Case CO2 Emission Reduction.pdf

Ecological Economics 39 (2001) 257270

ANALYSIS

The CO2 emission reduction benefits of Chinese energypolicies and environmental policies:

A case study for Shanghai, period 19952020

Dolf Gielen a,*, Chen Changhong b,1

a ECN-Policy Studies, PO Box 37154, 1030 AD Amsterdam, The Netherlandsb Shanghai Academy of Enironmental Sciences, 508 Qinzhou Road, Shanghai 200233, Peoples Republic of China

Received 16 January 2001; received in revised form 21 May 2001; accepted 22 May 2001

Abstract

The international literature has paid much attention to so-called fringe benefits of greenhouse gas (GHG) policies.The concept is that GHG emission reduction in developing countries will also reduce local air pollution. On the basisof this concept, it is argued that it is possible to achieve simultaneously a reduction of local air pollution and areduction of greenhouse gas emissions. In reality, however, there is a sequence to the policy agenda. First theapparent local air pollution problems are tackled then the more distant greenhouse gas problem is considered. Thissequence has consequences for the optimal policy selection. Moreover, most studies that focus on fringe benefits ofGHG policies neglect the existence of cost-effective dedicated abatement technology for local air pollutants. Thispaper analyses the optimal set of policies for reduction of SO2, NOx and CO2 in Shanghai for the period of20002020. The analysis is based on a linear programming MARKAL model for the Shanghai energy system. Theresults show that the relevance of no-regret options is limited because Shanghai has improved its energy efficiencysignificantly in recent years. The model calculations suggest that this trend will persist if current policies are sustained.This energy efficiency improvement and the planned introduction of natural gas have important benefits from a GHGemission point of view. These benefits have received little attention as yet. Local air pollution reduction can result inadditional GHG emission reduction up to 2010. After 2010, however, its CO2 emission co-benefits are limited.Dedicated abatement technology is the most cost-effective way to reduce local air pollution. An additional incentiveof 100 Yuan/t CO2 emission reduction (12.5 Euro/t) results in an additional emission reduction of 11% (22 Mt CO2),and it results in a significantly different technology mix than stand-alone local air pollution policies. The totalpotential for GHG emission reduction amounts to 66 Mt in 2010 and to 49 Mt in 2020 compared to base case levelswithout policies. 2001 Elsevier Science B.V. All rights reserved.

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* Corresponding author. Present address: National Institute for Environmental Studies, 16-2 Onogawa Tsukuba, Ibaraki305-0053, Japan. Tel.: +81-298-502-540; fax: +81-298-502-572.

E-mail addresses: [email protected] (D. Gielen), [email protected] (C. Changhong).1 Tel.: +21-64085119x849; fax: +21-64758279

0921-8009/01/$ - see front matter 2001 Elsevier Science B.V. All rights reserved.

PII: S0921 -8009 (01 )00206 -3

D. Gielen, C. Changhong / Ecological Economics 39 (2001) 257270258

Keywords: Urban air pollution; Energy policy; CO2 policy; Shanghai; China; MARKAL

1. Introduction

China is the country with the largest populationin the world. Its energy use has been increasingrapidly during the last two decades because of thephenomenal economic growth of 810% per year.If this economic growth persists, Chinese energyconsumption will represent an increasingly signifi-cant fraction of global energy consumption. As aconsequence, future developments in China are ofgreat importance to the future of the global en-ergy system and its related environmentalimpacts.

The most important Chinese energy resource iscoal. Coal use represents approximately 73%2 ofthe total primary energy use, the remainder beingoil and, to a much lesser extent, hydro, nuclear,and natural gas. Coal use is the source of anumber of environmental problems. Local pollu-tion problems related to coal use, such as sulphurdioxide (SO2) emissions and particulate matter(pm) emissions, are well-known, e.g. (Qian andZhang, 1998). Recently, nitrogen oxides (NOx)have emerged as a local air pollution problem incities due to rapidly increasing oil consumption inroad transportation. In recent years, the carbondioxide (CO2) emissions that are related to Chi-nese coal use have received much internationalattention.

