies to support the technical progress. Increase Government Investment in R&D Compared to foreign governments’ R & D input, the proportion of government’s R & D input in the total R & D input in china was remarkable lower .The same happened in the proportion of R & D finance expenditure in the total budget. So it is necessary to invest more in technological progress, the proportion of Government R & D funding accounted for the financial expenditure should be formulated. And make sure that there are a certain percentage of budgets allocated for environmental technology, to provide material support to the development of technologies in controlling water pollution. Establishing Policy Bank or Fund At present, Chinese enterprises’ Innovation ability is relatively weak, technical conditions are relatively poor. So there is some need for the government to establish policy banks or fund. Policy banks or fund can carry out public finance technological transformation discount. These funds should be used as seed capital, in the way of substituting subsidies with rewards, to achieve the radiation effects of the funds. Improving Taxation Policy R & D costs of enterprises can be accounted costs in pre-tax expenses. Or we should allow additional research and development costs to deductible from the tax of the year for a certain percentage. The fast depreciation policy is feasible. The enterprise’ equipment and research space used in the R&D should be allowed to account as accelerated depreciation of fixed assets. The "pilot" products should be duty-free. The government should Increase support, make corresponding tax support policy to SMEs in order to encourage scientific and technological research and development. 3.4 Summary

First, economic policy system of water pollution control has gradually formed. However, considering current uniformed economic policy system, there is still a long way for its improvement. In addition to standardized pollution charging system, systems on pollution right trading, ecological compensation, sewage charges and PPP market are still in the pilot of exploration. In the future, the policy development should include establishment of water pollution control financing policy, taxation policy, full cost pricing, ecological compensation, water pollution compensation and so on. Second, the great effect of economic measures on raising money has been universally recognized. However, the effect of pollution reduction is not evident.

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There are still many problems during the application. For example, in the implementation of economic policies, there are many problems such as low-level standard, Collection inefficiency and so on. So the policy is hard to form an appropriate motivation system to the people concerned. The emission trading is in the pilot stage, and the technical requirements are still under exploration. A conventional environment management system is not formed yet. There are many problems existed such as legal basis is not founded, monitoring and supervision of supporting capacity are insufficient, the emission trading market is not formed and some other imperfections in the technology. In the PPP and the market, since the lag in legislation, policy objectives are too general; the efficiency of policy implementation is affected. In the public finance policy, there are also other problems such as the government, market players and responsibilities are unclear, the insufficient investment, poor access to financing and so on. Third, the existing water pollution control system is in need of reform. China has formed a system which has serious overlapping of functions between departments. The financial department and the National Development and Reform Commission have the right to inform economy policy, while the environmental protection bureau has limited impact which is served only to advocacy. Watershed management system is not perfect, without unified or integrated supervision. So it is urgently to make clear government’s management function, strengthen coordination and improve the water environment management system, to promote the joint conference system of water pollution prevention. Fourth, China's serious shortage in investments the R&D of water pollution control, lack of the necessary policy support on scientific research institutions, leading to weak in Innovation ability, poor in science and technology support capabilities. There is some need to support and guide the development of the water pollution control technology by financial investment and financing policy, guiding the risk investment, establishing a research fund, tax incentives and other means of financial and tax policies to effectively enhance China's ability to innovate water pollution control technology.

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4.

ECONOMIC POLICY FRAMEWORK AND IMPLEMENTATION STRATEGY FOR WATER POLLUTION CONTROL IN CHINA
This chapter attempts to propose an economic policy framework and implementation strategy for water pollution control in China in reference to international experiences and an assessment of the water pollution control policies in China, with a view to promote the continued refinement and implementation of economic policies for water pollution in China. It goes by the following stream of thinking: design a market-based water pollution control policy framework –– formulate options for key policies –– propose overall implementation strategy –– put forward recommendations on implementation of the key policies. The key policy recommendations will include objectives of policy implementation, specific implementation strategy and a roadmap.

4.1 4.1.1

Market-Based Economic Policy Framework for Water Pollution Control Objectives

The primary objective of formulating a market-based economic policy framework for water pollution control is to provide medium- and long-term technical guidance to the reform and innovation of environmental-economic policies. The technical guidance will serve the general principles for environmental-economic policies. The establishment of the economic policy system for water pollution control will help strengthen the integrated environmental and economic decision making mechanisms, and maximize the environmental considerations into economic development decision making process. Market-based environmental policies avoid the high cost of command-and-control approach and the lack of self-initiatives on the part of the polluters in pollution abatement, and accomplish the objective of low social cost of water pollution control. 4.1.2 Principles and Approach A) Principles First, the principle of harmonizing environmental protection and economic development. This will require the market-based water pollution control policies to pay attention not only to policy instruments for managing specific environmental resources but also to the impact of macroeconomic policies on environmental resources and the constraining role of environmental resources to macroeconomic operations. Integrated decision making needs to be based on a full understanding of the relationships between environmental protection and economic development. Second, the principle of operability. The policy framework must have operability. 95

Policy formulation should, on the one hand, abide by the general theories and methodologies of policy design and more importantly take full account China’s special circumstances, the water environment conditions and the existing water pollution policies. Third, the principle of sustained motivation. China’s water environment policies were established under the central planned economic system whereby water environment management decisions were made mostly on a short-term and ad hoc basis, with a lack of long-term, effective mechanism for water environment management that could adapt to the market economy. Policy formulation should therefore focus on building a policy framework that can provide sustained motivation. Fourth, the principle of policy combinations. Each policy has its own applicability, and a policy is often targeted at a limited number of problems. As such, it is necessary for the government to identify policy gaps and use a combination of policies to complement each other. Fifth, the principle of social acceptability. Policy reforms often means to impose a charge, annul a right or take away an economic rent. Therefore for the effective implementation of the policy reform, wide social support is needed to counter the opposition forces. If there were a lack of social support and acceptance, any new policy, regardless how good it may be, would become useless. Public support to the policy reform can be obtained by information dissemination (informing the general public about the cost of environmental degradation and pollution) and public participation (directly witnessing environmental impacts). Sixth, the principle of systematicity. The problem of water pollution cannot be solved by one single policy, such as pollution levy. Wise and effective environmental management should combine multiple policy instruments into a policy system, and make the policies to complement each other. Therefore the formulation of the water pollution control policy framework should stress totality and systematicity. B) Basic Approach Generally speaking, market-based water environment policies represent one type of indirect macroeconomic regulation by the government. They influence the economic interests of the water polluter and the environmental protector by defining and changing the rules of the market. They motivate the polluter to abate pollution and the environmental protector to improve the water environment, by handing over the responsibility for water environment improvement to the polluter. Role of Policies in Motivating Behavioural Changes By nature, water environment protection incentives are an indirect regulation instrument. Through the use of such incentives as water pollution levies, taxes,

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permits trading and ecological compensation, they motivate environmental protection behaviours and thus promote the harmonization of water environment protection and socioeconomic development. Role of Policies in Raising Financing The implementation of market-based water pollution control policies does not only motivate polluters to regulate their environmental behaviour but also help raise funds for water environment protection. Maximizing Synergy of Environmental-Economic Policies Various market-based water environment protection policies should be combined and well coordinated to maximize the effectiveness. 4.1.3 Formulation of Policy Framework

The formulation of the environmental-economic policy framework is based on an assessment of the market-based instruments presently in use in China, with reference to international experiences and with due consideration to science-based and people-centered decision making and social harmony. The framework comprises three groups of economic policies for water pollution control: i) public finance policies; ii) market-oriented policies; and iii) market-building policies. Public finance policy reforms and innovations refer to policies with regard to environmental investment and financing, subsidies and earmarked funds. They focus on how to promote pollution control from the perspective of public finance. Market-oriented water pollution control policies cover fees and taxes on pollution discharges, wastewater treatment tariffs, ecological compensation and PPP. Policy reforms in pollution discharge fees and taxes target the current problems of non-standardized collection and low rates of collection, by converting fees into taxes, for example, COD taxes. Water pollution treatment fees refer to fees charged in connection with water pollution services provided by public or private sector, such as wastewater treatment tariffs paid by enterprises and the public to the WWTP on the basis of “user pays principle” (UPP) according to agreed fee rates. Ecological compensation polices deal with water quality-based, downstream-to-upstream compensation payments, and compensation for protection of water supply source areas. PPP policies are concerned with the forms of cooperation between the public service agencies and the private sector for water pollution control, such as BOT and TOT. Market-building policies refer mainly to water pollutant discharge trading policies (Figure 4-1).

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Market-Based Water Pollution Policy Framework

Investment and Financing Policies

Market-Oriented Policies

Market-Building Policies

Subsidy Policies Investment and Financing Policies Earmarked Funds …….

Pollutant Discharge Fees and Taxes Ecological Compensation Wastewater treatment tariffs PPP ……

Pollutant Discharge Trading ……

Of course, the classification of economic policies for water pollution control can be approached from other perspectives. For example, water pollution control policies can be divided, according to sectors of target, into industrial wastewater control, urban sewage control and rural wastewater control. 4.2 4.2.1 Design of Policy Options Pollutant Discharge Fees A) Basic Approach It is intended to solve the problem of low fee rate and low collection rate. Additional pilot provinces can be selected for fee-to-tax conversion, with a focus on the collection system and supporting policies with a view to lay a technical and policy foundation for the transition from fees to taxes. It is important to formulate supporting policies and make them into laws and regulations. B) Policy Design Pollutant Discharge Fee Standards The low fee rate has been a long-standing problem with pollutant discharges. The problem has become more pronounced after the implementation of the “total

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pollutant discharges control”. Violating enterprises are not penalized proportionately. Fees for enterprises that reduce the discharge of pollutants do not necessarily decrease. The fee decreases are not comparable with the cost of pollution abatement. It is necessary to investigate the basic unit costs of reducing the discharges of the major pollutants. Fees should be raised above the basic unit costs. The fee increase can be done in a gradual fashion in consideration of social and enterprise affordability. Moreover, the fee standards should be designed jointly by the local EPB, finance bureau and pricing bureau so as to take into account regional differences and local economic situation. The State Council has issued guidelines on raising SO2 emission fees, from the present CNY 0.63 per kg to CNY 1.26 per kg stepwise within a timeframe of three years. It is recommended that the fee standards be raised to CNY 1.4 per unit of pollutant equivalent for water pollutants and CNY 1.2 per unit of pollutant equivalent for air pollutants, with 20% allowance for fluctuation according to local conditions. Pollutant Fee Verification and Collection There is need for further defining the scope and target of collection, and for collecting fees for discharges into WWTPs. Fee collection should be extended to livestock and poultry breeding, small enterprises and the service industry. One of the major difficulties for collection of pollutant discharge fees is to accurately verify the amount of pollutant discharge. An enterprise’s refusal to pay the fee has to do with non-acceptance of the data. The lack of data results from inadequate budget and staffing for environmental monitoring in comparison to the high monitoring cost, or in some cases technological constraints. In practice, when accurate monitoring data are not possible especially for small and medium polluting sources, the verification procedure should be simplified with a view to lower the cost of collection. For enterprises without treatment facilities, a universal calculation standard should be used. It is recommended that the 2003 SEPA guideline on pollutant discharge fee collection 2 be stringently followed in determining the types and amounts of pollutants in the following sequence: monitoring from automated control equipment, inspection monitoring data, data calculated with the material balance method and sampling data by the environmental supervision agency. Harmonization with Total pollutant discharges control Data: The fee standard can be established on the basis of the allocated pollutant discharge amounts, taking into consideration the total pollutant discharges control targets and the pollutant discharge permits. For areas where pollutant discharge permits are implemented, the permissible total amount of pollutant discharge can be used to determine the fee to be charged.
2

SEPA official document [2003] No. 64.

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Simplified Verification Method for Service Industry: The number of small service enterprises is large, so the fee determination and collection procedure should be simplified. Environmental protection authorities at or above the prefecture level can establish a fixed fee collection model in according to the scale of production and the pollutant discharge amounts from sample surveys. Strengthening Coordination between Environmental Monitoring and Supervision: As discussed above, the SEPA guidelines on pollutant discharge fee collection have stipulated the order of precedence of the methods for verifying the types and amounts of pollutant discharges. In Hubei province, the enterprise will submit an application at the beginning of the year for pollutant discharges. The environmental monitoring station will conduct a quarterly compliance monitoring of the pollution sources. The supervision authority will collect the pollutant discharge fees on a quarterly basis. It is necessary for the environmental supervision agency to well coordinate with the environmental monitoring station to ensure the reliability of the monitoring data, so as to lay a solid foundation for full fee collection. Policy Context for Fee Collection and Management Preventing Misuse by Separating Collection and Expenditure: The collected pollutant discharge fees should be remitted to public finance; the remittance should be earmarked for the purpose of environmental protection; and supervision and audit of the use of the collected funds should be strengthened. After the collected fees are earmarked as environmental protection funds, of which the purposes and uses should be clearly defined and supervised. The use of the funds should be open, transparent and subject to public scrutiny. Any violation should be investigated and prosecuted. Increasing Environmental Protection Investment: In order to avoid the misuse of pollutant discharge fees, the local government should incorporate the EPB’s operating budget into the government budget so that the EPB will not depend on collected pollutant discharge fees to support its operation. Financial assistance to environmental agencies in poor regions should be raised, and funding channels be broadened. If conditions permit, a threshold may be set for the percentage shares of environmental agency budget in the overall government budget, and increase the percentage shares when additional financing become available. The above may be written in the law to ensure the proper operation of the environmental agencies in the various levels. Clarifying and Expanding Collection: There is a need to further clarify the scope of collection and target of collection and to start collecting fees on discharges to WWTPs and NOx discharges. The collection of discharge fees for livestock and poultry breeding farms, small enterprises and the service industry should be strengthened.

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Innovative Use of Pollutant Fees With the policy reform on the use of funds, collection and use are separated. Except for the remittance of 10% to the central government, all collected funds are placed in the local government finance. Misuse of the pollutant discharge funds is not uncommon in the provincial, municipal and county levels. Although the policy of giving as high as 80% of the collected fees back to the enterprise was abolished by the 2003 SEPA guideline, the collected funds are used for the most part as subsidies. There are no additional exemptions or rewards to enterprises that take extra measures to abate pollution. The following measures are recommended: i) rewards should be provided in proportion to the pollution abatement above the quotas to encourage enterprises to adopt effective measures to control pollution; ii) the feasibility be investigated in regard to waiving pollutant discharge fees for enterprises whose pollution control level has reached the international best practice. 4.2.2 Pollutant Discharge Trading Policy A) Basic Approach At the national level, a policy framework for pollutant discharge trading policy should be built gradually. This can be achieved by thoroughly investigating key policy issues, formulating supporting policies, and providing strong guidance. Discharge trading pilot programs should be implemented for proactive regions and sectors. Effort should be made to nurture the pollutant discharge trading market. B) Policy Design Implementation Framework The implementation of the pollutant discharge trading policy framework will depend on a series of strong technological and supportive systems. The proposed design of the implementation system is shown in Figure 4-2. The structure consists of one administrative agency and four subsystems. The administrative agency is intended to provide for staffing allocations to guarantee the proper functioning of the system. It entails national supervision, local management and an implementing agency. The four subsystems include: quota allocation subsystem, quota trading subsystem, trading supervision subsystem and trading assurance subsystem. The quota allocation subsystem divides and manages the total allowable pollutant discharge amount according to the environmental target. The pollutant discharge trading subsystem sets the trading methods and rules. The trading supervision subsystems tracks the changes and uses of the pollutant discharge rights, and assess the impact of the trading rights on the environment. The trading assurance subsystem provides for regulatory means, finance and taxes to support the trading, and conducts performance on a regular basis.

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National Supervision Agency

Trading Management Structure

Local Management Agency Trading Consulting Service Agency Pollution Rights Quota Allocation

Quota Allocation Subsystem

Determination of Initial Price Payment of User Fees Selection of Trading Method

Pollutant Discharge Rights Pay-per-Use and Trading System

Trading Subsystem

Trading Procedure Trading Network Support Environmental Monitoring Quota Tracking Ethic Regulation of Trading Entities Participation of Other Stakeholders

Trading Supervision Subsystem

Trading Assurance Subsystem

Financing/Tax Policy Assurances Legal and Regulatory Assurances Performance Assessment

Figure 4-2: Framework Design of Pollutant Discharge Trading System

Trading Management Agency The management agency should cover the functions of quota management, trading verification, market management, consulting services and assessment, intervention and coordination and decision-making. It entails three levels: national, local and the third party. The nationals supervision agency will not deal with the pay-per-us and individual trading cases, but will be responsible for establishing trading rules and reward and penalty measures, and supervising the progress of the pilot programs. The national supervision agency will comprise the Ministry of Environmental Protection and provincial-level agencies authorized by the MEP. The local management agency will be responsible for setting up the trading price, provide for the trading platform and manage the entire process of pay-per-use and trading. It will also be responsible for recommending the use of collected funds, and review and approve trading transactions. The third party will provide technical support to

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government management agencies, conduct system R&D, data review and policy advice, assess the trading feasibility, and coordinate the redress of the concerns of various stakeholders. Quota Allocation The quota allocation procedure is shown in Figure 4-3.

Determine Pollution Abatement Target

Sector Adjustment Considerations

Determine Maximum Total Discharge

Watershed Adjustment Considerations

Allocate the Total Pollutant Amount

Enterprise Adjustment Considerations

Determine Quotas

Figure 4-3: Flowchart for Quota Allocation Determining the Total Pollutant Amounts Control Target: The total pollutant discharge reduction is determined according to the environmental protection target for the region. This amount is the sum of the pollutant discharge trading quotas. The total discharge reduction must have a framework attached to it. That is, the amount is valid only within the specified period. Beyond this period, a new discharge limit should be established. In the process of determining the total amount, consideration should be given to a combination of factors, including the present status of socioeconomic development, regional environmental carrying capacity, total amount of pollutant discharge and the pollutant discharge characteristics of the sector. Defining the Quota Allocation Method: After the total pollutant discharges control target of a country and region or watershed is determined, the next important task will be the selection of a method for allocating the discharge quota. At present there are many quota allocation methods, such as inference from environmental quality method, historical data method, auction and discharge performance method. Of these, the discharge performance method has many advantages, including being scientific and fair, attention to the close linkage between pollutant discharge and economic efficiency, and being simple to operate and manage. It has become a common method for quota allocation for major pollutants in China. The quota can be given for free or for a charge. From the perspective of the value of environmental

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resources, the pay-per-use allocation is recommended. Discharge Trading System Selection of Pollutants for Trading: The list of pollutants suitable for trading can be developed by examining the feasibility of trading. It is recommended that the first priority should be given to COD trading. In certain regions where the conditions are mature, the trading of total nitrogen (TN), total phosphorus (TP) and other pollutants could be piloted. Geographical Scope of Trading: The geographical coverage of a trading program should be determined on the basis of the trading location and the characteristics of the pollutant to be traded. Controversial “hotspot” issues that span over temporal and spatial dimensions should be avoided. Type of Pollutant for Trading: Pollutant discharge trading can target point or non-point sources. But statistical data on non-point sources is not available, and as such it is not presently feasible yet to do non-point source trading. Priority should be given to such point sources that can be estimated, calculated and managed relatively accurately. Such sources include industrial enterprises (including centralized livestock and poultry breeding farms) and WWTPs that discharge pollutants to water bodies or do so via the sewerage network. Trading Ratio: The next step is to determine the conversion factor or trading credit for the pollutant discharge rights buyer or seller. The determination should be done on the basis of the special features of the water body, water quality, pollutant transport characteristics, types of pollutants discharged from the polluting sources, discharge reduction requirements, economic considerations and other factors. Defining the Temporal Boundary: Pollutant discharge rights are valid within a time period. Therefore pollutant discharge rights are time-bound. The determination of the temporal limit should take into account the following factors: changes in enterprise production, regional economic development status, newly-built enterprises, national requirement for environmental pollution control and changes in the targets for total pollutant discharges. Establishing the Trading Procedure: The steps of the procedure are as follows: • Application: The buyer or supplier of pollutant discharge rights submits an application for trading. After a qualification review by the national environmental authority, the information will be published in the trading platform. Discussion: The buyer and supplier will discuss and reach a trading agreement with regard to the pollutant type, quantity, price, time of transaction and so on.

