A system allowing companies to trade water-pollution permits will be tested around Taihu Lake, China's third-largest lake, from next year.

The Ministry of Finance and State Environmental Protection Administration (SEPA) recently decided to allow the Jiangsu provincial government to carry out a pilot trading system among factories around the Taihu Lake, which provides drinking water to 30 million Chinese people.

Under the system, which will function as a cap-and-trade program, the government will sell the permits to enterprises, which will be allowed to trade among themselves when they need additional discharge permits.

Trading prices will be nearly twice the waste treatment cost, according to a plan drawn up by the provincial environmental protection department.

The discharge permits of chemical oxygen demand (COD), a key measure of pollution, will be the first to be traded in 2008, and the scheme will be expanded to ammonia, nitrogen and phosphorus in 2009, the plan says.

Serious water pollution by paper mills and petrochemical plants caused an algae outbreak at the end of May, which rendered tap water undrinkable for about 10 days for more than 1 million residents in Wuxi, a city in Jiangsu Province.

The new system, with prices set by the market, would force enterprises to conserve their limited emission permits and reduce waste discharge more effectively, said an official with the provincial environment watchdog.

"The cost you pay should equal the environmental resources you use or destroy. The system reflects the idea very well," the official said.

Earlier reports said that chemical plants around Taihu Lake would be charged 10.5 yuan (US$1.4) per kilogram of COD. Prices of COD per kg for dyeing, paper-making and brewing factories were set at 5.2 yuan, 1.8 yuan and 2.3 yuan, respectively.

These costs are expected to force more than 1,000 small chemical plants to close. Currently, polluting factories only need to pay about 1 yuan for waste treatment by special plants.

(Xinhua News Agency December 27, 2007)