The international literature has paid much at-tention to so-called fringe benefits3 of green-house gas (GHG) policies (see for example, Ekins,1996; WRI, 1997; Wang and Smith, 1999). Theconcept is that certain options for GHG emissionreduction in developing countries will simulta-neously reduce local air pollution. The benefits oflocal air pollution reduction are very significant.As a consequence, greenhouse gas emission reduc-

tion can be obtained with low additional costs.This argument is used to plead for a reduction ofGHG emissions in countries such as China. Inreality, however, the order of issues on the policyagenda is different. First the apparent local airpollution problems are tackled; next the moredistant GHG problem is considered. Therefore, itis more relevant to study the impact of local airpollution abatement on GHG emission reductionthan vice versa. Moreover, most studies that focuson fringe benefits of GHG policies neglect theexistence of cost-effective abatement technologyfor local air pollutants that does not have apositive effect on GHG emission (e.g. SO2 scrub-bers for coal-fired power plants). As a conse-quence, the GHG emission mitigation effects oflocal air pollution reduction can be questioned.The goal of this paper is to identify the optimalset of air pollution mitigation policies by taking abroader perspective (i.e. options with multiplebenefits versus options with single benefits).

The Chinese government has developed ambi-tious plans for reducing Chinas dependency oncoal in favour of other energy sources such asnatural gas, as well as increasing the efficiency ofenergy use. These policy plans have been drivenby strategic considerations and by concerns re-garding local air pollution. Up to now, any CO2emission reduction target has been rejected. How-ever, the energy policy plans and strategies aimingfor local air pollution reduction will also affectCO2 emissions. This paper will answer the follow-ing questions: What is the impact of planned Chinese energy

policies on GHG, SO2 and NOx emissions? What is the impact of a significant reduction of

local air pollution on GHG emissions? What would be the cost-effectiveness of a

GHG emission reduction policy on top of thesetwo policies?This paper is based on a case study for the city

of Shanghai. This coastal metropolis has approxi-mately 16 million residents, the size of a smallcountry such as, e.g. the Netherlands. This indi-

2 The figure is reduced to 62% if straw and firewood areincluded (non-commercial energy carriers).

3 The terms co-benefits, auxiliary benefits or secondarybenefits are also used.

D. Gielen, C. Changhong / Ecological Economics 39 (2001) 257270 259

Fig. 1. Structure of the Shanghai energy system, 1998.

cates the relevance of the case study from a globalGHG emission perspective.

Since 1990, total energy consumption in Shang-hai has been increasing at an average annual rateof 5.7%. The energy system structure for 1998 isshown in Fig. 1. In the last decade the share ofcoal in total energy consumption has been in-creasing to 70% of energy consumption. Industryaccounts for 70% of total primary energy con-sumption, the living needs of the residents foronly 8%.4 Power generation accounts for 48.3% ofcoal consumption, coke making and gas genera-tion for 24.1% and direct combustion for 24.3%.Energy imports amounted to 1789 PJ and exportsamounted to 383 PJ in 1998 (the exports consistmainly of oil product shipments from the coastalrefineries to the interior of China). Note thatconversion losses from primary to final energy in

Fig. 1 amount to 318 PJ (including transportationlosses), the bulk of which (274 PJ) is accountedfor by electricity production. Especially the lossesin refining, heat production and coke productionseem rather low in comparison to process energyefficiency data for other countries. This differencecan be explained by the different definitions inChinese energy statistics, where (part of) the pro-cess energy of the conversion processes (the en-ergy for process furnaces) is accounted for in thecategory final industrial energy use.

Energy efficiencies for Shanghai are illustratedin Table 1. Comparisons with other regions arecomplicated by the fact that the energy servicesare generally not exactly the same (for example,the average cars are smaller than in the US, TVsets have a smaller screen, power production isbased on coal instead of natural gas). Moreover,climatic differences and differences in equipmentuse complicate a proper comparison. However,the data in Table 1 suggest that there is somepotential left for energy efficiency improvement.Note that the figures in Table 1 are only indica-tive; generally speaking there is a lack of proper

4 Secondary industry in Chinese energy statistics includesall energy use for manufacturing and for power generation,thus residential use excludes electricity use. The service sectoris called tertiary industry, agriculture is called primary indus-try.


Table 1Comparison of energy efficiency in Shanghai and in OECD countries, 1998

Application ShanghaiUnit OECD countries

0.38(GJ el/GJ fuel) 0.400.44Coal-fired electricity production2025Primary steel production 1820(GJ/t)0.03(GJ/GJ) 0.030.07Oil refining

(GJ/t)Ethylene production 65 55600.65(GJ steam/GJ fuel) 0.70.75Coal-fired industrial boilers 410 t steam/hr

10Passenger cars 814(l/100 km)100150(W) 70120Colour TV

Air conditioner (kW cold/kW el) 3.64.4 3.85.5

well-documented energy efficiency data for China.The data presented are based on interviews withlocal energy experts, matched by data from energystatistics.