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Setting up rules of conduct for the negotiating parties. The model for public contracts management should be adopted to avoid market distortion behaviour such as fraudent monopoly and price jacking. Verification: The trading management authority will review the qualification of the traders, pollutant rights restrictions, available rights for trading, whether or not regional controversial “hotspot” issues will occur and whether or not there exists price jacking. On the basis of the review, a clear decision will be made on whether or not the trading can proceed. Transaction: The buyer and supplier will complete the transaction of funds and pollutant discharge rights in accordance with the trading agreement. Registering the Trade: Upon completion of the transactions, the buyer and seller must register with the national environmental protection authority the change in ownership of the pollutant discharge quota.

• •

Trading Network Support: A platform will be established for information sharing with the national environmental protection authority, provincial environmental protection authority and the public. The provincial or municipal environmental protection authority will compile statistical data, and process and approve the demand and supply of pollutant discharge rights of the polluters in the region. Information release will cover pollutant discharges in the major watersheds, inter-provincial pollutant discharge rights trading and trading among enterprises in the province. Trading Supervision Supervision of the various trading steps will be strengthened to make sure that trading is transparent, fair, just and informed. This will also facilitate information dissemination, information sharing between enterprises and public scrutiny. Environmental Monitoring: Environmental monitoring is an essential assurance for the success of pollutant discharge pay-per-use and allocation policies. Effective accurate and timely monitoring should be conducted. Real-time statistics on pollutant discharges should be compiled and transmitted via the network to the relevant environmental protection authority, so as to be used to determine the pollutant discharge indicators within the region or watershed. The environmental protection authority will also be able know the pollutant discharges of the trading enterprises. Quota Tracking: Quota tracking includes information on total allocations, pollution source registration and pollutant discharge rights trading. It is an important element of a pollutant discharge rights trading program. The trading management agency at the national level should keep close track of the allocation and publication of discharge quotas of the provinces. Meanwhile, it will also review inter-provincial trading deals for legitimacy. The provincial and local management agencies should also track and monitor the trading and transfer of quotas.

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Regulating the Ethic Conduct of Trading Entities • The rights and responsibilities of the trading entities, including the buyer, seller, national (local) government and their agents should be defined through policy provisions. The buyer should meet the discharge standards before it is allowed to participate in pollutant discharge rights trading. In the trading process, it should furnish monitoring data in accordance with the time and frequency as specified in the agreement. The seller must provide adequate data to confirm its ability to cut the pollution load to the nationally set total amount target, before it is allowed to participate in trading. The national and local governments have the mandate to formulate relevant policies, facilitate the implementation of trading, and oversee the trading process. The establishment of an information disclosure system will ensure the trading to be conducted under the principles of transparency, fairness and justice. The various trading intermediary agencies make a profit by providing consulting services and trading support. The general public can exercise supervision over the trading process through the trading information published by the government. It also supervise the compliance of the two trading parties with covenants of the agreement, and report violations timely to the responsible authority.

• •

Assurances Finance and Taxation Policies: The earnings of the government from pollutant discharge trading should be place in a special fund which can be used to support local trading, subsidize the building of the local supervision capacity, and provide financial assistance to proactive enterprises. Policies should be formulated to regulate the procedure for application, review and use of the special fund. The loan disbursement and recovery requirements should be defined. Tax reduction and exemption policies should be used to facilitate the trading, and invest and subsidize pollution monitoring facilities of the third party. Regulatory Development: It is recommended that the State Council formulate regulations on the paid use and trading of pollutant discharge rights, to provide regulatory support to piloting. It is recommended that the Ministry of Environmental Protection and Ministry of Finance formulate ministerial guidelines, including technical guidances, on paid use and trading of pollutant discharge rights, on the basis of the State Council regulations. Moreover, the government of the piloting province should also establish local policy requirements for the pilot program in accordance with the national regulations and guidelines. The government of the piloting city should set up local guidelines to guide implementation of the pilot program. When the national government amends the water pollution control law, the legal position of pollutant discharge permit system should be established. Local 107

government should put forth local guidelines on the implementation of the pollutant discharge permit system and trading system in according to the legal provisions in the water pollution control law for pollutant discharge permits. Penalty Mechanism: In addition to rewarding enterprises that have brought discharges below the assigned discharge quota, penalty should be imposed on enterprises exceeding the assigned discharge quota, so as to lift the cost of violation above the cost of compliance. Performance Monitoring: The performance of the trading program will be monitored on a regular basis through the process. Performance monitoring should cover: • • • • • • Allocation of total discharge amounts; Collection of funds from pay-per-use of pollutant discharge rights; Pollutant discharge trading method; Use of the pay-per-use funds; Supervision and monitoring; Development of the platform.

Training and Exchanges: Technical personnel that participate in the pilot trading program should be trained. The training should cover, among other things, tasks, technical methods, platform development and management. The regular exchanges of the experiences from the pilot programs should bring together government officials and technical personnel of national, provincial and municipal governments and enterprises. 4.2.3 Wastewater treatment tariff A) Basic Approach The present policies on wastewater treatment tariff collection have played a positive role in internalizing economic externalities. But they have many areas needing improvement. The policy recommendation is to raise the wastewater treatment tariff rate to the level that will reflect the social cost of pollution, through synchronized reforms in pollutant discharge fees and water resource fees. Although the wastewater treatment tariff has been raised several times in an attempt to bring the fee rate higher than the operating cost of the treatment facility (or the ideal state of “cost recovery with narrow margin of profit”), the present rate is still too low to compensate for the cost of pollution abatement. Therefore, the wastewater treatment tariff rate needs further increase to reach the cost of pollution abatement in the medium-term. In the long-term, the rate increase should reflect the full social cost of pollution, to a level that can cover the costs of construction, operation and maintenance of the WWTP and associated sewerage network. It is recommended that the wastewater treatment tariff should also be able to cover the cost of sludge 108

treatment and disposal. On the basis of discussion in Chapter 3, we understand that the cost of sludge treatment and disposal is between CNY 100 and CNY 500 per ton. Assuming 5 to 8 tons of sludge will be produced from treating 10,000 tons of wastewater. This adds CNY 0.1 to CNY 0.5 of sludge treatment and disposal cost to the cost of treating each ton of wastewater. That is to say, the wastewater cost should include the sludge treatment and disposal cost of CNY 0.1 to CNY 0.5. The feasibility of incorporating the sludge treatment and disposal cost into the water tariff will be explored. B) Policy Design Determining the Wastewater Treatment Tariff from a Market Perspective: The setting of wastewater treatment tariff should reflect the market principles of the wastewater treatment sector, and overcome the arbitrary nature of decision making that only reflects the government command-and-control function. With the deepening of the reform of the economic system, especially after the accession into the WTO, the wastewater treatment industry in China is faced with many challenges and opportunities. The gradual enterprise-oriented transformation of the wastewater treatment sector with commercialized management, independent accounting and self-responsibility for its profit and loss is the trend for the future. Wastewater treatment tariff should be able to cover the full costs of O&M of the WWTP and the associated sewerage network, and make a reasonable profit, so as to lay a solid foundation for the smooth transformation and development of the wastewater treatment industry. Basis for Calculating Tariff: The first task is to determine the reasonable levels for the various aspects of the treatment cost. The wastewater treatment cost cannot be calculated solely on the basis of actual measurement, nor uses an average figure. Rather, the calculation should take into consideration the different treatment technologies, different capacities and the different treatment levels, including power and material consumption, unit cost of sludge treatment and disposal, staffing, interest rates and so on. Reference can be made to advanced levels of the overseas counterparts, to come up a science-based and reasonable quota and rate. Other methods include empirical method, statistical method and technological measurement method. Moreover, the period of depreciation of the wastewater treatment facilities should be defined. The standard period of depreciation of fixed assets used today was established during the 1993 reform of the financial system, which does not cover the new industry of wastewater treatment. No standards are available for calculating the depreciation of wastewater treatment equipment and facilities. It is therefore urgent to determine the life of wastewater treatment facilities. The period of depreciation for wastewater treatment facilities should be determined in consideration of three factors, namely, conditions of use, natural force and invisible brasion. It is

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recommended that the period of depreciation for wastewater treatment facilities be calculated by adding 10% to 20% to the depreciation period for water treatment facilities. Finally, a reasonable margin of profit should be assured. After the wastewater treatment sector is commercialized, it is entitled to obtain a profit under normal conditions of operation. This will provide the guarantee for the development and growth of the sector. The calculation of profit should be based on the average rate of profitability of the capital investment. C) Determining Differential Tariff According to Extent of Pollution In the history of environmental charges, Japan is one of the earliest countries to calculate the tariff by use the wastewater quality. The tariff is higher for wastewater with higher pollutant concentration. This approach has been copied by many countries. Many Chinese cities now collect the tariff by pollutant type. However, most cities have adopted a unified wastewater treatment tariff without regard to the target pollutant or concentration. Under the “polluter pays” and fairness principle, differential tariffs should be charged for wastewater discharges with different levels of pollutant loadings. This is particularly relevant to setting tariffs on industrial wastewater from heavily polluting sectors and enterprises. D) Tariff Setting Mechanism Wastewater treatment is a public service that is closely linked to the quality of the living environment. It is a common practice in many countries with market economy for public finance to invest and subsidize the public service sector. In accordance with the principle of establishing a market-based socialist economy, the government has the responsibility of providing universal public service, but in the meantime should also follow the rules of the market, including the “polluter pays principle” and “more pollution, more payment principle”. The wastewater treatment tariff should be adequate to cover the cost of operation of the wastewater treatment facilities as well as a reasonable financial return to the operating enterprise. A differential tariff policy is able to reflect the social justice of cost sharing and the principle of more payment for more pollution. Tariff setting for public services must also consider socioeconomic affordability. When the wastewater tariff cannot cover the operating cost, the local government should finance the gap. In addition, adjusting wastewater treatment tariff should not be done alone. Attention should be paid to the need for adjusting the other components of the aggregate water tariff and the price reforms for other living necessities. Complementary policies are also necessary to provide subsidies to the poor or increase the minimum living guarantee. Tariff adjustment may need to be done with a phased approach to ensure the smooth implementation of the plan.

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E) Collecting and Managing the Wastewater Treatment Tariff The development of the wastewater treatment sector is a long-term, systematic and social endeavour. The local governments should closely manage and supervise the tariff collection and use, to maintain a healthy flow of funds for the construction and operation of WWTPs. The environmental protection authority should supervise the technologies, measurements and standards, with the objective of full collection, earmarked use of tariff funds and preventing misuse. The finance agency should strengthen accounting, bookkeeping and reasonable use, and disburse the funds according to the amount of wastewater treated. It will also supervise the funds to the enterprise to prevent misuse. Certain percentages of the urban maintenance tax, matching fund for urban infrastructure and land transfer tax should be used to fulfil any financial gap for WWTP operation. The audit bureau should conduct stringent audits of project accounts. 4.2.4 Public Finance A) Basic Approach The jurisdictional responsibilities between the central government and the governments within the watershed for water pollution control should be clearly delineated. The structure of the public expenditures should be optimized for the purpose of maintaining a stable growth of the government investment in water pollution control. Expenditures on the ecosystem protection should be incorporated into the transfer payment system. The establishment of the intra- and inter-watershed ecological compensation policies should be accelerated. The subsidy policies should be improved to increase public investment in rural sewage treatment. In summary, there is a need to build a long-term, effective mechanism for securing adequate public expenditures on environmental protection. B) Policy Design Division of Financial and Administrative Responsibilities As per the principles and requirements of public finance, the division of responsibilities for environmental affairs amongst the central government and the local governments within the watershed should be defined on the basis of the geographical and environmental characteristics of the watershed concerned. First, the roles and responsibilities of government, market and public in environmental protection and water pollution control, especially those between the government and the enterprise, should be delineated on a scientific basis. The role of the central government is to provide guidance through policy and financial interventions and to strengthen coordination, particularly to ensure the fulfilment of the responsibilities of local governments and the enterprise. Second, the management functions of the

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environmental protection agencies at the central, provincial and local levels with regard to water pollution control should be defined respectively. Third, there is a need for reform to bring the financial rights in compatibility with the administrative duties in environmental protection for different levels of government. Design of Special Fund The various funding mechanisms for water pollution control should be combined into a “water pollution control super fund”, to stabilize the flow of funds, attract additional investment, improve spending orientation, strengthen supervision and improve the efficiency. The policy framework can be strengthened by formulating supportive policies on incorporating water environment protection indicators into the performance assessment of local governments, and on parallel growth of the economy and the environmental protection budget. C) Transfer Payment for Ecosystem Protection “Whoever develops will be held responsible for environmental protection, whoever pollutes will be held responsible for cleanup, and whoever benefits will offer compensation” are the general principles for environmental protection. The fiscal transfer policies can be used for watershed ecological compensation, protection of urban water supply sources and establishment of ecological barriers. The central and provincial government should each set up an environmental transfer payment account; and the local government should also increase its financial support to watershed ecological compensation. Environment-oriented inter-regional, horizontal transfers should be promoted. An environmental transfer payment mechanism, targeting environmental functional zones and basic public environmental services, should be established in the central ordinary transfer system. The area of a designated ecological functional zone should be a consideration for determining the central transfer payment. D) Ecological Compensation for Watershed and Water Supply Sources There is a need for a clear definition of the roles of responsibilities of the various players in watershed ecological compensation. Transfer payments and hydropower development surtax can be used to set up a watershed ecological compensation fund. The formation of the watershed ecological compensation mechanism can be accelerated by the development of market-based supportive preferential policies. 4.2.5 Watershed Ecological Compensation A) Basic Approach Watershed ecosystem health and sustainability depends on many factors: the

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watershed environmental protection objectives, the water quality performance indicator system, status of compliance with water quality targets, water pollution control investment, ecological value of the watershed ecosystem, and penalty and reward policies. B) Policy Design General Principles First, economic and administrative instruments should be combined. The ecological compensation for basin-wide water quality protection should be integrated with the watershed administration system, to become an extension of the basin-wide water quality performance assessment system. Second, the polluter shall pay and the victim shall be compensated. Watershed-based water pollution penalty and ecological compensation requires a prior delineation of the responsibilities of the stakeholders involved. When the upstream causes downstream pollution and ecological damage, the upstream government will bear the responsibility of compensating the downstream government. When the upstream sends water whose quality meets or is better than that specified in the agreement, the beneficiary downstream government should be financially rewarded. Third, water pollution penalty and ecological compensation should consider both the water quantity and quality in the watershed. Water Quality Objectives and Performance Indicators If there already exists a watershed pollution control plan approved by the upper level of government, the water quality objectives for the borderline set forth in the plan can be considered the most appropriate basis for ecological compensation. If the upstream and downstream governments have an existing transboundary water quality agreement, the water quality provisions set out in the bilateral agreement would be the basic condition for watershed ecological compensation. When there is neither a water pollution control plan nor a water quality agreement, it is appropriate to use Class III or IV of the national surface water quality standards as the borderline water quality in view of China’s level of economic development and the present status of water quality. Water quality performance assessment at the provincial border should be carried out. It is recommended that MEP work with MWR and relevant provincial and municipal governments to set up water quality monitoring sections in the watershed, and designate the responsible authority for the achievement of provincial borderline water quality target. MEP will conduct performance assessment against the water quality target. The provincial government will have full accountability for the water quality within the provincial territory. The performance assessment of borderline water quality should be conducted quarterly or monthly. The results of the assessment will be verified by MEP and published.

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Performance assessment of water quality at the municipal border within the province should also be conducted. The provincial environmental protection department, in partnership with the water resources department and relevant city and county governments will set up the assessment sections. The water quality objectives will be determined on the basis of national, provincial and municipal water pollution control plans and the water quality target and normal flowrate of the provincial water functional zones, along with the total pollutant amount control target established by the provincial government. The municipal government will have full accountability for achieving the water quality target at the municipal borderline. Water quality at the municipal borderline within the province will be assessed on a monthly basis. The results of the assessment will be verified by the provincial environmental protection authority and made public. Determination of Ecological Compensation Standard The determination of water quality ecological compensation standard involves the borderline water quality, pollutant discharge flux, technical capacity of environmental supervision and the state of socioeconomic development in the watershed. At present, it is not yet feasible to directly determine the compensation standard on the basis of the value of ecological service. In the interim, the determination can be done by use of two methods: pollutant flux above the designated discharge standard and water quality violation at the borderline, as is provided in Box 4-1.
Box 4-1: Methods for Determining Water Quality Ecological Compensation Standard 1. Compensation Based on Pollutant Flux in Violation of Discharge Standard at Borderline For sections that violate water quality target, the compensation amount is determined on the violating parameters, distance of violation and the compensation rate. In view of the general characteristics of river pollution in China, compensation can cover COD, NH3-N, TP and Cd. The compensation can be collected for a single pollutant or for multiple pollutants:

Single-pollutant compensation amount=(pollutant concentration measurement at borderline-pollutant concentration target at borderline) × monthly flowrate × water quality compensation rate (1)

Multiple-pollutant compensation amount = ∑ (pollutant concentration measurement at borderline - pollutant concentration target at borderline) × monthly flowrate × water quality compensation rate (2)

According to the above formula, the water quality compensation standard is in fact the compensation rate per unit of flux of violating amount of the pollutant. The compensation standard can be determined on the basis of pollution level in the watershed, level of economic development, fiscal capacity, along with pollutant discharge standard, pollutant treatment cost and the economic loss of pollutant discharge.

2. Compensation Based on Water Quality Violation and Adjusted by Flowrate

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If the water quality at the borderline reaches Class III or IV of the national surface water quality standards, there is no need to impose a penalty on the upstream government nor for the upstream government to compensate the downstream government. If the borderline water quality is better than Class III or IV, the downstream government should provide compensation to the upstream government. If the borderline water quality is lower than Class III or IV, the upstream government should pay compensation to the downstream government. The formula for calculating the ecological compensation is as follows: P = Q×∑(Li×Ci×Ni) (i=1,2,……n) (3)

Where, P = compensation amount, Q = downstream water withdrawal, Li = level of water quality above the standard for pollutant i, Ci = cost of raising the level of water quality above the standard for pollutant i, Ni = times of violation. The formula for estimating downstream water withdrawal is as follows: Q = (S1×T1) / (S2×T2) × V1 (4)

Where, S1, T1 = area and precipitation of upstream watershed, S2, T2 = area and precipitation of downstream watershed,V1 = yearly average flowrate.