2. The methodological approach

Given the rapid changes in the Chinese energysystem with regard to the demand structure, tech-nology, and policy objectives, econometric modelsare inadequate for proper long-term analysis. De-tailed system engineering models are a better toolin order to gain proper insight into the interac-tions of these variables in case of changing energysupply and changing energy demand. TheMARKAL (MARKet ALlocation) optimisationmodel has been used in this study.

The MARKAL model was developed 20 yearsago within the international IEA/ETSAP frame-work (International Energy Agency/Energy Tech-nology Systems Analysis Programme). Nowadaysmore than 50 institutes in 27 countries useMARKAL (ETSAP, 2000). A MARKAL modelis a representation of (part of) the economy of aregion. The economy is modelled as a system,represented by processes and physical and mone-tary flows between these processes. These pro-cesses represent all activities that are necessary toprovide products and services. Many productsand services can be generated through a numberof alternative (sets of) processes that are based ondifferent technologies, with different costs anddifferent environmental impacts (e.g. incandescentlighting vs. compact fluorescent lighting). The

model covers all processes that are relevant froman energy and emission point of view, and calcu-lates the least-cost system configuration. In thisstudy the emissions considered are carbon dioxideCO2, methane CH4, sulphur dioxide SO2 andnitrogen oxides NOx. The model algorithm canrepresent the market forces or a perfect regula-tor, and is obviously an abstraction. The optimalsystem configuration is characterised by processactivities and flows.

The model user can define the process databaseand the constraints. Constraints are determinedby the demand for products and services thathave to be met by the energy system, the maxi-mum introduction rate of new processes, theavailability of resources, and environmental pol-icy goals for energy use and for emissions, etc.Processes are characterised by their physical in-puts and outputs of energy and material, by theircosts, and by their environmental impacts. Envi-ronmental impacts can be internalised in the pro-cess costs and the costs of energy and materialflows between processes (and are thus consideredin the selection of processes). Alternatively, anupper emission limit (a constraint) can be definedin order to represent a policy target. The processalternative with the lowest costs will be selected inthe optimal model configuration.

The time span to be modelled is divided intonine periods of equal length, generally covering 5years/period. In this case the period 19952035has been considered (1995 and 2035 are the mid-period years of the first and last period). Themodel is used to calculate the least-cost systemconfiguration for the whole time period, meeting


externally defined product and service demandsand emission reduction targets. This optimisationis based on a so-called perfect foresight ap-proach, where all time periods are simultaneouslyoptimised. Future constraints are taken into ac-count in current investment decisions. In thisstudy, a discount rate of 12% has been applied,based on Anderson and Williams (1994). Thishigh discount rate reflects the fact that China is adeveloping country, where high uncertainty re-garding future development must be reflected inthe discount rate.5

The model covers 22 energy carriers, 20 materi-als and 150 processes, and the system must satisfy24 demand categories. The technology data havebeen derived from Chinese technology studies. Insome sectors, foreign sources had to be used tocomplete the data set. The technology selectionhas been limited to proven technology in orderto achieve maximum policy relevance. This in-cludes technologies that are currently not yetwidespread in advanced countries such as the US(e.g. hybrid vehicles, fuel cell cars). The sameapplies for integrated gasifier combined cycles(IGCC for electricity production from coal),Corex (iron production) and Hycon (refining sec-tor). This shows that there is ample room fortechnological change in the model. Technologiessuch as nuclear fusion, fuel cell systems for powergeneration, computer systems to control residen-tial energy use, etc. have not been included be-cause we consider these technologies unfeasible inthe short term. The development and large-scaleintroduction of new technology is a slow process

which takes decades. The evaluation of technol-ogy assessment studies in the last decades showsthat any claims in literature regarding upcomingdramatic changes are very unlikely; see e.g.(Olsson, 2000).

The database is characterised briefly in Table 2.The model has been calibrated with municipalenergy statistics and environmental data for 1995.Trends since 1995 have been used to calibrate themodel for the year 2000.

Costs for emission reduction (in Yuan/t emis-sion reduction) are only one dimension in theselection of policy strategies. The potential effec-tiveness of emission reduction (in kt emissionreduction for the whole city) is another importantparameter. For example, it is comparatively cheapto use low-NOx burners, but these burners achievea maximum emission reduction of 4050%. If80% emission reduction is aimed for, this measureis not adequate. Other measures (e.g. selectivecatalytic reduction SCR) that can achieve an 80%emission reduction result in higher average costsfor emission reduction. Both dimensions are con-sidered in the MARKAL optimisation.

Certain measures reduce different kinds ofemissions simultaneously. For example, if naturalgas is introduced as a substitute for coal, CO2,NOx and SO2 emissions are reduced at the sametime. The actual benefit for each emission typedepends on the emission targets per emission cate-gory or it depends on the damage per (marginal)tonne of emission. Only an aggregated compari-son of costs and benefits is sensible in such a case.In MARKAL terms, the benefits are accountedfor on the basis of the marginal emission reduc-tion costs. The characteristics of the emissionmitigation options have been taken from litera-ture (e.g. Halkos, 1995; Dings, 1996; Arai, 1997).

3. Policy plans and policy simulations

3.1. Shanghai energy policies

Shanghai municipality has recently drafted aplan for sustainable development, including en-ergy and environmental policies (Shanghai Mu-nicipality, 1999). The total coal consumption will

5 Note that a lower discount rate is not necessarily beneficialfrom an environmental point of view. For example, the com-petitiveness of coal-fired power plants increases versus gas-fired power plants in case of lower discount rates because theinvestment costs for gas-fired power plants are significantlylower. However, the environmental impacts of coal-firedpower plants are much more serious. On the other hand, alower discount rate increases the relevance of future damagecaused by GHG emissions, which would be an argument infavour of natural gas. However, the estimation of such long-term effects is a formidable problem beyond the scope of thisstudy. Instead GHG emissions are valued based on previousstudies, (see Section 3.2). The uncertainty regarding the extentof future damage caused by GHG emissions is probably muchhigher than the uncertainty regarding the discount rate.


Table 2Characterisation of the model database

SourcesSector Technologies/sectors

Power plants Coal, Gas, co-generation (CHP), hydro import (3 gorges dam), nuclear, Interviews with local experts,renewables

(Chandler et al., 1998),(Logan and Luo, 1999),(Torrens and Stenzel, 1997),(Perrels and Lako, 1998)

Industry Steel, petrochemicals, other boilers, other motors, pumping, office Interviews with local experts,equipment, lighting

(Daniels and Moll, 1997),(Groenendaal and Gielen, 1999),(Beijing Energy Efficiency Center,1995),(IIEC, 1999),(Yang et al., 1996),(Zhou et al., 1997)

Transportation Passenger cars, trucks, scooters, others Interviews with local experts,(Cannon, 1998),(Dempsey, 1999),(Environmental ResourcesManagement, 1998),(Malakoff, 1999),(Mao et al., 1999),(Tang, 1999)(Chen, 1999),Residential Air conditioners, lighting, refrigerators, cooking, others(Kaita, 1998),(Liu, 1993),(Liu et al., 1996),(Min et al., 1997)(Ybema et al., 1995)

be kept below 50 Mt by 2005 and 4850 Mt by2010. As a consequence, the proportion of coal inprimary energy will drop to less than 55%. Nonew power plants will be built in the urban area,gradually switching to power imports. The totalcapacity of coal-fired power plants in the munici-pality will not exceed 12 GW.6 Shanghai hassecured 3 GW electricity imports from the ThreeGorges Dam and the nuclear plant at Qinshan.The share of natural gas in primary energy con-sumption will reach 1012% by 2010 as a resultof liquefied natural gas (LNG) imports and somegas import from the East China Sea. This gas willsubstitute for residential and commercial coal gasuse. The construction of new coal-fired boilers in

areas inside the Inner Ring will be prohibited. Asa matter of principle, no more coal-fired boilerswill be built in city-level industrial developmentzones (Shanghai Municipality, 1999).

In order to improve energy efficiency, boilers,kilns and furnaces will be renovated. Co-genera-tion will be promoted in areas where annual loadreaches 4000 h. Gas air-conditioners, solar boilersand passive solar energy will be promoted. Ratio-nal energy use will be promoted in general.

Beside energy policies, demographic policiesand transportation policies must also be consid-ered. For example, the number of registered resi-dents will be controlled at 15.5 million in 2005and 16 million in 2010. At the same time, themigrant population increases from 2.37 million in1997 to 3.54 million in 2010. These growth6 The current level is approximately 7 GW.