Borderline Water Quality Monitoring First, there is a need for determining the location of borderline water quality monitoring. Consideration should be given to the provisions of the watershed water pollution control plan and transboundary water quality agreement, existing water quality monitoring stations, monitoring cost, tributary inflow, location of water withdrawal, location of wastewater inflow outlet and the characteristics of river channel. The monitoring point should be set up in principle at the borderline of the two administrative jurisdictions. It has to be agreed upon by upstream and downstream governments and the government at the upper level, especially the respective environmental protection authorities. Second, the monitoring agency should be selected through bilateral consultations. If there is a dispute, arbitration should be sought from the upper level environmental protection authority. Third, consultation and arbitration in regard to watershed ecological compensation should be coordinated by upper level of government. Upstream and downstream government and other stakeholders should set up an ecological compensation consultation platform for regular consultation and dialogue. Issues for which an agreement cannot be reached should be referred to the upper level government for mediation and arbitration. Any inter-municipal dispute on water quality, water quantity and monitoring data should be referred to the provincial environmental monitoring agency and provincial water resources survey agency for mediation and arbitration.

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Fiscal Mechanism for Ecological Compensation From the fiscal perspective, the establishment of transboundary water quality ecological compensation scheme requires the various levels of government to agree upon the division of administrative and financial rights and responsibilities for water quality management in the watershed. Incompatibility with regard to the two sets of rights and responsibilities can be mitigated by the use of transfer payments. Corresponding fiscal policy arrangements can be designed to serve this purpose. The forms of transfer payments include ordinary transfer payments from the central government, payments from special funds of the central government, and horizontal transfer payments instructed by the central government. It is recommended that the first form be used for inter-provincial rivers with good water quality, and the second and third forms be used for heavily polluted watersheds. First, the central government fulfills the basic financial need of the local government for water quality management through the ordinary transfer payment mechanism. Under the present fiscal system of separate taxation, the central government is responsible for fulfilling the fiscal deficit of the local government through the ordinary transfer payment system when the administrative rights and responsibilities of the local government are incompatible with its financial rights and responsibilities. With this arrangement, the local government should first ensure the water quality at the provincial borderline to reach the basic national water quality standard. If the financial capacity of the local government cannot permit the local government to fulfill this administrative responsibility, the central government will have to step in by means of ordinary transfer payments. Thus, the financial needs of the local government for the purpose of water pollution control and water quality improvement in the watershed to achieve the national standard can be met by self-financing of the local government, and transfer payment of the central government to the local government. Second, the central government satisfies the special financing needs through the earmarked fund mechanism with regard to solving the major environmental problems in the nationally designated key watersheds. There are problems that the local government cannot solve in the processing of fulfilling its responsibilities for water resource management and water quality improvement. The resolution of typical water pollution problems (e.g., involving trans-provincial watersheds), major water pollution accidents and historical water pollution problems will need the financial assistance in the form of water pollution control projects financed by the earmarked funds of the central government. Third, the central government can meet the financial need of the provincial government by means of the horizontal transfer payment mechanism. In practice, the local government’s own effort may not enable the achievement of the water quality standard at the borderline. Meanwhile, a local government may, out of the need of socioeconomic development, demand higher water quality from another

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local government than the national water quality requirement. In this case, it is necessary to set up an inter-provincial horizontal transfer payment mechanism, or inter-provincial ecological compensation mechanism, under the sponsorship and guidance of the central government. Then, the central government plays the role of arbitration and coordination. Fourth, intra-provincial ecological compensation is established on the basis of horizontal transfer payment. This can be done in reference to the inter-provincial ecological compensation mechanism, to set up the responsibility system for meeting sub-provincial (inter-city and inter-county) water quality management needs. Inter-Agency Coordination for Ecological Compensation Watershed ecological compensation involves a great deal of complexity that one single agency cannot overcome. Clear division of roles and responsibilities and close coordination between the relevant agencies is needed to accomplish the objective. Each agency should incorporate into their daily work the tasks of formulating and implementing the ecological compensation policy and collecting compensation funds, in accordance with the watershed ecological compensation pilot program. The environmental protection authority has full responsibility for setting up the watershed ecological compensation mechanism, for deciding on water quality monitoring sections, and for determining the ecological compensation rate. The finance agency will be responsible for collecting the ecological compensation funds and manage the use. The water resources agency will be responsible for providing water quantity data. 4.2.6 PPP and Market-Based Reform A) Basic Approach PPP is achieved by means of private sector providing quasi-public goods and services, rather than private sector providing commercial goods and services. The policy design should coordinate the relationship between the government, market, general public, construction contractors for WWTPs and operators, and defines the respective roles and responsibilities, in reference to international experiences, taking into account the national circumstances and in a gradual fashion. The use of PPP and the reform toward marketization of the operation of water pollution control facilities will have the benefit of combining government, market and social resources –– the so-called “government guidance, social participation and market-based operation” –– for the healthy and sustainable development of the construction of the water pollution control infrastructure in China. B) Policy Design Policy Framework

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The framework design is shown as follows:

Supervision

General Public

Supervision

Government

Licensing

Environmental Supervision

Private Sector

Coordination and Joint Decision Making

Project Feasibility Study

Tendering

Construction

Operation

Transfer

Figure 4-4: Policy Framework for PPP and Marketization

As is shown in Figure 4-4, the use of PPP for urban WWTP should ferment a tripartite healthy interactive relationship between the government, private sector (enterprise) and the general public. The government is a user in the contract, and assess the performance and efficiency of the operator. Here, the government shifted from controlling the operational process of the enterprise to assessing the enterprise’s performance, away from the traditional command-and-control role that the government used to play. The government becomes the contracting party and external supervisor. The government should closely monitor and supervise the effluent discharges of the WWTP. The private sector becomes the contractor and operator with the responsibility of constructing and operating the facilities to produce the desired goods and services according to the contractual specification. Information dissemination and public participation should be emphasized. The general public oversees the performance of the government’s supervisory function as well as the quality of the public service provided by the private sector. In addition, the public has the right to know and participate in decision making on price setting for the public service. Process-wise, the PPP model, regardless of its type, entails project feasibility study, tendering, project construction, project operation and project transfer (some PPP projects may not involve transfer). Supportive policies are necessary to ensure the effective implementation of the PPP model.

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General Procedure for PPP and Marketization First, project feasibility study. In the feasibility study stage, it is necessary to conduct a comprehensive assessment of the feasibility of the project, including the economic and social benefits. On the one hand, the justification for the project should be examined. The so-called justification refers to the rationale for introducing the PPP model. There are two criteria: i) cost, that is, whether or not the adoption of PPP will lower the investment and operational cost of the environmental infrastructure facilities to the government; and ii) efficiency, that is, whether or not the use of PPP can provide equivalent or better service in addition to reduced investment and operation cost. Moreover, there is a need for assessing the feasibility of project privatization, including the ability to attract private capital and the strength of the private capital and its ability to deal with the risk. Depending on the specific model to be used, the public and private sectors may assume a different partnership relationship in this stage. Second, project tendering. The selection of the private investment agency is an important step in the PPP procedure. The government usually introduce competition through tendering to select the private investment agency. For the bidding enterprises, the government will conduct a necessary assessment which covers design options, risk, technological and financial strength and need for government support. Because the urban WWTP is, in nature, an environmental infrastructure that provides public urban environmental service. Therefore, risk assessment is particularly important. Third, project construction. After the application for start of construction is approved, the project will enter the construction stage. The PPP project company will be responsible for project design and construction, as well as for ensuring the private investment agency putting the planned funds into the project according to the licensing provisions. Project construction can be undertaken by the project company itself or contracted out to subcontractors. Fourth, project operation. After project is constructed and certified, it enters the operation phase. The project company can operate the project by itself or contract it out to another company. Project operation and maintenance are closely linked to the quality and economic efficiency of service provision. The operating contractor shall have full compliance with contractual covenants. Meanwhile, the government should undertake regular monitoring and inspection, and establish the channel for information disclosure to ensure public participation and supervision. Fifth, project transfer. When the licensing term is over, the PPP company shall transfer the project to the government, in accordance with the contractual specifications on the quality of the project assets. A good PPP project can enable the investor to liquidate all its debts and make a reasonable profit. Then the project will

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be transferred to the government as a debt-free handover. If the project has not, due to force majeure, achieved the desired profit level, the licensing term can be extended. Of course, if the project has realized handsome profit ahead of the transfer date, the handover can be advanced. The government should ensure that the project upon transfer is in a good state, so as to guarantee the continued operation and provision of quality services. Selection of the PPP Model: Many PPP models are in use in China. They include: service contract, management contract, leasing agreement, licensing, BOT, BOO, BOOOT and shareholding. Among the licensing arrangements, BOT, TOT and OTT are commonly used and therefore are the most mature. The private BOO model is not in favour. The suitability, township relationship and risk of various PPP models are presented in Table 4-1. The selection of the PPP model should be based on careful analysis and in consideration of local conditions. Table 4-1: Comparison of PPP Models for Urban WWTPs
Model Trustee operation Applicability Facility has been built; public agency needs to improve operational efficiency and quality, but no need to recover investment capital Facility is not constructed; public sector lacks capital investment and needs to improve operational efficiency and service quality; assets ownership will return to the public sector Facility is not constructed; public sector needs to improve operational efficiency and service quality, and to recover partial construction investment Facility is not constructed; public sector lacks construction capital, and needs to improve operational efficiency and service quality; facility will be owned by private sector Capital Investment Public sector O&M Private and public sector Ownership Public sector Risk Small risk to both private and public sectors

BOT

Private sector

Private sector

Private sector and public sector

Mutual risk; greater risk to private sector

TOT

Public sector

Private sector

Public sector or private sector

Mutual risk; risk to private sector is smaller than BOT

BOO

Private sector

Private sector

Private sector

Greatest risk to private sector

Defining the Roles of Different Parties

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The rational definition of the functions and roles of the government, market and public in the construction and operation of water pollution control facilities is crucial to the successful implementation of the PPP model. From the perspective of public administration, the government should pay adequate attention to its relationship with the general public. Under the systems theory, society is a complex, mega system whereby the government is only a subsystem. Although the government subsystem plays a very important (or central) role in the social system, it cannot set itself above the society nor replace it. The government can manage social public affairs, but after all it is an institution that provides services to society. Under the socialist market economy, future reforms should be designed to follow the “small government, large society” model, and return the power to society. The government should take care of only a limited number of important things. Priority should be given to the establishment of market mechanisms and motivating the initiatives of the private sector, to make the government more competent and efficient. In conclusion, the government plays the role of regulator and supervisor in the PPP model. The construction and operation of urban WWTPs should be left to the hands of the private sector. In promoting the use of PPP and marketization for wastewater treatment projects, the government has three major roles to play: first, setting up the market mechanism, assuring the legitimate role of the private enterprise in the wastewater treatment sector, establishing the tariff collection system and defining the ownership arrangements under different marketization models; second, regulating the market, avoiding arbitratory actions on construction of wastewater treatment facilities, defining the rules for entry of private enterprises and fair competition, and ensuring that everyone will enjoy the facilities and services by means of fair pricing; third, supporting the market by assisting with enterprise participation, by means of preferential policies on taxes, land and electric power and the provision of technical and information consulting services. The market entities should, under the guidance of the government policy framework, choose a suitable PPP model and operate under the market principles, thus facilitating the marketization of wastewater treatment facilities. The general public will function with a supervisory role. The importance of public participation cannot be overemphasized, especially when the wastewater treatment facility is intended to provide quasi-public goods and services. Design of the Supervision System First, the government should strengthen supervision to correct the market imperfections. As a public service, urban wastewater treatment is intended to provide for a clean environment and public health. It is concerned with the public interest and is characterized by monopoly. In the reform toward PPP and marketization, the introduction of market-based competitive mechanisms will improve the efficiency of the urban wastewater treatment sector. But on the other hand, it will also be faced with the imperfections of the market; for example, the private sector has the tendency of maximizing profit at the expense of public interest.

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Therefore, it is indispensible for the government to supervise the behaviour of the private sector with a view to rectify market faults. Second, preventing rent-seeking and corruption that may occur during PPP implementation. As one type of public goods and services, wastewater treatment is a relatively stable sector in terms of financial returns, with low cyclical fluctuations. Therefore, it has great potential for profit making (rent seeking), which attracts many interest groups. In the privatization process, the transfer of the production and operation of public goods and services from the government to the private sector brings with it the profit making power that naturally becomes the target of rent-seeking. The risk of corruption (political power in exchange for money) exists in both setting up and implementing the PPP. To the private enterprise and the foreign investor, the introduction of PPP into the public service sector is a process with rent-seeking opportunities. On the other hand, the local governments or government officials have their own vested interests. Demand creates supply –– the process of marketizing public service is accompanied by the risk of corruption involving power-money exchange and the loss of state assets. Third, setting up relatively independent supervision structure and maintaining its autonomy. The autonomy of the government in public sector reform is of critical importance for ensuring the independence of the supervising agency. The supervisory structure can be established in the local government to oversee the market entry, pricing and service delivery. Fourth, strengthening price control to overcome the market imperfections associated with the sectoral monopoly. The price should be tightly controlled so as to ensure transparency and scientific soundness. Public service should be properly priced to allow profit to the operator on the one hand and on the other hand prevent over-pricing that may damage the interest of the consumer. Therefore, setting the wastewater treatment tariff should not only consider full cost recovery but also the compatibility with the level of local economic development and send the right price signal. Regardless of what methods to use, price setting should be based on transparency and scientific soundness. The intermediary organizations may have a role to play. Since the cost of operation is the basic reference for determination and adjustment of the price of public goods and services, the accuracy of the enterprise’s costing information should be assured. Because of the conflict of interest, the information provided by the enterprise may be questionable. In order to overcome this problem, an intermediary organization, such as a certified domestic or foreign accounting firm or audit firm, can be engaged to review and audit the project costs so as to provide scientific evidence for setting the proper price. This in fact serves to leverage third part resources to supplement the government’s supervision capacity. Fifth, formulating sector standards and overseeing their implementation, to strengthen the supervision of the entry and exit of the private enterprise.

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Sixth, setting up performance assessment mechanism to shift from relative competition to full competition for protecting the interests of the consumer while promoting the healthy development of the wastewater treatment market. Seventh, strengthening discharge supervision. Because the urban WWTP is a public asset, the introduction of the private enterprise will inevitably bring about exclusivity. Meanwhile, the urban WWTP is a major pollution source whose discharge warrants stringent supervision. First of all, industrial wastewater can only be allowed into the urban WWTP when it meets the national pollutant discharge standards. The compliance should be supervised by the environmental protection bureau. If the WWTP is confirmed to violate the discharge standards, a fine should be imposed. Fraudent behaviour should lead cancellation of the operating license or even prosecution. Moreover, the urban WWTP as a major pollution source should be closely monitored and supervised. Different discharge standards may be used for WWTPs where the receiving water bodies have different assimilative capacities. The quantity and quality of the WWTP should be reported to the EPB on a regular basis. Regulatory Strengthening An assessment of the existing PPP laws and regulations has revealed that improvements should be made three major aspects. First, a national agency should be established to formulate and interpret PPP laws, regulations, strategies and guidelines. Second, the existing management guidelines should be reviewed, streamlined and harmonized. Finally, future laws should pay more attention to incentives that help attract domestic private capital into urban public service delivery. Risk Management PPP has risks. Attention is needed to raise the ability of the public and private sectors to manage the project and control the risks. First, public risk control. The risks can be mitigated by rule by law, transparency, effective public participation and strengthened government supervision. Political and regulatory risks can be dealt with by legislative and administrative measures. Social, economic and environmental risks can be contained at the local level. Second, project management risk. This risk can be mitigated in three stages: pre-risk prevention, during-risk control and post-risk remediation. The pre-risk prevention refers to taking preventive action before the risk causes damage. During-risk control refers to action, while the risk is occurring, to minimize the damage. Post-risk remediation refers to action taken to contain the damage. The selection of the risk prevention strategy should take into consideration the cost and benefit, that is, to compare the cost of risk prevention and the resultant benefit. The least-cost, most-effective risk management strategy should be selected. Public Participation and Accountability

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The prerequisite for public participation and accountability is information disclosure. The information on the construction, operation and discharge of the WWTP should be published to the general public. As the buyer of the wastewater treatment service, the public has the right to know the quality of the service. Meanwhile, the effluent discharge of the urban WWTP affects the quality of the urban water environment. Therefore the discharge information should be disclosed to the general public. 4.3 4.3.1 Implementation Strategy Basic Approach

The implementation strategy is an important assurance for market-based water pollution control policies to achieve the desired objectives. The design of the strategy should be based on judgments on the socioeconomic and environmental conditions, determine the priorities and temporal and spatial sequences of policy reforms, and provide for an implementation roadmap. 4.3.2 Overall Objectives

The overall objective is to formulate, on the basis of research and piloting, a set of effective market-based water pollution control and environmental protection policies that protect, safeguard and conserve water resources. The policies will strengthen the role of market-based water pollution control policies in the national environmental management strategy. They will also provide for a long-term, effective mechanism for science-based decision making, building ecological civilization and promoting social harmony. They will also serve as an important support to the historical transformation of the country’s strategic environmental protection orientation. 4.3.3 Guiding Principle

The guiding principle is to promote the sustainable development of China’s water resources by innovating and reforming with regard to public finance for water pollution control, discharge fees and taxes, service tariffs or water pollution control, discharge trading, ecological compensation and PPP for construction and operation of water pollution control facilities, by building China’s new water pollution policy system, by uplifting the position of environmental protection in economic development, and by strengthening the role of market-based instruments in water pollution control, with reference to international experiences and according to the requirement for sustainable development. 4.3.4 Implementation Principles and Arrangements A) Implementation Principles

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i) Policy implementation should not only pay attention to maximizing the role of market mechanisms, but also the role of the government, as well as rationally and clearly divide the scope of application of the government and the market in water pollution control. ii) Policy implementation should be adaptive such that successes and lessons learned can be used to revise the policies and adjust policy orientation with a view to improve the operability and effectiveness. iii) Policy implementation should not only emphasize the entirety, but also proceed step by step, in order of priority and according to the existing policy environment. iv) Policy implementation should pay attention to the combination of policy constraints and incentives, with coordinated use of rewards and penalties. v) Policy implementation should pay attention to fairness to all policy targets, as well as the policy benefits and the balanced consideration of the two. B) Implementation Schedule The design of implementation schedule for market-based water pollution control policies should be guided by overall policy objectives, research and piloting experiences, based on the phased approach as well as the demand of socioeconomic development and environmental protection. A time frame of 10 years is recommended to build a comprehensive market-based policy system. The overall implementation roadmap is as follows: In the near-term (2009-2010), design the market-based water pollution control policy framework, select and implement representative regions and sectors for pilots on priority policy areas with regard to discharge trading, converting discharge fees into taxes, ecological compensation and marketization of the operation of water environment services, and carry out research on essential techniques for operation of the priority policy areas. In the medium-term (2011-2015), accelerate the implementation of policy pilot programs on the conversion of fees into taxes, ecological compensation and water environment financing, summarize the pilot experiences, continue with the pilot programs, and expand piloting to other areas and sectors. In the long-term (2016-2020), deepen the implementation of the pilot programs, continue to upgrade the market-based water pollution control policy framework; key policy instruments, including discharge trading and ecological compensation, become the center of water pollution control policy framework; a long-term, effective policy system for water environment protection will be developed. The implementation schedule and order of priority for various policies are presented in Table 4-2.