Table 3Characterisation of model cases

Cost effectiveAcronymModel run Constraint maximum 50 CO2 reductionSO2, NOx emissionincentiveconstraintMt coal/yearefficiency/fuel switch

Base case XBCEPEnergy policy X XLEP X XLocal X

environmentalpolicy

SP XSustainability X X Xpolicy

figures are important because they will also affectthe demand for energy services, energy use andthe related emissions.

Shanghai environmental policy has decided tolimit SO2 emission to 450 kt/year in 2005 and to420 kt/year in 2010 (Shanghai EnvironmentalProtection Bureau, 1998). Shanghai does not yethave NOx emission control policies.

3.2. Policy simulations

Four cases have been compared (see Table 3).The policy ambitions increase from top to bottomin Table 3. In the base case (BC), cost-effectiveefficiency improvements and cost-effective fuelswitches are introduced.

In the energy policy case (EP), the coal use islimited to 50 Mt/year (1050 PJ/year) for the wholeperiod beside the cost-effective measures. In thecase of SO2 and NOx policies (LEP), SO2 emis-sions are limited to 250 kt/year from 2005 onward(a reduction by more than 50%). NOx emissionsare reduced to 250 kt in 2005 (a reduction by3540%) and decrease further to 200 kt/year inthe next two decades. These local air pollutionpolicies are added to the energy policies. Notethat the constraints exceed current policy targetswith regard to local air pollution reduction. Moreambitious targets have been analysed because thecurrent emission levels are very high and thefringe benefits become clearer in case of an ambi-tious target (in other words, they are a reflectionof significant external effects).

In the sustainability policy case (SP), a CO2emission reduction incentive of 100 Yuan/t CO2

(approx. 12.5 EURO/t) is added from 2005 on-ward (based on Weyant and Hill, 1999; Criqui etal., 2000; Sijm et al., 2000). This incentive repre-sents the value of GHG emission reduction in aglobal market. For example, such a value repre-sents a realistic subsidy paid by foreign countriesin the framework of the clean development mech-anism (CDM).

4. Results

A selection has been made from the modelresults, focusing on three levels: Energy use and emission trends for the whole

city of Shanghai, 19952020. The impact of policies on the sector emissions,

2020. The impact of policies on technology selection,

focusing on electricity supply.These three levels will be discussed separately in

Sections 4.1, 4.2 and 4.3. The latter two levelsillustrate the mechanisms that drive the trends forthe whole city, which are discussed in Section 4.1.

4.1. Energy use and emission trends for the wholecity of Shanghai

Table 4 shows the results of energy use andemissions of CO2, SO2 and NOx for the fourpolicy cases for the years 1995, 2010 and 2020.Based on these data, two indexes have been calcu-lated, which are also shown. The first one is thetrend for 2010 and 2020, compared to 1995 levels(1995=1.00). Energy use and emissions for indi-


Table 4Energy use and emission trends in the four policy cases, 19952020

2010/1995 Case/BC 2020Case 2020/1995Unit 1995 2010 2020

1.68 1.87 1.00BC Energy (PJ/year) 962 1615 18001.56CO2 (Mt/year) 133 196 208 1.47 1.001.28SO2 1.00(kt/year) 1.11524 581 672

1.67 1.69 1.00NOx (kt/year) 280 467 4751.74EP Energy (PJ/year) 962 1559 1678 1.62 0.931.33CO2 0.85(Mt/year) 1.39133 185 177

1.01 1.03SO2 0.80(kt/year) 524 529 5391.50NOx (kt/year) 280 453 421 1.62 0.891.73LEP Energy 0.93(PJ/year) 1.56962 1496 16691.36CO2 (Mt/year) 133 169 181 0.871.270.48SO2 (kt/year) 524 250 250 0.48 0.370.81NOx 0.48(kt/year) 0.88280 247 228

1.48 1.68SP Energy 0.90(PJ/year) 962 1420 16151.20CO2 (Mt/year) 133 130 159 0.98 0.760.48SO2 0.37(kt/year) 0.48524 250 250

0.48NOx (kt/year) 280 247 229 0.88 0.82

vidual policy cases show different trends. Thesecond index compares energy use and emissionsin the policy cases in 2020 with energy use andemissions in the base case (BC=1.00). This indexshows the impact of policies in 2020 compared toautonomous trends.