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Table 4-2: Implementation Schedule and Order of Priority for Market-Based Water Pollution Control Policies
Policy Priority Pollutant discharge fees Near-Term (2009-2010) Continue with the studies in Inner Mongolia, Shandong and Guangdong on conversion of fees into taxes; continue with pilots in Hubei on reform of the discharge fee collection and management system; conduct research on the collection and management model and methods for fee-tax conversion, in consideration of the feasibility of fee-tax conversion In combination with the national policies on total pollutant discharges control and on discharge permits, accelerate the preparation of technical guidance and handbook on discharge trading; implement pilots in typical watersheds, such as Tai lake, Xiangjiang river and Liaohe river, on COD trading; start pilots in selected regions on discharge trading for TP and TN, and trading between point and non-point sources Deepen research on wastewater treatment tariff determination and collection standards and methods; clarify the administrative responsibilities of urban construction, environmental and water resources bureaus in wastewater treatment tariff collection; strengthen awareness and Medium-Term (2010-2015) Summarize the Hubei pilot experience and the study results in the representative regions; expand pilots on discharge fee reform; recommend Jiangsu, Henan, Liaoning and Yunnan be selected as new pilots Long-Term (2015-2020) A system of balanced use of fees and taxes for water pollution control will be built

Discharge trading

Speed up the development and release of relevant policies and regulations; accelerate implementation of discharge trading pilots and expand to other areas; Continue with TN and TP trading pilots

Summarize experiences with discharge trading pilots; continue with discharge trading pilots and demonstrations in key sectors and watersheds

Wastewater treatment tariff

Raise wastewater treatment tariff gradually in due regard to regional and sectoral characteristics; formulate relevant policies; promote market-based operation of wastewater treatment facilities on the basis of wastewater treatment tariff reform

In combination with water resource fee reform and discharge fee reform, sped up development of regulations on wastewater treatment tariff; continue with improvement to supportive measures; the wastewater treatment tariff policy system will be developed

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outreach on wastewater treatment tariff to increase social acceptability and tariff collection rate Public finance Increase investment in water pollution control; conduct studies of reform and innovative measures on investment and financing mechanisms; plan for the establishment of water pollution control superfund Continue to increase investment in water pollution control; strengthen the role of credit and financial institutions in water environment protection; speed up the development of relevant investment and financing policies; set up the national water pollution control superfund Implement provincial or municipal ecological compensation pilots within watersheds of national significance; encourage the local governments to self experiment with different models of ecological compensation; promote implementation of ecological compensation pilots in key watersheds across the country Mechanism for parallel growth between water pollution control investment and public finance; develop a preliminary economic national policy framework on investment and financing market for water environment protection

Watershed ecological compensation

Speed up the implementation of ecological compensation pilots in Shayinghe river, Liao river, Mingjiang river, Dongjiang river, Ziya river and Tai lake basins; conduct study of ecological compensation standards and modalities for water supply sources and based on performance assessment of upstream and downstream water quality targets; implement trans-provincial ecological compensation pilot in Huai river basin Accelerate pilots on different PPP models; start preparatory studies for amendment to the “Management Guidelines on Licensing Agreements for Municipal Public Services”; speed up development of supportive policies for implementation of PPP; speed up development of

Speed up development of policies and institutions; formulate relevant ecological compensation laws; complete development of watershed ecological compensation policy framework

PPP and market-oriented reform

Continue with PPP pilots; complete the amendment to the management guidelines on licensing agreements and formulate implementation guidelines; continue with development of supportive preferential policies on public finance and taxes, subsidies and credit

Complete the development of the preliminary policy framework on PPP; make PPP into an important model for municipal wastewater treatment sector in China

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supervisory system for PPP implementation

and financing; encourage local governments to self experiment with PPP different models

4.4 4.4.1

Suggestions for Implementation of Key Policies Pollutant Discharge fee A) Setting the Objectives

The pollutant discharge fee system has played a role in raising funds for water pollution control in China. However, it has not helped much in stimulating enterprises to cut their pollution loads, mainly because the tariff cannot reflect the cost of wastewater treatment and is too low to entice the enterprises to reduce pollution. As such, the design of the pollutant discharge fee policies should focus on raising the wastewater discharge levies to the extent that it can reflect the marginal cost of wastewater treatment. In the near-term, the priority should be placed on the feasibility and method of fee-tax conversion through piloting, summarize the piloting experiences and expand the pilot program. In the long-term, a balanced tax-fee structure should be established with a view to improve the performance of discharge fee and tax policies. B) Implementation Recommendations Conversion of Discharge Fees into Taxes The guideline on pollutant discharge fee collection started the implementation on 1 July 2003. The collected fees are remitted to the government budget. Many stakeholders do not know much about the policy and have not accepted it. The impact of some policies has not emerged. If a full-fledged fee-to-tax conversion program is implemented, the policy cost will be quite high. Moreover, taxes and fees differ in “authoritativeness”, as many arbitrary, irregular charges have raised public sentiment and resistance. The use of discharge fees for administrative purposes of environmental protection agencies in the early days had diminished public support to the policy. Many enterprises still have a misunderstanding and ask for return of the collected fees. Some government officials equate the discharge fee to a regular administrative charge, and sometimes collect irregular charges. Therefore, fee-to-tax conversion in China should proceed slowly. A full-fledged implementation of the fee-to-tax conversion is impractical at present. Pilots are recommended to accumulate experiences, and make the decisions on the basis of

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lessons learned. In the near-term, the Hubei pilot experience should be studied; and the pilot programs be expanded. When ready, relevant policies should be proclaimed. Piloting the conversion of discharge fees into taxes should pay attention to the following considerations: First, the selection of pilots should give priority to those pollutants for which the volume of the discharge are large and relatively stable and the fee collection is easy (e.g., COD). A fixed tax rate can be collected from small enterprises by the tax bureau. Second, for large sources, the pollutant discharge amounts should be monitored with advanced technologies; and the collection of fees should be based on the quantities of discharge. For small enterprises, the inputs-based tax rate should be adopted. Third, two collection and management methods can be considered: i) collection by the tax bureau and verification by the environmental protection bureau; and ii) collection also delegated to the environmental protection bureau. In consideration of the comparative advantages of the two agencies, the collection is best carried out by the tax bureau and supported by the environmental protection bureau. The tax bureau will be responsible for collection and inspection; and the environmental protection bureau responsible for verification and supervision. Therefore, after fee-to-tax conversion, the monitoring and supervisory capacity of the environmental protection bureau should be upgraded. Fourth, formulate preferential tax policies. One important purpose of collecting environmental taxes is to motivate the producer and consumer to change their polluting behaviour. Thus, preferential tax rate should be provided to pollution-reducing behaviour. Accelerating the Implementation of Fee-to-Tax Pilots Fee-to-tax conversion may create some new problems that should be overcome. First, discharge fees and taxes have many similar features, and the pathways of effects on pollution control are identical. From the existing experiences of implementation, discharge fees possess the features of taxation, including coercion and being fixed. Low fee rate and low collection rate are two important factors that affect the motivational effect. The same problem will occur after the conversion. When the fee-to-tax conversion is completed, the environmental protection bureau will no longer collect discharge fees, and as such its role in supervising the polluting enterprise will be weakened to a certain extent, and regulatory enforcement will be affected. Therefore, fee-to-tax conversion should be accompanied by the strengthening of the monitoring and supervisory capacity of the environmental

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protection authority to ensure that the enterprise will comply with the law and pay taxes. First, supportive systems should be developed. Weak action or inaction in punishing law-violating behaviour such as non-operation of pollution control facility, illegal discharge and fraud will result in distortion and lack of fairness in implementing discharge fee collection policies and affect the market competitiveness of the enterprise. It is recommended to strengthen training, raising the quality of law enforcement personnel and upgrade the equipment of the environmental supervision authority so as to reduce the chances of regulatory violation. The amount of penalty for violation should be raised by increasing the fines for illegal and accidental discharges. Second, establishing a cooperation mechanism between the monitoring agency and the supervision agency. The monitoring agency should provide timely, accurate and reliable data, as the collection of discharge fees is based on monitoring data. The management guideline on the collection and use of pollutant discharge fees has stipulated that the verification of pollutant discharge quantities should be based mainly on monitoring data. In the future, the environmental monitoring agencies in the various levels should cooperate closely with the supervisory agencies. The online monitoring program should be expanded. Third, strengthen the management of discharge reporting. According to the management guideline, discharge reporting lays the foundation for discharge fee collection. At present, discharge reporting is used to know the pollutant discharges in the territory. The reported data serves as the basis for calculation and verification of discharge fees. However, the present reporting requirements focus on key pollution sources. Reporting on regular pollution sources, tertiary industry and individual businesses is weak. There is a need for improving reporting quality, and reducing false reporting and under reporting. Fourth, strengthen awareness building and outreach to increase stakeholders’ understanding about discharge fees. Discharge fee collection involves all segments of society so social support and participation is necessary. All forms and formats should be used to raise public awareness and encourage public participation. One task is to educate senior government officials and relevant agencies to reduce political interference. The second task is to use newspapers, radio stations other mass media for public education to increase social knowledge about discharge fee collection policies and related environmental protection laws and regulations and change people’s thinking. The third task is to organize conferences and training courses on a regular basis, to provide the polluters with related knowledge about discharge fee collection, conduct technical training on pollution control and increase the governments’ sense of public service.

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C) Road Map In the near-term (2009-2010), implementation of Hubei pilot should be accelerated. The needs for supportive policies for discharge fee-to-tax should be assessed, along with the cost of policy implementation. The attitude, views and opinions of concerned stakeholders should be gathered and analyzed. Meanwhile, investigation should be made into the feasibility of discharge fee-to-tax conversion in other provinces. The technical support requirements with regard to fee-to-tax conversion, including collection methods and standards and the division of administrative responsibilities of the collection agencies, should be studied. In the medium-term (2011-2015), the scope of piloting should be expanded to include pilot programs in eastern, central and western provinces. Based on past experiences, preference should be given to eastern advanced provinces when selecting new pilots. With respect to policy design, the upper threshold of fee collection should be defined. On the other hand, the affordability to the enterprises in the pilot provinces should be investigated to determine the lower limit. The fee rate should be determined in consideration of all factors. Moreover, related policies on discharge fee reform should be formulated. If fee-to-tax is to be implemented, the collection of wastewater discharge taxes should be coordinated with other environmental protection taxes. The taxation law should be amended to include the fee-to-tax reform. For the long-term (2016-2020), a preliminary policy framework, suitable to Chinese conditions, on pollutant discharge fees or taxes that target water pollution discharge behaviour will be completed. 4.4.2 Wastewater Treatment Tariff A) Setting Objectives Near-term: enlarge the geographical coverage and increase the fee rate, for the coverage to be expanded to include rural areas and for the rate to reach cost recovery with a narrow margin of profit. Long-term: raise the wastewater treatment tariff to be equivalent to the marginal cost of wastewater treatment, so as to promote and achieve market-based operation of wastewater treatment. B) Implementation Recommendations In the process of market-based reform for the wastewater treatment sector, the roles and responsibilities of the government should be clearly defined. They should not be too tight or too loose. The wastewater treatment is a public service. As such, it is

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necessary to build a fee collection policy framework that takes into consideration the nature of public welfare and market principle. Such an approach will promote the healthy development of the wastewater treatment sector by alleviating the financial burden that the market-oriented reform will bring to the local residents and at the same time by fostering competition. Tariff Reform Wastewater treatment tariff reform should add the O&M cost of both the WWTP and the sewerage network to the wastewater treatment fee. The determination of the fee rate should be science-based and practical, to ensure that the WWTP can generate a reasonable financial return for the healthy development of the sector. Establishing a Tariff Setting Mechanism The wastewater treatment tariff policy reform should focus on the establishment of a tariff setting mechanism that give full consideration to both the nature of public welfare and market principles. Due attention should be paid to wastewater treatment being a public service and at the same time the fee rate should abide by the user-pays-principle. An appropriate tariff rate should be one that is based on market principles and social affordability. Strengthening Tariff Collection for Self-Operated Water Supply There is an urgent need to proclaim implementation guidelines on the collection of wastewater treatment tariff on self-operated water supply. The provisions should cover: the scope of collection, collecting agency, collection method, management of collected tariff and penalties. Moreover, a dedicated collection agency should be set up, and the funding for its operation be sourced. Clearly Defining the Scope of Collection to Avoid Double Collection The justification for collecting wastewater treatment tariff is the coverage of the discharging enterprise by the wastewater treatment facilities. If the polluter sends its wastewater to the urban wastewater treatment facility, the wastewater treatment fee should be charged. If the polluter discharges its wastewater directly into a water body without going through the municipal wastewater treatment facility, the wastewater discharge levy should be collected. Streamlining Tariff Adjustment Method and Procedure The present tariff adjustment procedure is as follows: based on its financial needs, the wastewater management authority will submit an application, along with supporting documents such as background materials, financial budget and detailed basis for the calculation, to the urban construction authority. The price bureau will conduct a review and investigation of the cost calculations and organize a public hearing. The price adjustment plan will be deliberated and approved by the municipal government.

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It is necessary to raise the wastewater treatment fee when inflation results in an increase in the wastewater treatment cost. According to the present adjustment procedure, it takes approximately 6 months to go through the procedure, with a large amount of investment of financial and human resources. Moreover, a science-based, rational and stable tariff adjustment mechanism is not yet in place to overcome the delays and uncertainties with tariff adjustment. Therefore, tariff setting in accordance with market competition should be gradually introduced. An effective and efficient tariff adjustment policy should be put in place to ensure the delivery of quality service. The policy should define the timeframe and formula of tariff adjustment. A two-year timeframe is recommended. Strengthening Supportive Systems First, the collection and management of wastewater treatment tariff should be strengthened. The roles and responsibilities of the relevant agencies, including environmental protection, urban construction and finance, should be clearly defined, and there should be close interagency coordination. The collection for key polluting enterprises should be assured. The tariff should be raised gradually. The use of the collected tariff funds should be closely supervised to prevent misuse. Second, regulatory development should be accelerated. Problems encountered should be dealt with promptly. The legal authority of wastewater treatment tariff collection should be reinforced. Various levels of government should strengthen the supportive policies, and the authority and social respect of law. Third, deepening public education. Environmental education is an important tool of achieving the national resolve to protect the environment. It is necessary to raise public understanding of national environmental protection policies and regulations, and the sense of concern and responsibility of the enterprises and the general public with regard to water resource protection and the sense of urgency and necessity of water pollution control. The polluting enterprises and individuals should be made aware of the obligations under the polluter-pays principle. The mass media has a role to play in public environmental education by considering it as a service to the public. C) Road Map Near-term (2009-2010): conduct in-depth studies of wastewater treatment fee collection standards and procedures, implement pilots on government-guided market mechanism for wastewater treatment tariff, clarify the administrative roles and responsibilities of relevant government agencies (urban construction, environmental protection, water resources/affairs) in tariff collection, strengthen public education and outreach, and increase the social acceptance and collection rate.

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Medium-term (2011-2015): with due consideration to regional and sector conditions, raise the tariff rate gradually, formulate supportive policies and accelerate the market-oriented reform of the operation of WWTPs. Long-term (2016-2020): put in place a wastewater treatment tariff policy framework by accelerating tariff reform and regulatory development, in combination with water resource fee and tax reform and pollutant discharge levy reform. 4.4.3 Pollutant Discharge Trading A) Setting Objectives In combination with national policy on total pollutant discharges control, implement discharge trading between point sources in medium- and small-size watershed, watersheds of national significance and important sectors, achieve total pollutant discharges control targets with least cost, and build a long-term, effective policy framework for water pollution control. B) Implementation Recommendations Phased, Step-Wise Implementation It is recommended that COD discharge trading be implemented in the Tai lake basin under the guidance of MOF and MEP. In the early stage, several small watersheds or regions in Jiangsu and Zhejiang provinces located in the basin where there is good environmental management capacity, can be selected. Pilots may also be implemented in Heilongjiang, Henan and Hubei provinces. The pilot experiences can then be summarized to improve the management mechanisms and methods of COD trading, expand piloting areas, and lay a solid foundation for replication of major pollutant discharges trading in medium and small watersheds across the country. Second, research and develop necessary technical support systems. At present, the implementation of the discharge trading policy is faced with many technical challenges. These problems affect the effectiveness and fairness of policy implementation. Therefore, it is necessary to accelerate the development of the techniques to provide technical assurance for the effective implementation of the discharge trading policy and the pilot programs. The urgent needed techniques include the procedure and methods that will determine the initial allocation and fair distribution of the discharge quota, tariff setting for initial discharge rights, discharge trading platform, methods to remove trading asymmetry, trading ratios between different sectors and regions, plan for determining the cost of violation, solution to tax issues involved in discharge trading, and techniques for trading between point and non-point sources, as well as the links of discharge trading to total pollutant discharges control, discharge levy, discharge permits and EIA. Effective support

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systems should be developed to lower the cost of discharge trading. Fair and Rational Allocation of Discharge Rights Government-guided fair allocation of the initial discharge rights in the primary market is a prerequisite for the effective implementation of the discharge trading program. Relevant policies should be developed to regulate the ownership of the discharge rights in the primary market, with a view to clarify the division of responsibilities of the MEP as the national responsible authority for rights allocation and local environmental authorities in determining the discharge targets and the initial allocation of the discharge rights. There is also a need for defining the terms and conditions for obtaining the discharge rights, procedure, timeframe, initial tariff setting mechanism, equivalent factor or adjustment factor for different regions and sectors, and the use and management of collected funds. It should be pointed out that the discharge performance method be adopted for allocating discharge quotas to the enterprises. The initial price of the trading rights should be adjusted in accordance with changes in supply and demand and in the unit treatment cost. Existing and new enterprises should be treated differentially; the discharge rights of a bankrupt enterprise will be recalled. The validity period for discharge permits should be set at 5 years to coincide with the five-year plan for total pollutant discharges control. The period is long enough to allow for proper expectation and planning on the part of the trading enterprise with regard to the price of the discharge quota. Trading payment can be made in lump sum or in combination with instalments. The earnings from auctioned discharge quotas should be placed in the earmarked fund and used for environmental purposes. The government will achieve the transparent, fair and just allocation of the discharge quotas, prevent corruption and fraud and build a good primary market for discharge trading. Activating the Primary Market of Discharge Trading A well functioning secondary market for discharge trading requires the following: i) the targets and scope of secondary market policy should be clearly defined; ii) new enterprises are allowed to purchase discharge quotas from the secondary market or from the quota reserves retained by the government; iii) the trading price is set on the basis of “government-guided market-driven”; iv) the rules of trading should be designed to prevent price monopoly; v) a trading information platform should be established to provide for tracking and supervision of trading activities; vi) transboundary trading should be designed to avoid pollution hotspots associated with concentrated pollution sources; vii) the transfer of trading rights should be submitted to the local EPB for incorporation into the EIA approval procedure; viii) regulations should be put in place to prevent fraudent or illegal transfer of trading rights; ix) market hoarding and cornering and other market distortions should be strictly forbidden; and x) penalties for violations of trading agreements should be clearly specified. The above measures will assure the proper trading of the trading rights in the secondary market, thus achieving an active, healthy discharge trading market.

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Developing Supportive Policies First, building a regulatory system for discharge trading. It is recommended that the legal authority of paid acquisition and trading of discharge rights be confirmed when amending the environmental protection law and water pollution control law. The 2008 amendment to the water pollution control law only contained general provisions for discharge permits, without reference to discharge trading. In the meantime, no implementation guidelines are available. Moreover, it is necessary to develop management guidelines for total pollutants control, discharge rights trading and the use of trading funds. The accountability and obligations of the government, enterprises and intermediary agency and the penalties for violations with regard to total pollutant discharges control and the purchase of discharge quotas should be clearly delineated, with a view to regulate the primary and secondary market of discharge trading, improve the operational stability of the discharge trading market and ensure the rule of law for discharge trading. Second, improve the pollution source monitoring and build assurance system for supervising the operation of discharge trading in pilot regions and sectors. The full implementation of discharge trading requires the monitoring and supervision capacity for pollutant discharges to be strengthened, including the installation of online monitoring equipment in pollutant discharge enterprises to ensure the effective tracking of the pollutant discharges. Considering the complexities of discharge trading as it involves multiple pollution entities, multiple sectors and multiple agencies, there is a need for establishing a platform for hosting the pollutant discharge data, a platform for managing the allocation of discharge quotas, a platform for monitoring and verifying pollutant discharges and a platform for managing the pollutant discharge trading accounts. An accounting system for enterprises’ pollutant discharges should be set up, with a view to and monitor and manage all participating pollution sources in the discharge trading system. Third, strengthen law enforcement capacity to provide for regulatory assurance for implementing discharge trading. If without effective enforcement and supervision, the implementation of the discharge trading policy would be discounted. Review, approval and permitting for discharge trading should be tightened; inspection and supervision should be strengthened; and the cost of violating discharge quotas should be raised. Fourth, increase training and public education on discharge trading policy. Many local governments have strong interest and motivation to implement innovative discharge reduction policies. Some are prepared to implement trading pilots. On the other hand, we should realize that many local governments lack understanding about discharge trading. Premature implementation of the policy may lead to many problems. For example, some participating governments in the existing trading pilot programs allow a trading period of 10-20 years, which is disconnected with the total

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pollutant discharges control policy with a planning horizon of 5 years. C) Road Map At present, the pay-per-use and trading of pollutant discharge rights system faces many policy, administrative and technical challenges. The MEP, MOF, NDRC and other relevant central agencies are striving to make significant breakthroughs in piloting discharge trading in suitable sectors and regions, by taking advantage of the opportunities of ongoing economic reform and transformation and by making use of the successes and lessons learned from domestic pilots and international experiences. The implementation schedule should be well planned to ensure prioritized, smooth and orderly expansion, with the aim of completing, by 2020, the establishment of a suitable pollutant discharge trading policy system suitable in china. Near-term (2009-2010): The main tasks include: i) developing key techniques for the pay-per-use and trading of discharge rights system; ii) strengthening the supervision system, information sharing platform, organizational arrangements and public education; iii) provide support to the third party entity for operating the discharge trading system; iv) accelerate the implementation of the COD trading pilot program in the Tai Lake basin; v) expand the trading pilot to interested provinces such as Henan and Hubei; and vi) initiate nitrogen and phosphorus pilot programs in selected regions. Medium-term (2011-2015): The main tasks are to: i) speed up the development of relevant policies; ii) broaden and deepen the scope of discharge trading policies; iii) expand trading pilots to other sectors and regions; iv) if the preparation for the national policy framework is mature, strive to implement COD trading in nationally designated key watersheds across the country; and v) accelerate the implementation of nitrogen, phosphorus and mercury trading pilots. Long-term (2016-2010): The main tasks are to: i) build the national pollutant discharge trading market; ii) accelerate the development of supportive policies; iii) deepen the implementation of nitrogen, phosphorus and mercury discharge trading pilots; and iii) in combination with air pollutant trading, improve the discharge trading market policy system, with the aim to put in place the pay-per-use and discharge trading policy system. 4.4.4 Public Finance A) Setting Objectives Near-term objectives: clarify and define the boundary of the administrative roles and responsibilities of various levels of government in water pollution control; determine

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and stabilize the fiscal expenditure structure that is conducive to watershed-wide pollution control, and set up a mechanism for stable growth of government investment in environmental protection; improve subsidy policy, and increase investment in rural sewage treatment facilities; and explore proactive and effective water environment transfer payment policies and watershed-based ecological compensation policies. Long-term objectives: establish a fiscal transfer payment system that incorporates the consideration of ecological function zones; build a comprehensive an intra-basin transboundary ecological compensation system; and set up a long-term, comprehensive, effective and stable fiscal expenditure system for watershed-based water pollution control. B) Implementation Recommendations Increasing Investment and Strengthening Supervision Local environmental protection is closely linked to local economic growth, social development and the standards of living. It is also for the long-term interest of the region. Therefore, the local governments in the watershed have the responsibility and obligation to increase investment in water pollution control. The priorities and mandatory targets of water pollution control investment should be clearly defined in deliberating the government budget, with a view to set forth an environmental accountability system for the relevant government agencies and officials. In the process of making and executing budgetary arrangements, relevant mechanisms and operating procedures should be strictly enforced to ensure the safe and effective use budgeted funds in pollution control. In the processing of supervision and performance assessment, a environmental performance target accountability system should be established and implemented. In the meantime, inspection and supervision should be strengthened to ensure that the earmarked environmental protection funds and transfer payments provided by the central government are used effectively for water pollution control projects, and that any forms of fraudent uses are prevented. Stabilizing Financing from the State Bond Since 2005, the Chinese government has adopted a stable and prudent fiscal policy whereby the State (Longterm Construction) Bond Program has been downsized. But in light of the present economic situation and the impact of international financial crisis, changes in China’s fiscal expenditure policy have taken place. It is recommended that environmental infrastructures continue to be accorded priority. Making Best Use of the Water Pollution Control Fund Use the special fund for water pollution control should be adjusted in two aspects: i) pay more attention to supporting the development of water-saving and water-recycling technologies, so as to prevent pollution at the source and change the

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old path of “pollute first, clean up later”; and ii) pay more attention to control of key pollution sources, rural non-point source control, development of new pollution control technologies and the development, demonstration and commercialization of new technologies, and increase contribution to the special fund for the construction of rural wastewater treatment facilities. Increasing Horizontal Transfer Payment It is recommended that: i) an environmental transfer payment special fund be established and incorporated into the government budgets at the central and provincial levels to provide financial support to water pollution control and to the development and application of new technologies; ii) improve the existing environmental tax policies, start to collect ecological compensation tax, start to collect new environmental taxes, improve the existing resource tax, for example, add water resource tax; and iii) strengthen the government’s guiding role, explore market-based models of ecological compensation, promote discharge rights trading through science-based environmental and resource price setting, accelerate the capitalization and marketization of resource and ecosystems, and bring the prices to truly reflect their scarcity. The water resource allocation and pay-per-use system should be improved, speed up the establishment of mechanisms for the transfer and leasing of water resource extraction and use rights. Increasing Intra-Basin Horizontal Compensation and Transfers At present, horizontal environmental transfer payments between regions within a river basin remain a gap. The establishment of the horizontal transfer payment mechanism includes the following aspects. First, strengthen the management of environmental functions. The upstream and downstream governments should set up a “watershed environmental agreement”, with a view to propose watershed environmental protection objectives, establish supervision, assessment and incentive mechanisms and set up watershed development and performance indicators as the basis for watershed-based ecological compensation. Second, determine locally appropriate ecological compensation standards. The watershed ecological compensation standards should be established on the basis of upstream and downstream ecological protection objectives, investment needs, opportunity costs of sacrifices by local people and pollution damage. Third, diversifying investment and financing channels and establishing cost-sharing mechanism for watershed comprehensive environmental rehabilitation. A joint watershed ecological compensation fund with contributions from the upstream government, downstream government and the upper-level government should be set up. The account should be placed in the upstream government. The fund should be earmarked for use on upstream ecological protection and pollution control, in the form of concrete projects. The upper-level government will be given the authority to audit the use of the fund, and the upstream and downstream governments will

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provide full supervision. Fourth, guiding the upstream to develop circular economy and ecological economy, restrict the development of industries with high-levels of energy consumption and pollution, and guiding the downstream enterprises to take the surplus labour from the upstream region. The upstream and downstream governments will be supported to establish a water quantity- and water quality-based environmental cooperation agreement. An intra-basin, transboundary environmental dispute arbitration mechanism should be established. Transboundary water pollution disputes should be referred to the environmental protection authority of the upper-level government for mediated consultation and solution. Fifth, the water quality monitoring data for intra-provincial rivers should be verified by the provincial environmental protection authority. If the water quality violates the designated standards, the upstream region will pay financial compensation to the downstream region. If the water quality of a lake which directly discharges into the river is poorer than the water quality of the river, the lake region should remit the compensation to the provincial finance. Sixth, in implementing the ecological compensation policy within a trans-provincial watershed, attention should be paid to the determination of the compensation standard and amount, as well as to borderline water quantity and quality monitoring. Watershed environmental protection and ecological conservation plan should be prepared. The various levels of governments in the watershed should share the environmental protection spending on a pro rated basis according to their respective shares of the uses of the resources and environmental services. A watershed environmental protection council should be established, with the mandates to coordinate the review and approval of large projects in the watershed. Under the coordination of the upper-level government and relevant agencies, the upstream and downstream governments, in partnership with stakeholder groups, should set up a watershed ecological compensation platform and an arbitration mechanism, and conduct regular or aperiodic consultations and dialogues with regard to the various issues of watershed ecological compensation, and establish watershed-based inter-regional environmental resource compensation policy. Developing Supportive Policies First, accelerate the establishment of assurance mechanism for institutionalized fiscal budgeting mechanism. Environmental protection has been included into the fiscal account of the public finance. The major task now is to put it into practice to ensure continued flow of fund and replenishment. The establishment of an environmental protection investment mechanism with long-term sustainability and growth is particularly important. Three sources of funding can be considered: i) requiring various levels of public finance to make arrangements to raise the water pollution control investment with a rate of growth higher than that of the public fiscal

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revenues; ii) requiring the local governments in the watershed to give higher priority to water pollution control investment when planning the allocation of the year’s incremental fiscal revenue; and iii) requiring the water pollution control expenditure to account for a certain percentage of the GDP or public finance. Second, deepen fiscal and taxation policy reform. The discharge tariff policy should be further upgraded. The discharge tariff rate should be gradually raised, so that it will best reflect the full social cost of pollution. A central-local-enterprise responsibility sharing mechanism should be established, and funded by the three parties. The various enterprises in the watershed should set aside a certain percentage of the revenues to replenish the watershed environmental compensation fund. New environmental taxes, such as water resource tax, should be collected. The scope and types of resource taxes should be expanded. Tax revenue and expenditure policies should be improved and the taxes on water pollution control should be reduced. Third, establishing economic incentives conducive to water pollution control. Such fiscal incentives as financial subsidies, preferential interest rate, state bonds and tax refund should be introduced to the water pollution control sector, under the guidance of market principles and in reference to experiences of developed countries in the use of economic incentives. The government may consider support, in the form of fiscal subsidies, preferential interest rates, state bonds and tax refund, to enterprises that actively participate in water pollution control and adopt cleaner production. For the implementation of large environmental infrastructure and ecological protection projects, the government may use subsidies and tax reductions and exemptions to entice enterprises and individuals to increase investments in environmental protection facilities. This type of incentive policies can motivate the business community to develop environmental industries. On the surface, the national tax revenue may appear to be lowered, but it serves to magnify the investments in environmental protection. Meanwhile, various levels of government should reward the organizations and individuals who have made significant contributions to the cause of environmental protection. The economic incentives will help create an atmosphere whereby the enterprises, organizations and individuals consciously participate in water pollution control and ensure the successful implementation of fiscal policies on water pollution control. The progress in implementing water pollution control facilities should be included in the performance assessment system for the local government. With respect to the financing for WWTP construction, government investment should pay attention to sewerage network cost and operating cost. The government should introduce policies to promote market-based operation of water pollution control infrastructure. C) Road Map

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The implementation schedule is proposed for the development and implementation of a public finance policy for water pollution control. Near-term (2009-2010): The priority tasks are to: build a framework for reforming public finance policies on water pollution control, and to accomplish breakthroughs in key sectors; introduce policies that define the division of roles and responsibilities of the central government, local government and the enterprise in water pollution control, define the division of responsibilities for financial and environmental management, harmonize the standards of environmental expenditures and the scope, priorities and modalities of using the special water pollution control fund; continue to implement the transfer payment policy for key water supply source areas and ecological function zones, incorporate considerations with regard to ecosystems and ecological function zones into the central ordinary transfer payment system and expedite the implementation of the pilot programs, accelerate the implementation of ecological function zone-based and watershed-based ecological compensation programs, and introduce relevant policies. Medium-term (2011-2015): expedite the regulatory development with regard to public finance policies for water pollution control. Attention should be paid to harmonizing the financial and administrative roles and responsibilities of various parties and environmental expenditures. The environmental protection fund in the central government budget should increase investment in water pollution control. Long-term (2016-2020): continue to deepen reform of environmental public finance system, with a view to build a public finance system for water pollution control that covers the strong coordination between the national overall public finance framework and the national environmental public finance framework. 4.4.5 Watershed-Based, Water Quality-Targetted Ecological Compensation A) Setting Objectives The near-term objectibes are to summarize the domestic and international experiences with watershed-bsaed water quality ecological compensation pilot programs, strengthen guidance and coordination at the national level, and accelerate the implementation of ecological compensation pilots within the province, with a final outcome of establishing a national policy framework for ecological compensation. The long-term objectives are to introduce ecological compensation policy into major watersheds across the country, reform and improve the management system, strengthen the monitoring, financial and regulatory systems, build a systematic and effective ecological compensation policy framework.

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B) Implementation Recommendations Moving Forward Step by Step At present, the policy and regulatory system has not yet been set up at the national level. Watershed-based, water quality-targetted ecological compensation is the main form of ecological compensation used in China today, and it is still in its infancy. Most of the ecological compensation practices have considerable distance from its strick definition. Therefore a go-slow, go-easy, step-wise approach is recommended. Pilots can be implemented in watersheds where the local governments have strong interest and technical expertise exists. The full use of ecological compensation and pollution compensation mechanisms can only follow after considerable experiences are gained and the regulatory and technical supporting systems are built. Practical and Easy to Operate The design of ecological compensation and pollution compensation policies should be based on the principles and methodologies of ecology, environmental economics, watershed management and finance. It should take into consideration the status of pollution control and ecological protection in the watershed, as well as equitable distribution of basic public goods and services, sharing of ecological benefits, sharing of environmental protection responsibilities and the rational allocation and utilization of water resources within the watershed. The determination of compensation standards needs to be science-based; more importantly easy to operate. It should be linked to the performance assessment of the local governments in regard to borderline water quality. Accelerating Regulatory Development There is an urgent need to introduce guidelines with regard to a number of key issues, including the scope, basic principles, compensation standards, and compensation modalities, to provide regulatory and technical support to implementing local pilot programs. The results of the pilot programs can be used to improve the relevant laws, regulations, policies and technical design. Public Education and Training Various levels of governments should be made aware of the importance of ecological compensation to improving the water quality in the river basin. They should be provided with the understanding that the adoption of ecological compensation can help achieve the fair use of the watershed’s environmental assimilative capacity and fair allocation of the responsibilities for environmental protection in the basin, by offering compensation to the upstream communities for safeguarding the quality of the water resources at the expense of their development and by compensating the downstream communities for suffering a loss from transboundary pollution, so as to promote the harmonious development between the upstream and downstream communities. The stakeholders should be made aware that watershed-based, water quality-targetted ecological compensation is a

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reflection of the principle of the “common but differentiated responsibilities”, and an economic extension of the environmental protection responsibility of the local governor as the “river master”. It supplements the performance and accountability system for the implementation of the watershed pollution control plan, and an important aspect of the historical transformation of environmental management. Transboundary Water Quality Monitoring Water quality monitoring is the basic foundation for adopting water quality-based ecological compensation. The monitoring locations should be able to clarify the water quality responsibilities between the upstream and downstream; and they should be agreed up by both the upstream and downstream governments. An automated continuous monitoring system should be considered to ensure the accuracy and continuity of the monitoring data. The transboundary water quality monitoring data should be published regularly to ensure social justie, fairness, transparency, public partipcation and public supervision. It is recommended that the central government give priority to the establishment of automated water quality monitoring systems at the provincial borders in the 7 key river basins. Accordingly, the provincial government does the same at the county borders. C) Road Map Near-term (2009-2010): Piority should be placed on eological compensation pilots. At the national level, pilot programs are recommended for Huai river, Xin’anjiang river and Liao river be selected. Piloting plan should be developed for approval by the relevant central ministries. The first case of water pollution control plan in China began with the Huai river. For three consecutive years since 2006, MEP, in cooperation with other ministries, formed an assessment panel and conducted a performance assessment, with a report card, of achieving the water quality targets as set forth in the “Responsibility Assignment for Achieving the Targets of Water Pollution Control in the Huai River Basin during the 11th FYP”. The assessment was approved and publicly released. It is worth mentioning that the pilot program in the Huai river basin has laid a solid foundation and produced wide recognition. MEP may consider implementing a national program on ecological compensation and pollution compensation policies in the Dianchi Lake basin (Yunnan) and the Tai Lake basin (Anhui), as part of the performance assessment of the 11th FYP on water pollution control for the key watersheds. At the provincial level, effort should be made to expand and deepen the intra-provincial, inter-county ecological compensation pilot programs, to build the technical support capacity on watershed-based ecological compensation, and summarize the experiences of the on-going ecological compensation pilots in Minjiang, Ziya, Liao, Shaying and Xiangjiang river basins. Medium-term (2011-2015): Accelerate the implementation of national pilot programs. In the first two years of the 12th FYP (2011-2012), piloting priorities should be given to the trans-provincial rivers, lake (reservoir) and major tributaries, in conjunction

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with the implementation of the “Interim Guideline on Performance Assessment of Special Plans for Water Pollution Control in Key Watersheds” proclaimed by MEP and five other central ministries. The performance assessment will also be useful to defining the responsibilities between the upstream and downstream for the purpose of implementing the administrative accountability system for achieving the water quality target at the borderline. At the provincial and prefecture level, priority should be given to implementing water quality ecological compensation pilots within their respective jurisdictions. Another important task for this phase is regulatory strengthening, so as to lay a solid regulatory foundation for wider replication. For the last three years of the 12th FYP (2013-2015), trans-county ecological compensation should be fully implemented by the provincial and prefecture levels. At the national level, the goal is to implement trans-provincial ecological compensation in the national key watersheds, and complete the development of a technical support system compatible with transboundary water quality performance assessment. Long-term (2011-2015): The priority should be given to improving policies and management systems for ecological compensation, with the aim to set up a comprehensive ecological compensation policy system. When amending the water pollution control law and the soil conservation law, ecological compensation should be covered. Ecological compensation should also be incorporated into the public finance policies. The administrative structure should also be improved by clearly defining the roles and responsibilities of the various concerned authorities on environmental proection, environmental monitoring and public finance, to ensure that they can meet the requirements of ecological compensation policy implementation. 4.4.6 PPP and Marketization A) Setting Objectives In the near-term, conduct studies on the design of licensing contract template and on risk management, accelerate the implementation of PPP pilot programs in representative areas, identify the major problems faced with PPP and the major policy needs for PPP implementation. In the long-term, summarize the pilot experiences, introduce policies and regulations with regard to PPP operations so as to provide the market with predictable policy system, and accelerate the formulation of supporting policies on public finance and taxation and financial loans and credits, with a view to establish an operational environment whereby the government, market and society can function synergetically. B) Implementation Recommendations Speed the Establishment of Supervisionay System for PPP Operation: The success