BC shows almost a doubling of energy usebetween 1995 and 2020. This base case includes asignificant cost-effective increase in energy effi-ciency throughout the energy system. Emissionsincrease at a much lower pace than energy use.CO2 emissions increase by 56%, SO2 emissionsincrease by 28% and NOx emissions increase by69%. The divergence between energy use and CO2emissions (31% in 25 years) is caused by a partialswitch from coal to gas and oil and increasedimport of electricity. This switch is caused bystructural change (a larger than average growth inthe transportation sector), policies (no new coal-fired boilers in industry) and market mechanisms(substitution of town gas by cheaper natural gas).The total impact of energy efficiency improve-ments amounts to an emission reduction of up to20 Mt CO2.7 This 10% reduction shows that the

relevance of no-regret options is limited becauseShanghai has improved its energy efficiency sig-nificantly in recent years. The SO2 emissiontrends are closely related to trends in coal use,while the NOx emission growth is closely relatedto trends in the transportation sector (see alsoSection 4.2).

EP shows a 15% decline of CO2 emissionscompared to the BC in 2020. Total energy use isreduced by 7%. Due to the maximum constrainton coal use, more gas is introduced. Gas useefficiency is generally higher than coal use effi-ciency. Moreover, the remaining coal is used withgreater efficiency due to introduction of new tech-nology. The reduction of CO2 emissions indicatesthe important contribution of local energy policiesto long-term GHG emission reduction. SO2 emis-sions are virtually stabilised at 1995 levels, whileNOx levels increase by 50% compared to 1995levels.

LEP shows a strong decline of CO2 emissions in2010 compared to EP. However, this effect hasdisappeared in 2020. Given the inherently moreenvironment-friendly character of new technol-ogy, the long-term impact of local air pollutionpolicies on GHG emissions is negligible. The tech-nological change is discussed in more detail inSection 4.2.

7 Estimated on the basis of energy efficiency difference be-tween existing technology and new technology introducedbefore 2020 in the model database.


SP shows a decline of CO2 emissions by 23% in2010 and 17% in 2020 compared to LEP. Theemission reduction is substantial in both years,but the larger emission reduction in 2010 showsthat some of the GHG policies accelerate theintroduction of new technologies which wouldhave been introduced by market forces anyway,but at a later stage. This is an important issue tobe addressed when the GHG benefits of CDMprojects are estimated. A long time horizon isrequired in order to prevent an overestimation ofemission reduction benefits. The impact on localair pollution levels is negligible compared to LEP.This suggests that a GHG policy on top of anambitious policy focusing on local air pollutantsoffers no additional benefits to local air pollutionlevels.

A comparison of costs and benefits of the pol-icy scenarios is provided in Table 5. The costsrefer to the annualised system costs in 2020. Thebenefits have been split into CO2 reductions andother emissions. The reason for this split is adifferent valuation method. The global estimatesof CO2 emission reduction benefits vary widely.The value of emission reduction credits in a CDMsystem (100 Yuan/t, see Section 3.2) has beenused as an approximation. SO2 reduction andNOx reduction have been valued on the basis ofestimates for Shanghai from a study of the WorldBank (1997) and estimates of WRI (1999) at avalue of 5000 Yuan/t emission reduction. Theemission reductions can be derived from Table 4.The resulting benefits minus costs suggest in allpolicy cases a significant increase of welfare.However, many caveats must be added. The mostimportant is probably that the bulk of the benefitswill arise for other individuals than those thathave to bear the costs. Also the value of benefits

is subject to substantial uncertainty (at least oneorder of magnitude). However, given the veryconsiderable difference between costs andbenefits, this suggests that ambitious environmen-tal policies make sense in the case of Shanghai.

In conclusion, current energy policy plans willhave important environmental benefits on a locallevel and even on a global level. The technologieswith multiple benefits are more costly than themeasures with only local emission benefits. As aconsequence, the international community shouldpay for the cost difference if they want additionalGHG benefits. This will have important conse-quences for the optimal investment strategy. Forexample, in the electricity sector LEP results inthe selection of coal gasification, while gas-firedpower plants are optimal in the SP case (seebelow). A switch from one technology to theother implies complete replacement of costly capi-tal goods. As a consequence, timely participationis recommended in order to prevent a sub-optimaltechnological lock in. In case such a lock inoccurs, the costs of additional CO2 policies will besignificantly higher because, for example, newcoal-fired power plants cannot switch to gas. As aconsequence such plants would have to closedown before the end of their technical life and bereplaced by gas-fired power plants, resulting insignificantly higher costs. The costs will be inexcess of the added costs for LEP and SP. In fact,such a scenario could make the CO2 reductionsuneconomical. Especially if the additional trans-action costs of CDM are considered, which arenot accounted for in the model, such a situation isnot unlikely. Timely participation is essential inorder to achieve maximum environmental benefitsat minimum costs.