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or failure of the PPP model depends to a large extent on the existence of a supervision system which can meet the demands of a diversified investment system. The introduction of private capital cannot change the nature of public ownship of the public infrastructure services. Whereas the goal of the investor is to maximize the economic return to the invested capital. Thus, there is a need to establish a supervision system to ensure a reasonable return to the private capital and protect the public interest. Building a Solid Regulatory Foundation: The marketization of public services should be based on law so as to prevent and control risk to the public. Through legislation, the rights, obligations and responsibilities of all stakeholders, including the government, supervisioary agency, intermediary agency, operator and the consumer, should be clearly defined. The sharing of responsibilities should be delineated by law which should provide for detailed terms and conditions for opening public services to the private sector. First, accelerate the revision of the “Management Guideline on Licensing Arrangements for Municipal and Public Services”, and the introduction of documentation requirements for the operation of licensing arrangements for wastewater treatment. The PPP regulatory strengthening should pay attention to the specific requirements for market entry, fees, subsidies, market supervision and risk management, and in the meantime to detailed definitions of assets and debt ratio, the percentage shares of domestic and foreign capital and the financial management of capital flow for PPP projects. Second, clearly defining the legal obligations of the enterprise so as to ensure the safe and reliable operation of the WWTP. Meanwhile, the environmental protection and wastewater treatment authorities should put in place an independent system for monitoring water quality on a timely basis. The public should be provided with easy and timely acces to water quality information. The law should also provide for incentives for improve the quality of service delivery, and penalties and compensation for failures and losses, with a view to link price control to service quality and to increase public participation. Third, revise the Management Guideline on Licensing Arrangements for Municipal and Public Infrastructure Services to clearly define the delineation of the roles and responsibilities of between administrative functions of the government and the operational responsibilities of the water company. The guideline should not be restrictive on the contents of the operational contract; instead more attention should be paid to the targets that the government should monitor and supervise during the licensing period. The procedural requirements for licensing should be further refined. More attention should be paid to coordination between the government agencies so that the private sector will have to deal with one government agency. Licensing for wastewater treatment involves many issues, and many government agencies. It

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recommended that the Ministry of Construction be assigned as the primary agency for policy making with regard to assets sales and price setting for wastewater treatment licensing projects. Government support to licensing projects should be clearly delineated so that the private sector will know, prior to signing the contract, what it will assistance they will receive from the government to the licensing project. The model contracts should be developed to guide the licensing participants and the government for results-based management. With the use of the model contract, the licensing operation will become standardized for easier supervision by the construction supervision authority. Fourth, formulate implementation guidelines to support the implementation of the management guideline, with a view to put in place a clearly defined procedure on if and how to conduct feasilibility study for a licensing project, how to assist and promote the formation of competent water companies to undertake licensing projects. A three-step approach may be adopted. The first step is for government to encourage experienced state-owned water companies to buy out other enterprises, so as to facilitate the entry of state-owned enterprises into the market. The government should also encourage domestic and foreign companies to set up joint ventures, such that the domestic company will have the opportunity to learn management experiences from its foreign partner. The second step is for the government to formulate policies to help private water companies to grow, so that they can compete with existing state-owned water companies. The third step is for government to build a platform for completion whereby all water companies can compete on a fair basis. The desired outome will be for the water sector to have shared management, become more efficient and attract more financing. PPP Policy Continuity: Policy continuity is important for the market to effect long-term prediction and business planning. A stable policy environment and assurance is a prerequisite for the private sector to enter the market. It usually takes a long time to recover the investment; and as such the private sector needs the institutionalized assurance for entering and staying in the wastewater treatment market. Therefore, the PPP policy should be oriented to enable the market to make longterm predictions and business planning. The private sector confidence and asssurane can be achieved by the effective implementation of the national and local FYPs for urban environmental infrastructure development, clear provisions for compensating any risk or loss to the private sector that may result from policy changes, and the adoption of supporting and incentive policies on public finance, taxation and financing. Institutional Strengthening: First, assistance assurance policy. Both the public and private sectors will require the assurances from the financial market (commercial banks) and intermediary agencies (consulting entities). These assurance organizations cannot only provide the pricate sector with commercial loans, standard contracts and risk control, but also help the government to set up the enabling

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environment, by providing financial support to the government on public sector reform with respect to urban wastewater treatment and by providing international experiences and project-specific advice. Second, widening the channel of financing. This will ensure the steady flow of funds to finance the earmarked funds, fund raising through loans and credits and state and local bonds for expanding wastewater treatment facilities, and the use of ODA for building the fiscal strength of the local government. Third, use of subsidies to assist enterprises. Government subsidies to waste treatment projects can take many forms, including cash injections, low-interest loans, tax reductions or exemptions, and support to enterprise to raise funds from the commercial market, issuance of cooperate bonds, listing in the stock market and the use of preferential-interest loans. Fourth, policy assurance for reasonable return to the private sector, by improving the management system toward stable longterm return, by allowing the joint implementation of high-return projects (e.g., joint implementation of water supply and wastewater treatment as part of a regional development project). Fifth, information disclosure. Transparency is a best tool for preventing corruption. Effective information disclosure and stakeholder scrutity will help prevent rent-seeking in the use PPP for public services, avoid inheriting risks of the participating private enterprise, by means of institutionalization and regularization. C) Road Map The introduction of PPP into water facilities should pay close attention to the public nature of the water services. The future road map for reform should emphasize the guiding and supervision function of the government. The market-based operation of the water sector needs a conducive policy and institutional environment. Future reform should therefore target the formulation and introduction of policies in a prioritized and coordinated fashion. Regulatory strengthening should aim for improving the definition of rights and responsibilities of different parties, minimizing or removing the market distortations and preventing rent-seeking by the government during the process of marketizing public goods and services. Near-term (2009-2010): implement pilots of different PPP models, conduct preparatory studies for amending the “Management Guideline on Licensing Arrangement for Municipal Public Infrastructure Services”, and accelerate the development of supporting policies and institutional strengthening for supervising the implementation of PPP. Medium-term (2011-2015): continue to implement pilots of different PPP models in

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representative areas; speed up regulatory development with the goal of completing the amendment of the management guideline on licensing to define the obligations and responsibilities of the government and the enterprise in PPP operation, the supervision objectives of the government in licensing arrangements, the management responsibilities of the construction and environmental protection authorities; develop and release the sample contracts for different licensing models; formulate the implementation guideline for the management guideline; introduce supporting measures in public finance, taxation, subsidies and loans and credits; and encourage local governments to experiment with PPP models. Long-term (2016-2020): put in place an effective policy framework for the expeditious implementation of PPP and a functional mechanism whereby the government, market and society fully cooperate and coordinate, and make PPP become the main modality of operation in China’s urban wastewater treatment sector.

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5.

DESIGN OF WATER POLLUTANT DISCHARGE TRADING
Market-based pollutant discharge trading is an effective economic policy for water pollution control. It has been widely used in the US and proven to be a great success. In recent years, water pollutant discharge trading has also been experimented in China and rich experiences have been accumulated. In this chapter, the design of discharge trading between point sources and between point and non-point sources has been proposed by building on a summary of the experiences and analysis. The Tai Lake basin is used as a case study for the design of a pollutant discharge trading program.

5.1 5.1.1

Introduction to Tai Lake Basin State of the Water Environment

The introduction to the present state of the water environment in Tai Lake will cover the trend of water quality deterioration, changes in pollutant discharges, pollution control efforts, successes and lessons learned, and future directions of pollution control. A) Deteriorating Water Quality in Tai Lake Poor Water Quality in Tai Lake: Between the early 1980s and early 1990s, the water quality of Tai Lake declined from primarily Class II to primarily Class III. Since the 1990s, the average water quality for the lake as a whole has worsened to below Class V. The 1997-2006 monitoring data showed that the permanganate index and the TP in 2000 were higher than in other years, but decreased between 2000 and 2003. In 2000, NH3-N was lower than in other years, but experienced a sharp increase between 2000 and 2003. Between 2004 and 2006, all water quality indices become stabilized, only with minor fluctuations. Details are shown in Figure 5-1.

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高锰酸盐指数 8.0 6.0 4.0 2.0 0.0

Permanganate Index

1.2 1 0.8 0.6 0.4 0.2

氨氮

NH3-N

NH3-N Ⅱ类 Ⅲ类

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

0 1998 1999 2000 2001 2002 2003 2004 2005 2006

总磷 0.160 0.120 0.080 0.040 0.000

TP
4.00 3.00 2.00 1.00 0.00

总氮

TN

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Figure 5-1: Changes in Annual Concentrations of Permanganate Index, NH3-N. TP and TN in Tai Lake (mg/l)

The eutrophication level in Tai Lake has also worsened significantly in the past 10 years from light to medium. The area suffering from medium-level eutrophication increased by 1,600 km2 between 1998 and 2005. Details are provided in Table 5-1. Table 5-1: Eutrophication Level in Tai Lake in 2005
Area Wuli Lake Meiliang Lake Zhushan Lake Gong Lake Lake Center West Shore South Shore East Shore East Tai Lake Whole Tai Lake Assessment Area (km2) 5.8 124 56.7 147 1029 187.8 363 268 156.7 2338 Score 68 68 70 61 65 66 61 59 54 63 Level of Eutrophication Medium Medium Medium Medium Medium Medium Medium Light Light Medium

Poor Water Quality of the Feeding Rivers: Between 1998 and 2006, the average water quality of the rivers flowing into the Tai Lake was below Class V. The rivers in Changzhou municipality had the poorest water quality, followed by the rivers in Wuxi municipality, while the rivers in Suzhou and Huzhou municipaliteis had relatively

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good water quality. As far as individual rivers are concerned, the water quality of the Zhihugang river, Wujingang river, Caoqiao river, Taige canal, Chendong river and Nanxi river was the poorest. They account for large proportions of the pollutant loading into the lake and should be the priority for pollution control. Table 5-1: Average Water Quality of Feeding Rivers in Different Regions (mg/l)
Permanganate Index TP TN Changzhou 8.05 0.270 5.68 Wuxi 6.93 0.196 5.75 Suzhou 4.30 0.114 2.57 Huzhou 4.51 0.136 3.05

In recent years, the water quality of the feeding rivers deteriorated drastically. The water quality indices of the rivers in Changzhou municipality have been worsening. The water quality of the rivers in Wuxi municipality has yearly fluctuations, with a dcreasing TP and relatively stable permanganate indix and TN. The water quality of the rivers in Suzhou and Huzhou has also yearly fluctuations, with the permanganate index and TP maintaining within Class III but TN worsening. According to water quality monitoring data of the feeding rivers between 1998 and 2006, the annual average pollutant loadings were as follows: 56,600 t of permanganate index, 1,600 t of TP and 39,300 TN t flowing into the lake; and 36,100 t of permanganate index, 480 t of TP and 12,600 t of TN existing the lake. Damaged Water Ecosystem: Chlorophyll a is an important indicator of eutrophication. The concentration of chlorophyll a in the Tai Lake has been growing year by year. The average range of monthly concentration stand at 1.64 ~ 216 μg/l and the average annual range of concentration is 8 ~ 36.6 μg/l. The average concentration increased by 137%, and the rate of increase is accelerating in recent years. From 1998 to today, the algae count in the summer is 2.5 million ~ 100 millon per litre. The Meiling Lake has the largest algae count at 4.5 million ~ 200 million per litre. The trend of increase in algae count is shown in Figure 5-2.

2.5 2 亿个/升 1.5 1 0.5 0 1998 1999 2000 2001 2002 2003 2004 2005 2006
Wuli L. Meiliang L. Entire Tai L.

五里湖 梅梁湖 全湖

Figure 5-2: Summer Algae Counts in Tai Lake between 1998 and 2006

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B) Pollutant Discharges in Tai Lake Basin In 2005, the wastewater discharges totalled 3,314 million cubic meters. Of this, Jiangsu province accounted for 2,555 million cubic meters or 77.1%, Zhejiang province 747 million cubic meters or 22.6%, and Shanghai municipality 11.50 million cubic meters or 0.3%. Details are provided in Table 5-3. Table 5-3: Wastewater Discharges into Tai Lake for Key Provinces in 2005 (104 m3)
Jiangxu Zhejiang Shanghai Total Industrial Wastewater 179,404 35,965 143 215,512 Sewage 76,119 38,710 1,007 115,836 Total 255,523 74,675 1,150 331,348

In 2005, the discharge of COD totalled 850,300 t, NH3-N 91,800 t, TP 10,400 t and TN 141,600 t, as are shown in Table 5-4. Table 5-4: Discharges of Major Pollutants in Tai Lake Basin in 2005 (t/a)
Jiangsu Source Industrial Urban Sewage Rural NPS Total Industrial Urban Sewage Rural NPS Total Industrial Urban Sewage Rural NPS Total COD 205,726 144,643 235,608 585,977 58,881 49,960 142,233 251,074 119 6,969 6,182 13,270 NH3-N 26,365 12,295 25,560 64,220 4,865 7,818 12,847 25,530 18 551 1,469 2,038 TP 416 1,546 3,826 5,788 92 1,144 2,707 3,943 — 165 453.6 618.6 TN 35,066 16,353 46,742 98,161 6,417 10,308 23,992 40,717 23 733 1,953 2,709

Zhejiang

Shanghai

C) Water Pollution Control From the 9th FYP (1991-1995), the central government began to treat the pollution control in the Tai Lake basin as a priority, and formulated the 9th FYP and 10th FYP for Tai Lake pollution control. During the 9th FYP, CNY 12.95 billion was planned, with CNY 10.00 billion havng been invested. By the end of 2000, 29 WWTPs were built with a total capacity of 1.19 million m3/d, including 26 in Jiangsu with a capacity of 752,000 m3/d, 3 in Zhejiang with a total capacity of 435,000 m3/d. The 10th FYP witnessed an increase to CNY 22.01 billion of planned investment to build 255 WWTPs. By the end of 2005, CNY 16.87 billion were invested, with 220 WWTPs completed and 35 WWTPs under construction. Details are provided in Table 5-5.

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Table 5-5: Water Pollution Investment in Tai Lake Basin during 10th FYP
WWTPs No. of Planned Projects Urban WWTP Urban Solid Wastes Disposal Industrial Pollution Control Lakeside and Ecosystem Rehabilitation Dredging Ecological Demonstration Drinking Water Supply Source Protection Pollution Control for Special Industries Capacity Building By Province Jiangsu Province Zhejiang Province Shanghai Municipality Total 93 13 87 4 7 14 12 8 17 176 75 4 255 Planned Investment (CNY 100 million) 107.3 12.6 1.1 20.8 39.8 23.0 14.0 0.9 0.6 132.3 84.8 3 220.1 % of Completed Projects 83.9 76.9 97.7 75.0 57.1 85.7 83.3 100 58.8 89.0 79 100.0 86.3 % of Projects under Construction 16.1 23.1 2.3 25.0 42.9 14.3 16.7 0 41.2 11 21 0 13.7 Investment Planned % of Investment Actual (CNY 100 Invstment million) 107.1 99.8 13.2 1.4 6.6 15.5 15.0 6.3 2.0 1.8 90.2 77.2 1.5 168.9 103.4 122.7 31.5 39.0 65.2 45.0 219.6 301.7 68.0 91.0 50.0 76.7

Through the pollution control effort during the two FYPs, good progress was made by the two provinces and one municipality in structural adjustment, industrial pollution control, urban sewage management and rural non-point-source pollution control. Water quality has been improved or stabilized for parts of the lake amidst rapid economic growth. By 2006, 186 WWTPs with a total treatment capacity of 5.59 million m3/d were constructed (Table 5-6). The pollutant concentrations in the inflow are 350~600 mg/l for COD, 11~55 mg/l for NH3-N, 2~7 mg/l for TP; after treatment they are below 70 mg/l for COD, 7~15 mg/l for NH3-N, 0.3~2 mg/l for TP, which meet the Class I (B) of the national discharge standards. Table 5-6: WWTPs in Tai Lake Basin by 2006
Urban WWTP Capacity No. (104 m3/d) 28 108.6 14 67.8 9 46.9 1 4.0 52 227.3 3 121.0 4 50.0 6 18. 13 189.0 — — 65 416.3 No. 50 32 2 0 84 5 10 17 32 5 121 Town WWTP Capacity (104 m3/d) 49.5 36.9 5.0 0.0 91.3 7.1 17.3 24.1 48.4 2.8 142.5 No. 78 46 11 1 136 8 14 23 45 5 186 Total Capacity (104 m3/d) 158.1 104.6 51.9 4.0 318.6 128.1 67.3 42.1 237.4 2.8 558.8

Suzhou Wuxi Changzhou Zhenjiang Total for Jiangsu Hangzhou Jiaxing Huzhou Total for Zhejiang Shanghai Grand Total

D) Major Environmental Pressures in Tai Lake Basin

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The Tai Lake basin suffers from serious pollution. The painstaking pollution control efforts of the local governments cannot keep pace with the increasing pollution caused by rapid economic growth. There is a need for further adjusting the mode of economic development, and adopting a new development model which will achieve coordinated economic-social-environmental development and human-nature harmony. They should learn from past mistakes by using the total pollutants discharge control as a major control target and by controlling both the pollutant discharges and the pollutant concentrations. Tai Lake basin is faced with the challenge of growing pollution loads overtaking the increasing actions on pollution abatement. Water quality continues to worsen; lake surface area to decrease; wetland area to shink; biodiversity to decline; ecological function to deteriorate. Pollution accidents occur frequently, causing damage to the healyth and environmental rights of the local communities. Grave Situation of Safe Drinking Water: Some of the water bodies in the basin used as drinking water supply sources cannot meet the applicable national standards, and to make things worse they are faced with increasing pollution. Most of the water treatment plants in the basin still use outdated technologies. For some cities, the water supply is not diverisifed; when an accident occurs, the only choice is to shut down and suspend water supply. Drinking water safety and reliability is slow. Severe Non-Point Source Pollution: The use of chemical fertilizers in the Tai Lake basin is 40 kg/mu on average, which is 2.16 times the national average. The average use pesticides is 1.61 kg/mu or 2.37 times the national average. Livestock and poultry farming is widespread and of large-scale, but the rate of safe disposal of wastes is low, constituting a serious source of water pollution. Rural non-point-source pollution has long been neglected with little financial investment. The rural NPSs have become a major sources of pollution to the Tai Lake. Inappropriate Industrial Structure and Location: The Tai Lake basin is home to a large number of industrial enterprises for which pollution control is difficult, including dying, chemical, pharmaceutical and tanning. They are mostly situated in the towns and villages. Some regions do not comply with the industrial zoning and environmental planning policy in setting up enterprises. This makes pollution control all very difficult. Weak Regulations and Enforcement: There are no environmental management regulations that specifically target the Tai Lake basin. Existing general regulations have many loopholes. Violations are widespread; regulatory enforcement is weak; and penalties are light. Illegal discharges are not uncommon. The problem of “the penalty for volation is lower than the cost of compliance” has not been resolved. Fragmented Management and Lack of Coordination: The development, use and

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protection of the Tai Lake basin involve two provinces and one municipality and numerous agencies. The overlapping of mandates and lack of coordination are common. There are conflicting interests between the regions, which makes coordinated management difficult. Pollution control has not achieved the desired results. Lack of Financing and Investment: The pollution control efforts in the past 10 years have been constrained by the inadequate investment and heavy dependence on the limited number of financing channels. This was the major reason for the failure to achive the 9th FYP and 10th FYP panning targets. The root cause is the lack of well-functioning financing mechanisms and an inadequate use of the market. 5.1.2 Use of Economic Instruments in Tai Lake Basin A) Jiangsu Provincial Ordinance on Tai Lake Pollution Control The amended Jiangsu Provincial Ordinance on Tai Lake Pollution Control took effect on 5 June 2008. Several provisions in the ordinance were revised, including a new provision to grant the environmental protection authorities the veto for new projects in the respective regions, raising the upper limit of fines to CNY 1 million. It also stipulates that in case of a pollution accident, the culprit will be held responsible for all costs plus a fine in equivelance of 20% ~ 30% of the direct economic loss. The ordinance stresses “joint action” whereby the upstream will be responsible for the quality of water flowing to the downstream and the downstream will be responsible for the quality of water entering the lake. The ordinance has also adjusted the control area; the coverage has been enlarged to include to all water bodies (rivers, lakes, reservoirs and canals) that affect the water quality of Tai Lake within the territories of Danyang, Jurong, Gaochun and Lishui, in addition to the original three municipalities of Suzhou, Wuxi and Changzhou. Now five municipalities in southern Jiangsu all have shared responsibility for Tai Lake pollution control in the provincial territory of Jiangsu. The ordinance requires each enterprise to have two discharge outlets, one in the factory and another outside the factory, so that the EPB can take samples at any time and the public can supervise easily. The requirement will play a significant role in preventing enterprises from illegal discharges. Wastewater treatment is a sector with a high degree of monopoly, and is difficult to monitor and supervise, so illegal discharges occur often. The amended ordinance stipulates that any WWTP with a licensing arrangement, if confirmed to discharge illegally, will be fined between CNY 200,000 to CNY 1 million, as well as criminal prosecution for the the manager. The EPB may recommend the suspension or cancellation of the operating license and payback of the wastewater treatment fee.

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The complicated river network in the Tai Lake basin is conducive to frequent disputes amongst the different administrative jurisdictions over pollution. For many years, the reckless discharges from the enterprises have made it close to impossible to track down the polluters and identify pollution responsibilities. The amended ordinance assigns accountability according to the borderline. If the water quality at the borderline violates the applicable standards, the upstream administration will pay financial compensation to the downstream government. B) Jiangsu Provincial Management Guideline on COD Trading In 2008, the Jiangsu Provincial Price Bureau, in conjunction with the Finance Department and Environmental Protection Department, introduced the Management Guideline on Colelction of Paid Use of Pollutant Discharge Quotas in Tai Lake Basin within Jiangsu Province (Trial Implementation), which began the pilot program on paid use of COD discharge quotas in the Tai Lake. The sectors of coverage include: textile and dying, petrochemical, pulp and paper, iron and steel, electroplating, food manufacturing (monosodium glutamate and beer) and wastewater treatment. Of these, the charge is CNY 2,600 per ton of COD for wastewater treatment plants, and CNY 4,500 per ton of COD for the other types of industrial enterprises mentioned above. It should bep pointed out that the payment of a discharge fee does not entitle the enterprise to discharge at free will. The enterprise must comply with the certified allowable discharge quota. In addition to the regular pollutant discharge fee, a fine will be imposed on any violation. The secondary pollutant discharge trading market has been estaslished. If an enterprise discharges more pollutant than the purchased allowable quota, it can either take action to cut the discharges below the allowable quota within a specified timeframe or buy pollutant discharge rights at the secondary market. Conversely, an enterprise with lower discharges than the allowable quota can sell the surplus at the secondary market; it may also reserve the surplus for future use or for expanded production. The central element of this policy is “paid use of environmental resources”. Jiangsu Province plans to introduce similar policies to other pollutants, with a view to “tighten” the discharge outlets of the enterprises with the use economic instrument on the one hand and on the other hand reduce the cost of pollution control to the enterprises by optimal use of the environmental resources with the price leverage. C) Jiangsu Provincial Guideline on Environmental Compensation The Jiangsu Environmental Resource Compensation Guideline has established the economic compensation mechanism between the upstream and downstream. The

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regions within the province no longer act in separation. The sense of responsibility of the government for water quality in its jurisdiction has been strengthened. The definition of the borderline water quality targets provides for quantitative indicators for performance assessment, which has solved the long-standing difficulty of determining transboundary water quality violations. D) Establishment of Wuxi Tai Lake Protected Area The Tai lake shoreline within the territory of Wuxi has a length of more than 30 km. The area of water surface in Wuxi accounts for about 30% of the Lake Tai’s total. Therefore of all the cities in the Tai Lake basin, Wuxi has the highest dependence on the lake, suffers the most from its pollution and bears the greatest responsibility for pollution control. Recently the people’s congress of Wuxi proclaimed the decision on designating the entire municipality into a protected area, with a view to protect the Tai Lake. This has laid a solid regulatory foundation for pollution control and ecological protection for the Tai Lake. The decision calls for integrated planning, improved coordination and stringent enforcement, and for energy conservation, pollutant reduction, structural change and circular economy. The goal is to build Wuxi into as a pioneer area of circular economy and a demonstration area for green energy and for international outsourcing services, with high and new technologies and top-class service industries. The core area will be designated for ecological tourism demonstration, and first-tier and second-tier protection areas as ecological shelters. E) Pollutant Discharge Trading in Jiaxing On 1 November 2007, the Implementation Guideline on Trading of Major Pollutants (Trial) (Jia Fa [2007] No. 84) became effective in Jiaxing municipality. The trading program focuses on COD and SO2. As a prominent feature, the guideline has specified the location of pollutant discharge trading: pollutant discharge rights reserve and trading center. Under the authorization and guidance of the municipal EPB, the specialized agency is responsible for administering the pollutant discharge trading program. It is the designated platform for handling pollutant discharge trading transactions between the seller and the buyer. The guideline also contains provisions on the activities of the reserve and trading center and the trading market, as well as dispute resolution mechanisms and legal responsibilities. 5.1.3 Assessment of Laws and Regulations

The Tai Lake basin covers three provinces and one municipality (Jiangsu, Zhejiang, Anhui and Shanghai), with heavy population density and advanced economic development. Since the 1980s, the pollutant discharges into the lake have continued to grow. The central government has placed Tai Lake in the priority pollution control

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program (nicknamed “three rivers and three lakes”). But the painstaking efforts by the various levels of governments have not reversed the general trend, and the pollution situation in Tai Lake is still grave. In addition to being a policy priority for the national government, water pollution control for the Tai Lake has also been the center of attention for local governments. Administrative, regulatory and economic instruments have all been adopted. Local regulations have covered, among other things, surface water pollution control, protection of drinking water supply sources, total pollutant discharges control, pollutant discharge permits, resolution of transboundary pollution and pollution trading. They are playing an increasingly important role in water quality management. Integrated river basin management (IRBM) is key to solving the problem of water pollution. Any economic policy or instrument, if it cannot be implemented from the perspective of IRBM, cannot achieve the desired results. IRBM involves the sectors of environmental protection, water resources, construction, transportation, agriculture, fisheries and tourism. As far as Tai Lake is concerned, a special set of regulations may be necessary to propel the introduction of economic instruments. Since 2006, the formulation of Tai Lake Management Guideline has been included in the work plan on regulatory development. The initial drafting is ongoing by the Ministry of Water Resources in partnership with the Ministry of Environmental Protection. The guideline will strengthen the rule of law by regulating the water management issues for various sectors and regions, by defining the management relationships and responsibilities, by making use of economic instruments, with a view to ensure the sustainable development and effective protection of the Tai Lake. In addition to the amended Jiangsu Provincial Guideline on Tai Lake Water Pollution Control which took effect on 5 June 2008, the provincial 11th FYP for environmental protection and ecological conservation has proposed to strengthen the regulatory system for environmental protection, which covers laws, regulations, standards and procedures and policies that will address the most pronounced environmental problems associated with socioeconomic development and help achieve the goal of building an ecological province and circular economy. 5.2 5.2.1 Considerations with Regard to Discharge Trading in Tai Lake Basin Objectives and Scope of Discharge Trading

The objective of water pollutant discharge trading is to achieve the pollution reduction target with the least cost. However, the cost of pollutant abatement for some enterprises may be very high, if all enterprises are required to treat the wastewater to the same level. Pollutant discharge trading allow the enterprises to compare the cost of pollutant abatement on its own with the cost of buying discharge

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credits from the discharge trading market. For the region as a whole, this will lead to the least cost while meeting the water quality target. The determination of the scope of water pollutant discharge trading should pay attention to the following considerations: i) trading should cover the entire watershed. However, China still lacks a national trading legislation, which makes trans-provincial trading very difficult. Yet, given the fact that the total pollutant discharge control quotas are allocated on the basis of administrative boundaries, it is possible to implement trading within an administrative region in a watershed; ii) in determining the scope of trading, “hotspots” should be avoided. Hotspots refer to areas where localized pollution and damage to sensitive environmental receptors may still occur even if the total pollutant discharge control quota is not violated; iii) there are a large number of polluting sources. The success or failure of discharge trading depends, to a large extent, on the number of participating enterprises and the volume of trading. Generally speaking, an active trading program and a dynamic trading market should be supported by abandunt polluting sources. A small number of polluting sources may lead to market monopoly by large polluting sources and restrict the competitiveness of the market. 5.2.2 Principles of Discharge Trading

The central purpose of a water pollutant discharge trading program is to achieve the water pollution control target with the least cost. As such, the design of a trading program should be based on the following basic principles. A) Trading Enterprise Meeting Discharge Standards It is a prerequisite that an enterprise must meet the discharge standards before it is allowed to participate in trading. B) Trading Not Leading to Environmental Deterioration The trading program should be designed such that it will improve the water environmental quality instead of worsen it. Under the general condition of meeting the total discharge control, trading shall neither affect the water supply sources nor cause regional ecological damage. C) Trading Confined to an Administrative Region In view of the fact that China does not have a unified set of laws nor regulations on discharge trading nor a watershed-wide management agency, trading should be confined to an adiministrative region in order to avoid problems with interjurisdicational coordination. For example, trading can be done within a province or a municipality, rather than trans-provincially.

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5.2.3

Selection of Target Pollutant for Discharge Trading A) Targeting Major Pollutants

The trading should select those pollutants that cause major environmental problems in the region. As far as Tai Lake is concerned, the major cause of water quality deterioration is the rudimentary mode of economic development with the continued growth of industries with high energy-consumption and heavy pollution. Meanwhile accelerated population growth and urbanization has resulted in the increasing discharge of urban sewage, which together with outdated sewage treatment facilities, intensified water pollution. In addition, overuse of fertilizers, land reclamation from the lake and high-density water-based fish and animal farming aggrevate the pollution situation. At present Tai Lake suffers from organic pollution from COD, and nutrient pollution from TP and TN. Therefore, COD, TN and TP can be selected for initial trading. B) Same Pollutant with Same Pollution Effect The same pollutant should be assumed to have same pollution effect in different regions. The more homogeneous the pollution effect across a large area, the more suitable for trading. C) Differential Marginal Cost of Abatement Wide differences should exist in terms of the marginal cost of pollutant abatement. Only when there are differentials in marginal cost, can trading lead to cost savings on a regional basis. D) Measurable Discharges The discharge of the traded pollutant should be able to be measured accurately. The government should be able to accurately monitor the discharge of a trading pollutant. Trading would not be possible if there no facilities to monitor the pollutant discharges from the enterprises. On the basis of the above principles and pilot experiences in the country, it is recommended that COD be selected for trading in the near-term. In light of the increasing attention to water pollution caused by other parameters such as TN, TP, NH3-N and oils, it is recommended to explore the feasibility of trading of these pollutants, especially in closed water bodies. Moreover, considering the importance of COD, TN and TP in water pollution and for the sake of saving management cost, the feasibility of combined trading of the three pollutants may be ecplored.

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5.2.4

Patterns of Discharge Trading

Experiences with discharge trading in the US and other countries have shown that discharge trading can cover many types, but the major patterns include trading between two point sources directly discharging into the water body, trading between a point source direct discharging to the water body and a WWTP, trading between a point source that discharges into the sewerage network and a WWTP, trading between multiple point sources and trading between a point source and a non-point source. 5.2.5 Initial Allocation of Discharge Trading Rights A) Objects of Allocation In principle, the initial pollutant discharge rights should be allocated to all polluting sources. But in view of the existing gap in supervising the small pollution sources, the initial allocation can only target the nationally and provincially monitored large polluters and urban sewerage treatment plants. Allocation can gradually expand to small and medium enterprises and non-point sources as the conditions become mature. Initial Allocation to All Polluters: This is to allocate the available pollutant discharge quota to all polluters on a pro-rated basis according to the existing volumes of discharges. New enterprises will buy the discharge rights from the secondary market. This method of allocation is fair and conducive to the healthy development of the trading market. However, necessary measures should be taken to prevent large enterprises from hoarding and cornering. Initial Allocation to Partial Polluters: In view of the weak environmental supervisory capacity and the present system of assigning pollution abatement to large polluters, the initial allocation of the pollutant discharge quota can target only the nationally and provincially monitored large polluters and WWTPs. But this method may be accused by those enterprises who do not receive the allocations of being unfair. This may restrict the number of participating enterprises and affecting the healthy development of the trading market. For the small and medium enterprises (SMEs) that are not given the initial allocations, their discharge rights should be recognized. A voluntary discharge abatement program for SMEs, similar to that for the Clean Development Mechanism (CDM), may be established to encourage the SMEs to reduce pollution on a voluntary basis. B) Methods of Allocating Initial Rights

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There are many methods for the initial allocation of discharge rights. But none of them is universally accepted. Each method has its own pros and cons. Two major factors should be considered in selecting an initial allocation method: i) fairness to different regions and to individual enterprises; and ii) total available quota. The total available quota can be determined on the basis of policy target, either abatement target-based, water quality based or status quo-based. The relationships are depicted in Figure 5-3:
Target
Based on Status Quo

Based on Abatement Target

Based on Water Quality Obj.

Oucome of Allocation
All Enterprises Survive Some Enterprises Survive Small Number of Enterprises Survive

Figure 5-3: comparison of Allocation Outcomes

In consideration of fairness and efficiency, the recommended approach to the initial allocation of discharge rights is as follows: i) determine the discharge quota on the basis of watershed-wide water quality targets; ii) allocate the quota on the basis of the status quo of discharges within the administrative region; and iii) adjust the quota in accordance with local water quality target. C) Determining Enterprise Discharge Baseline The discharge baseline of an enterprise can be determined by use of pollutant discharge statitistics, pollutant discharge reporting by enterprises, EIAs and pollutant discharge levies. At the present stage, the baseline should be determined by reference to the collection of pollutant discharge levies; that is, the volume of discharge for which levies are collected should be used as the baseline for allocating the discharge quota to the enterprise. This will also have the additional benefit of

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reducing false reporting by enterprises and thus improving the quality of discharge data reported by enterprises. D) Payment for Obtaining Discharge Rights Pollutant discharge rights can be obtained in two ways: paid or free. It goes without saying that the paid use of the discharge rights is most suitable. It is important to set an appropriate price. Too low a price would neither reflect the value of the environmental resources nor help change the enviromentbehavoir of the enterprise. Too high a price may bring about heavy financial burden on the enterprise that affect its competitiveness and hinder the implementation of the trading program. Therefore, the initial price should be determined on the basis of an assessment of the pollution abatement cost and by taking into consideration the affordability to the enterprises. 5.2.6 Design of Two Trading Models

In view of the state of environmental management and national circumstances, two trading models are proposed. The “total discharge reduction and trading model” is based on the total discharge control. The “discharge credit and trading model” is based on discharge credits. A) Total Discharge Control and Trading Model The “total discharge reduction and trading model” uses the region-wide or watershed-wide environmental assimilative capacity and carrying capacity to determine the total discharge quota of the pollutant, and then allocate the quota to the enterprises free or on a pay-per-use basis. If an enterprise with advanced pollution control technologies discharges less than the allocated quota, it can sell the surplus abatement to another enterprise that exceeds the allocated quota. A major advantage of this model is, it has a close link to the total pollutant discharge control policy that is presently implemented in China, and help achieve the total discharge control target and the water quality objectives. However, the risk associated with this model is the risk of being affected by the possible downward adjustment of the total discharge control and thus the allocated quota, such that the enterprise may want to keep the surplus for its own future use instead of trading it in the market, thus affecting the trading program. B) Discharge Credit and Trading Model The discharge credit and trading model is for the government to recognize the “existing discharge rights”, encourage the enterprise to abate pollutant discharges and trade the surplus abatement above the existing discharges in the market. It is based on a voluntary basis; the enterprise usually has high motivation to reduce its pollutant discharge.