Table 5Comparison of emission reduction costs and emission reduction benefits, 2020

Case Benefits CO2 red. (MY/year) Benefits SO2/NOx red. (MY/year) Benefits-costs (MY/year)Costs (MY/year)

39353100100 935EP700 5345LEP 33452700

4900 33401700 6540SP


Fig. 2. The impact of policies on the sector CO2 emissions, 2020.

4.2. Impacts on sector emissions

The preceding analysis focused on the aggre-gated energy system level. The following discus-sion will focus on the changes at sector level andat process level. The CO2, SO2 and NOx emissiontrends for the four policy cases are elaborated inFigs. 13. Each figure shows the sector emissionsin 1995 and the emissions in 2020 for increasinglyambitious policy targets.

Fig. 2 shows the results for CO2. BC emissionsincrease in all sectors compared to 1995 levels.Industry remains the most significant emissionsource. The emission reduction in the policy casesis mainly achieved in industry and in electricityproduction.

Fig. 3 shows the results for SO2. The mainincrease in BC emissions, compared to 1995 lev-els, occurs in electricity production, representingover 60% of all emissions. Major emission reduc-tion is also achieved in electricity production incase environmental policies are introduced. Emis-sions in electricity production are reduced bymore than 90% in the LEP case due to introduc-tion of desulphurisation technology. Fig. 5 belowshows the changes that take place in electricityproduction. IGCC is introduced as a substitutefor the supercritical steam cycle and the ultra-su-percritical steam cycle. Small-scale industrial nat-ural gas combined heat and power (CHP) systemssubstitute for natural gas based combined cycles.

Fig. 4 shows the results for NOx. Compared to1995 levels, emissions in BC increase mainly in thetransportation sector and they increase to a lesserextent in electricity production. In the EP casesome emission reduction is achieved in electricityproduction. However, the most important emis-sion reduction occurs in the LEP case. The bulkof NOx emission reduction is achieved in thetransportation sector and in power production(see Fig. 3). New technologies include a 3-waycatalyst for gasoline vehicles, hybrid cars andIGCC power plants. The introduction of addi-tional CHP systems increases the efficiency of coaluse, which reduces the demand for coal-fired in-dustrial boilers. Yet 90% of the emission reduc-tion is accounted for by the introduction ofIGCC.

4.3. Impacts on technology selection in electricitysupply

The results in Section 4.2 have shown the im-portance of developments in the electricity sectorfor future emissions. The results for power pro-duction are elaborated in more detail in this sec-tion. Fig. 5 shows the electricity production forthe four cases in 1995 and in 2020.

The results show that electricity production hasmore than doubled between 1995 and 2020. In theBC this increase is accounted for by high effi-ciency coal-fired power plants and by coal-fired


co-generation of electricity and heat CHP forindustry. Electricity from nuclear and hydrosources is imported. In the EP case gas andimports increase at the expense of coal. In caselocal air pollution policies are added (LEP), thencoal gasification is introduced. Natural gas, im-ports and some renewables increase further in theSP case at the expense of coal.

5. Conclusions and outlook

Because of the strong economic growth and theheavy reliance on coal, CO2 emissions in Shanghaiare predicted to increase by 47% in 2010 and by56% in 2020 in the base case without policytargets. This base case includes cost-effective in-creases in energy efficiency in the whole energysystem and introduction of natural gas in theresidential sector as a substitute for town gas. Thetotal impact of efficiency improvements amountsup to 20 Mt CO2 emissions. This 10% reductionof CO2 emissions shows that the relevance ofno-regret options is limited because Shanghai hasalready improved its energy efficiency significantlyin recent years. This result conflicts with previousstudies such as (Liu, 1993; WRI, 1997) that iden-tified a significant potential for no-regret emissionmitigation in China. However, investments in thelast decade have largely been based on compara-tively efficient technology. Old efficiency figures

do not apply to this new equipment. On the otherhand, Shanghai is probably not representative forthe whole of China. The main emission mitigationpotential may be located in the rural areas whereenergy efficiency policies are less developed andthe investments in new capital equipment are at amuch lower level.

Due to energy policies and local air pollutionreduction policies, CO2 emissions will decrease byup to 24% in 2020 compared to base case emis-sion levels. This figure shows the important con-tribution of other Chinese policies to GHGemission reduction, a fact that has received littleattention as yet in global emission reduction pol-icy making. Local air pollution reduction canaccelerate the introduction of GHG emission re-duction to 2010. However, given the inherentlymore environment-friendly character of new tech-nology, its long-term impact on CO2 emissionreduction will be limited after 2010. This is animportant result to be considered in the discussionof secondary benefits of GHG policies. The re-sults suggest that dedicated emission mitigationtechnology (without or with limited GHGbenefits) is a more cost-effective way to reducelocal air pollution. Examples are 3-way catalystsfor cars and IGCC for electricity production.Such technologies should be considered if sec-ondary benefits are valued (a marginal costingprinciple).

Fig. 3. The impact of policies on the sector SO2 emissions, 2020.


Fig. 4. The impact of policies on the sector NOx emissions, 2020.

An additional incentive of 100 Yuan/t CO2results in an additional emission reduction of 11%(22 Mt CO2). This incentive is well in the range ofpredictions for emission permit prices in case of aglobal GHG permit market. This opens up aprospect for international co-operation, e.g. basedon CDM mechanisms.

In conclusion, the total potential for GHGemission reduction in 2010 amounts to 66 Mt andto 49 Mt in 2020 compared to base case levelswithout policies. These quantities are very signifi-cant. The Netherlands, for example, has a policytarget in the framework of the Kyoto commit-ment for 20082012 of 25 Mt GHG emissionreduction abroad. This entire emission reductioncould be achieved in co-operation with one singleChinese city. Still, a proper definition of a refer-ence scenario for emission reduction is crucial inorder to prevent any free rider effects, resulting insub-optimal allocation of GHG reduction funds.For example, the environmental policies that havebeen formulated will also reduce CO2 emissionssignificantly. In case these CO2 reductions arelabelled as CDM projects, the actual environmen-tal benefits of CDM are, in fact, negligible. Giventhe phenomenal growth of the Chinese economy,and emission levels in Shanghai that are ap-proaching levels in industrialised countries, itseems reasonable that some of the financial bur-dens are borne by the Chinese side. It is recom-mended that the LEP policy case be used as

reference level, thus still leaving a CDM potentialof 39 Mt CO2 emission reduction in 2010 and 22Mt emission reduction in 2020.

The costs of the local air pollution policies arelimited. As a consequence, financing such policiesis an issue of secondary importance. Where con-ventional technologies such as 3-way catalysts areconcerned, regulation may suffice (i.e. the polluterpays principle). In case of investments in newinnovative technologies such as gasification, thereis still a substantial risk that technological prob-

Fig. 5. Electricity supply structure, 2020 (SCSC, supercriticalsteam cycle; USCSC, ultra-supercritical steam cycle; IGCC,integrated gasifier and combined cycle; CHP, combined heatand power generation).


lems will occur. This may deter private financingof such projects. Given that the scope of suchtechnological breakthroughs extends to the wholeof China, and to other countries, it is recom-mended that the Chinese national government orthe World Bank assist in the financing of suchprojects.

Of course, the modelling study is subject tomany inherent uncertainties; the rate of economicgrowth and demographic change; the assumptionsregarding structural economic change and Chi-nese technology characterisation all affect the re-sult to some extent. The building of the liquefiednatural gas terminal in Shanghai is still in thefeasibility study stage (Ma, 2000). On the otherhand, a pipeline is being considered that willprovide gas from Xinjiang (Oil and Gas Journal,2000). The future of both projects will determinegas availability.

The study results are based on a cost optimisa-tion model with rational decision-making, an ob-vious abstraction from decision making in thecomplex real world. Important pollutants such asparticulate matter have not been considered in theanalysis. In the next stage of the project, theseaspects will be considered in more detail in orderto refine the model. The study will be finalised inthe summer of 2001.

Another issue within this study is the relevanceof these results for other Chinese cities and for theChinese national level. More case studies areplanned in the framework of the EU three citiesproject, where similar MARKAL models are be-ing developed for Tianjin and Chongqing (Jansen,2000). A similar MARKAL model is currentlybeing developed for Beijing (Lu, 2000). The re-sults from these additional case studies will showwhether Shanghai is representative for the otherChinese cities. The additional results are expectedin the summer of 2001.

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