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It is recommended that the national, provincial and local governments establish a pollution abatement fund which uses government finance to buy back the discharge quota from the enterprise. The disadvantage of this model is the possible financial burden on the governments. An alternative is to charge the enterprise a “discharge deposit”; that is, the government requires the enterprise to put up a deposit according to a certain rate, and to return the deposit when the enterprise cut its pollutant discharge. But this model is faced with legal barriers. Table 5-7: Comparative Analysis of Two Trading Models
Factor Relationship to total discharge control Total Discharge Control and Trading Model Directly linked to the total discharge control policy, including the initial allocation of the discharge rights Administrative pressure + economic incentives Reduce the total pollutant discharge Government has strong interest, but secondary market is difficult to establish due to uncertainties with total discharge control Government will be responsible for supervision; heavy burden on government Discharge Credit and Trading Model Not linked to total discharge control policy; no initial allocation of discharge righhts Economic incentives Increase the efficiency of the enterprise’s pollution control effort Enterprise has strong interest, and secondary market is easy to establish Government is responsible for verification; burden on government is small

Policy driver Purpose of policy implementation Difficulty in implementation

Supervision system

5.2.7

Case Studies of Discharge Trading

In this section, we will use two hypothetical scanarios to apply the above-discussed allocation methods and trading models. Assume three sectors and 6 enterprises in a region: iron and steel (2 enterprises), petrochemical (2 enterprises) and pulp and paper (2 enterprises). Let’s allocate the discharge quota to the 6 enterprises with three allocation methods: status quo-based, abatement target-based and performance-based. The results of allocation are provided in Table 5-8. Table 5-8: Results of Allcoation with Three Methods
Iron and Steel Enterprise Enterprise 1 2 COD Total Discharge Quota (kg) Baseline Product Outpout (t) Baseline COD 500 200 200 140 Petrochemical Enterprise Enterprise 1 2 55,000 500 1,050 200 640 Pulp and Paper Enterprise Enterprise 1 2 500 32,500 200 15,600

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Dischargev (kg) COD Removal Cost (CNY/kg) Percentage Shares in Total COD Discharge ( %) Class II of Discharge Standard for Iron and Steel Sector (kg/t) Baseline Discharge Performance Factor (t/kg) Design Performance Factor (t/kg) Baseline-Based Allocation Result (kg) Abatement Target-Based Allocation Result (kg) Performance-Based Allocation Result (kg)

2.48 0.4 0.5 0.4 0.4 220 250 200

3.32 0.28 0.5 0.7 0.4 154 100 80

10.55 2.09 2.5 2.1 2 1,149.5 1,250 1,000

19.72 1.28 2.5 3.2 2 704 500 400

8.36 64.83 70 65 60 35,656.5 35,000 30,000

16.45 31.12 70 78 60 17,116 14,000 12,000

5.3 5.3.1

Design of Trading Protocols for Tai Lake Basin Discharge Trading Procedure A) Information Disclosure

The trading parties should file an application to the environmental protection authority via the intermediary agency. Once the qualifications of trading are verified, the information should be published in the trading platform. B) Consultations and Application The trading parties will negotiate with regard to the type of pollutant, quantify, price and timing of transaction. If necessary, the intermediary agency and environmental protection authority may be invited to join the negotiations to provide information on supply and demand, and pollution control technologies and cost. The intermediary agency has the authority to consult the information from the platform on the trading parties. Wuth support from the environmental protection authority, the intremadiary agency will formulate the rules and procedures of negotiations between the trading parties. It will prevent joint monopolization and hoarding and cornering, and protect the commercial confidentiality of the trading parties. Once the trading agreement is confirmed by the trading parties, transactions can then take place. The buyer should file an application which should contain information on the pollutant discharges of the two parties, pollutant discharge quotas 167

and abatement plans. An application for change of ownership should also be filed at the same time so as to revise the discharge quotas and permits of the trading parties accordingly. C) Verification and Approval of Trading The environmental protection authority, after receiving the trading application, will request discharge monitoring information from the environmental monitoring agency who is responsible for ensuring the accuracy of the data provided. The environmental protection authority verify the information contained in the application and confirm the qualification of the trading parties, on the basis of the discharge information received from the environmental monitoring agency and the trading database in the platform. The environmental protection authority will then determine the feasibility of trading and the need for adjustment to the trading quantity in consideration of a number of factors: the environmental impact of the trading simulated by the trading platform, the requirement of the total discharge control policy, status of meeting the discharge abatement target, the scarcity of the environmental resources, the environmental sensitivity of the region, the average social cost of pollution abatement, structural adjustment policy and the level of economic development. Trading should be prohibited when any of the following situations is anticipated: i) Trading would lead to exceeding the assimilative capacity of the water body or bodies; ii) Trading would result in cross-contamination; iii) Trading would cause significant ecological and environmental impacts. After the qualifications of the trading parties and the feasility of the trading are verified, the environmental impact of the trading can then be simulated by use of an integrated simulation modelling system that includes GIS, dispersion model and toxicity test. The simulation results will then be combined with the economic benefits of the trading and the results of multiple trading deals, in order to obtain an overall picture of the trading and to provide information for decision making by the supervisory agency. D) Registering Transaction and Change in Ownership After the application is verified, the trading parties will complete the transaction and settlement in accordance to the prior-negotiated trading contract. The environmental protection authority will then update the database in the platform according to the trading contract, and monitor the discharges of the two trading enterprises. Upon completion of the trading, the two trading parties will register with the environmental

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protection authority the change of ownership. The environmental protection authority will use the discharge rights monitoring system to supervise the implementation of the trading contract. E) Termination of Trading Contract The environmental protection authority can terminate an on-going contract under implementation if the trading is confirmed to cause significant ecological and environmental impact. The trading parties will be ordered to pay financial compensation and take remedial actions. The trading parties should the contract if an environmental accident would occur, andn wait for the decision of the local responsible environmental protection authority. 5.3.2 Management of Discharge Trading Market A) Market Entry and Exit Unlike an ordinary market, the discharge trading market does not allow free entry and exit. The environmental protection authority will conduct a prior review the qualifications of the prospective traders. Entry Requirements: The terms and condition for entry into the discharge trading market should be based on the principle of market competition, full freedom of trading, large number of participating enterprises and meeting the environmental quality targets. First, the market should include as many enterprises as possible. Second, any legally registered enterprise can enter the market, but the terms of entry will differ. A polluter should possess a valid discharge permit to be allowed into the market. Enterprises or individuals, if not a pollution source, can also be allowed into the market but with certain restrictions. Third, any participant should be committed to comply with the trading management guideline. The enterprise should submit to the environmental protection authority the required information, including, among other things, production and operation, pollution control facilities and status of operation, pollutant discharges and discharge trading quotas. The enterprise should meet the applicable discharge standards. Exit Requirements: Exit can be voluntary and involuntary. An enterprise has the freedom to enter and exit, and at the same time, the environmental protection agency has the authority to expel a violating enterprise from the trading market. Voluntary exit will occur if the enterprise changes products, ceases production and closes down. The remaining rights can be sold at the trading market or to environmental protection authority. Involuntary exit will take place and the rights will

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be bought back by the environmental protection authority if the enterprise is found to have commmitted a fraud. B) Quota Tracking Quota tracking is an important component of the discharge trading system. The tracking system records the acquisition, sale and transter of the discharge rights, the status of meeting pollution abatement target of the enterprise, allocated discharge quota, earnings from sales and auction and remaining discharge quota. The purpose is to provide for automated, effective monitoring of the tradings. The enterprise can track its transactions and the quota holdings. The environmental authority can keep timely track of the market, and publish laws, policies, management guidelines and trading rules. The tracking will cover: total quota, outstanding quota in each trading account, traded quota, adjusted quota and transactions. The structure of the quota tracking system is presented in Figure 5-4.
Initial Quota Allocation Enterprise

Establishing Trading Account Tai Lake Basin Submit Trading Application Traded Quota Quota Trading System Quota Deduction Transfer Quota Verifying Trading Qualifications Pollutant Discharge Trading Center

Verify Quota

Inadequate Quota

Actual Discharge

Environ. Target

Local EPB

Remaining Quota

Surplus Quota

Type of Quota

Source of Quota

Operating Agency

Figure 5-4: Strcuture of Quota Tracking System Establishing the Trading Account: After the trading management authority has verified the trading application of the enterprise, a trading account will be opened in

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the quota tracking system. Trading Management: The trading entity may be an enterprise, social organization or individual. The enterprise can buy, sell or transfer the discharge rights. The representatives of the two trading parties should submit a trading application to the EPB. Once the EPB confirms the trading qualifications, the traded quota will be transferred from the seller’s account to the buyer’s account. The trading parties will be informed of the transaction. The transaction between the two accounts will be recorded in the tracking system. The verification system will inspect if the trading account has adequate quota to complete the trading. Trading Time and Format: The seller and buyer can submit the trading application at any time. The EPB will review and confirm the trading qualifications within a specified period, and approve and record the trading. The trading system will need to undergo an initial period of trial run. Once the system becomes fully operational, trading can be completed realtime via the internet. Development of Quota Trading System: The tracking system will be developed to monitor the quotas involving all of the pollution sources. The system should be able to accommodate the gradual expansion of the trading targets and scope. It should be deisgned for transparency and information sharing via the internet. 5.3.3 Development of the Trading Platform

The discharge rights trading platform consists of hardware and software. The software structure (Figure 5-5) is briefly discussed here, with emphasis on the supervision component and the baseline data management component.
Decision Support System
Trading Approval System Date Acquis. System Data Storage System Analytical Toolkit

Basic Database

Information Dissemination System

Discharge Trading Platform

Policy & Regulatory Assurance System

Server

Switchboard

Supervison Mgt System
Online Monitoring System Verification System Datebase Server Web Server Terminal

Discharge Trading System
Discharge Rights Initial Allocation System

Quota Tracking System

Pricing System

Tradng Mgt System

Figure 5-5: Basic Structure of the Trading System

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A) Trading Supervision Mechanism The environmental monitoring agency should provide information connection to the trading agency, so that pollution data about all participating enterprises can be shared real-time with environmental protection agency. Meanwhile environmental monitoring and supervision should be strengthened, in conjunction with regular and unannounced monitoring. Online monitoring of the polluting sources is an important tool for trading implementation and for post-trade discharge supervision. Pollution source monitoring can be done in conjunction with the enterprise discharge permit, with a view to supervise the enterprise’s achievement of discharge abatement target. The trading agreement should specify the monitoring method, frequency and monitor. The enterprise and the monitoring agency will be held accountable for the monitoring data which will be reported to the responsible authorities. Any violation of discharge standard will be reported to the environmental protection authority. The responsible authority may consider more frequent monitoring of pollution-intense enterprises. The monitoring data should be accurate and adequate enough to enable the permit holder, agents and the public to judge whether or not the trading parties have met the requirements as specified in the trading agreement. On the other hand, monitoring of the ambient water quality is necessary to understand whether or not the trading program has helped achieve the water quality target. Therefore a basin-wide water quality monitoring system should be established. B) Collection and Reporting of Discharge Data The participating enterprises in the trading program should submit to the platform the basic data about the enterprise. The reporting will support the responsible authority to assess and make informed decision of each trading. The responsible authority may also require the submission of the trading transactions of a particular pollutant on an annual basis. C) Discharge Data Storage and Publication Discharge data are stored in the basic database as a component of the trading platform. Different users can be provided with different levels of access to the database. The government agencies have the authority to inquire and manage the basic data about the pollution sources and monitoring data. The trading intermediary can access pollution source data and monitoring data related a particular trading case, as well as the authority to submit trading application to the system and manage the trading procedure. The participating pollution sources can submit their

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own data to the system and inquire the basic data and monitoring data about the respective trading parties. Once a trading is completed, the trading data should be published to the public, and a public supervision mechanism should be established. The public have the right to obtain information on the discharges of the trading enterprises. 5.3.4 Design of Anticorruption Policy and Mechanism

As early as 1993, the report of the Rome Club identified political corruption and environmental pollution as two of the most significant challenges of the 21st century. In its 2008 global corruption report, Transparency International points out that corruption in water resource management weakens the sustainability of water resource supply, and exacerbates the unfair allocation of water resources. This leads to political conflicts and accelerated ecological degradation. No country can be free of corruption in water resources. In China, corruption has weakened the enforcement of environmental laws and regulations. In developed countries, water supply projects are also full of price monopoly, collusive tendering and other corruptive behavoir. Discharge trading is considered an economic instrument for reducing corruption in the field of environmental protection. However, there are risks of corruption in discharge trading because of regulatory, technological and market gaps. If the cost of “rent-seeking” of the enterprise from the environmental protection authority is lower than the cost of buying the discharge quota, discharge trading may intensify “rent-seeking corruption”. Therefore the trading system should be designed to be corruption-proof. A) Factors Affecting Corruption Asymmetric Access to Information: Government, enterprises and the public have unequal access to information on discharge trading rules and discharge information. When there are loopholes in policy implementation, “rent-seeking” may occur. Some enterprises may attempt to use bribery for its own interests. Without access to information, the public would not be able to play its supervisory role in fight corruption. Economic Interests: Offering and accepting of bribes are driven by economic interest; corruption is to use power for private benefits. In economic theory, corruption is an economic activity. Like other economic activities, corruption involves cost calculations. The cost of corruption includes pre-payment, direct cost, transaction cost, opportunity cost and risk cost. Owing to the fact that China is in a transitional period and because of weak regulations and supervision, there are many opportunities for corruption.

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Role of Supervision: International experiences with anti-corruption have shown that weak supervision is one of the major causes of corruption. The PRC Environmental Protection Law and PRC Water Pollution Control Law contain provisions for the public to supervise environmental protection. The PRC EIA Law requires public participation through a variety of techniques such as stakeholder consultations and public hearings. But the public participation mechanisms and the role of public supervision need to be strengthened. B) Roles and Responsibilities of the Government Environmental pollution is a typical externality which cannot be solved purely by the “invisible hands” but requires the intervention of the government. The government has the roles of defining ownership, discharge volumes and initial allocation of discharge quota, exercising supervision and management and imposing penalties. These responsibilities constitute political power whereby rent-seeking opportunities exist and corruption is inevitable. C) Anticorruption Strategy Restricting Administrative Arbitrition Rights: The existing penalty system relies heavily on administrative penalities which leave room for corruption. In designing the discharge trading policy, rewards and penalities should be clearly stipulated, so as to leave little for administrative rights for arbitration. Science-Based Initial Allocation: The fairness of initial allocation and prevention of corruption in the allocation process are two major issues of concern. The key to anticorruption in the initial allocation of discharge rights is to use a science-based, fixed method, leaving no room for bargaining and interference. The past practice of SO2 allocation was based on the total emission control targets for different levels, negotiations and bargaining fostered corruption. A new allocation method will be required to avoid corruption. Information Disclosure: Trading information should be disclosed to the public under the principles of fairness, justice and transparency, with a view to encourage public participation and facilitate social supervision. The views of the enterprises should be solicited in the process of allocating initial discharge quotas. Information on trading and penalty should be fully accessible to the public. Strengthening Monitoring and Supervision Capacity: Accurate measurement is a key assurance to the effective implementation of discharge trading. In order to ensure the successful implementation of the Tai Lake discharge trading program, the participating enterprises should be required to install online continuous monitoring equipment. A standardized monitoring protocol should be established, and the data

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terminal of the monitoring equipment should be connected to the information network of the environmental protection authority. Reward and Penalty: Penalty serves as a resolution to a violation and a warning to potential violators. It is an important anticorruption tool. With weak supervision as is the case in China, it is necessary to establish an effective governance system, including reward and penalty, fair and stringent enforcement, law-binding and offence-reporting, so as to prevent corruption before it occurs and stop corruption when it occurs. Stiff penalties and good rewards can effectively deter corruption. Anticorruption measures should be incorporated into the national anticorruption legal framework, including the interim guideline on punishing offences in the field of environmental protection (2006). 5.4 5.4.1 Supportive Policies and Measures Water Pollution Monitoring System A) Strengthening Online Monitoring of Pollution Sources Online Monitoring Capacity Building: Online monitoring should be installed for any pollution source that: i) discharges more than 100 t/d of wastewater or more than 30 kg/d of COD or more than 3.5 kg/d of NH3-N (including urban WWTP) or more than 50 t/d of wastewater if located in a water supply protection area; or ii) listed in the national or provincial priority supervision lists. The monitoring equipment must be certified by a quality verification organization approved by MEP. According to relevant regulatory requirements, an enterprise is allowed to have two discharge outlets, one for clean water and one for wastewater discharge. The online monitoring equipment should be installed at the wastewater discharge outlet. The local environmental protection authority is charged with the responsibility to conduct pre-operation inspection and approval of the pollution discharge online monitoring system, supervise the operation of the online monitoring system and perform equipment calibration and and monitoring data verification. The online continuous monitoring system installed in each enterprise should be connected to the local environmental monitoring information network to submit real-time data. The environmental protection authority will verify the data. Table 5-9: Basic Equipment for Online Monitoring of Pollution Sources
Equipment Wastewater flow meter Online pH meter Online TP meter Online NH3-N meter Online COD meter Quantity 1 1 1 1 1 Unit Price (CMNY 104/set) 1 3 25 15 15

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Data transmission, equipment calibration, communication Air conditioning Building Total

1 1 1 8

15 0.5 10 84.5

B) Market-Based O&M of Online Monitoring System Regular calibration, maintenance and inspection is important to ensure the quality of the monitoring data and hence the role of online monitoring in the supervision of pollution sources. A market-based pollution source online monitoring system should be established within the basin, in accordance with the management guideline on the installation and maintenance of pollution source online monitoring systems. The polluting enterprise should contract the operation, maintenance and calibration of the online monitoring system to a certified third-party agency who will ensure the proper operation of the system. The local environmental protection agency should coordinate the planning and suopervision of the system. C) Pollutant Discharge Statistics According to the management guideline on pollution source monitoring, the local environmental monitoring station will verify the discharge data reporte by the enterprise, re-monitor an enterprise if questionable data are identified, and control the quality of the online continuous monitoring equipment installed in the enterprises. Pollutant discharges should be monitored with both the automated monitoring technology and the ordinary sample monitoring technology. The pollutant discharge is calculated by multiplying the concentration and flowrate. Two methods can be used to calculate the pollutant discharge: monitoring data method and discharge coefficient method. Monitoring Data Method: Monitoring data method is used for all key polluters to calculate their pollutant discharges. Monitoring data with certified automated monitoring equipment can be used. Discharge Coefficient Method: This method is mostly used to estimate the pollutant discharges for chemical materials producers, chemical products manufacturers, and pulp and paper, metallurgical and textile producers. The monitoring data method is the first choice. For pollution sources without automated monitoring equipment, the environmental protection authority should conduct ordinary monitoring with conventional sampling

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and laboratory testing technologies, at least on a quarterly basis. Meanwhile, site inspections should be conducted on material consumption, water use and drainage, wastewater discharge outlets and pollution control facilities. The pollutant discharge statistical reports should be compiled on a quarterly and annual basis. The annual report covers January to December. 5.4.2 Management System

The task of pollution control and environmental rehabilitation involves two provinces and one municipality as well as responsible central ministries. The provincial and municipal governments have the primary responsibility for safeguarding the environmental quality of their respective region, and therefore should ensure the implementation of pollution control and environmental rehabilitation programs and the achievement of the environmental targets in the respective region. The central ministries should also perform their duties of coordination and cooperation. The National Development and Reform Commission has the overall accountability, and serves as the chair of the joint provincial-miniterial committee. The joint committee is composed of NDRC, Ministry of Science and Technology, Ministry of Industrt and Information, MOF, Ministry fo Land Resources, MEP, Ministry of Housing and Urban and Rural Construction, Ministry of Communication, Ministry of Water Resources, Ministry of Agriculture, State Forestry Administration, State Council Legal Affairs Office, China Meterological Adminstration, and Jaingsu and Zhejiang Provincial Governments and Shanghai Municipal Government. Improvement should be made to the consultation, dialogue and coordination mechanisms. 5.4.3 Supervision and Enforcement

Two levels of monitoring networks (national and local) should be established by building on existing monitoring systems. A national watershed environmental information sharing platform, together with branch platforms in the two provinces and municipality, should also be set up, in a coordinated fashion. Unified monitoring protocols and procedures should be formulated to standardize information collection, sharing and disclosure. It is necessary to establish environmental enforcement and supervision system. Online automated monitoring should cover all key pollution sources of national and provincial priority. The frequency of unannounced inspections should be increased. All drinking water supply withdrawal locations should be fitted with real-time automated monitoring. A comprehensive indicator system, monitoring system and performance assessment

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system for totoal discharge control should be established. The skills and qualifications of law enforcement professionals should be improved. Local protectionism should be broken. Overlapping supervision, evasion and pollution transfer should be banned. Illegal discharges should be prosecuted. The problem of “high cost of law compliance, high cost of law enforcement and low cost of violation” should be solved. Supervision, law enforcement and inspection should be srengthend. 5.4.4 Public Participation

Relevant government agencies should implement, with full diligence, environmental laws and regulations and review and approval of construction projects. An information disclosure system should be established. Public hearings should be organized for major environmental issues involving public water use and environmental rights. Enterprises shoud be encouraged to release information. Information on the discharges of key pollution sources should be make accessible to the general public. Public’s rights to know, participate and supervise with regard to the environment should be upheld. The mass media should be mobilized to supervise the polluters, raise public awareness, and promote corporate social responsibility. The protection Tai Lake’s water resources should also be incorporated into the curricula for primary and secondary schools.

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