Page 1 CHINA: BAOTOU STEEL ENERGY EFFICIENCY CDM PROJECT ENVIRONMENTAL SAFEGUARD DUE DILIGENCE REPORT Background 1. China’s iron and steel industry challenges China’s efforts aimed at reducing the energy intensity of its economy and minimizing local and global environmental impacts. China became the world largest iron and steel producer in 1996 and it is growing at an extraordinary rapid rate. In the past five years, China’s raw steel production growth surged to over 20 percent annually to reach 350 million tons in 2005, about 31 percent of the world total production 1 . The iron and steel industry is one of the most energy- intensive sectors and the largest GHG emitters in the country. It consumes over 15 percent of China’s total primary energy and contributes over 10% to China’s GHG emissions. GHG emissions from iron and steel production almost doubled from around 395 million ton of CO 2e in 2000 to around 800 million tons of CO 2e 2 in 2005. 2. The energy efficiency of China’s iron and steel industry is around 20 percent lower than that of the most advanced countries. There are many technologies available in the global market to improve energy efficiency in the iron and steel industry. Coke dry quenching (CDQ) and dry type large blast furnace top gas recovery turbine (dry-type TRT) technologies are two of them (see Box 1). Due to various barriers, their penetration rates in China are still low. 3. The Baotou Iron and Steel Group Company (BISCO) located in Inner Mongolia of China produces about 7.5 millions of tons of steel products and ranks the tenth among steel producers in China. It initiated during the last years a modernization/renovation program to contribute to the country’s energy efficiency and environmental improvement efforts. Under this program, it is introducing CDQ and TRT (discussed below) technologies for waste energy recovery and pollution control. The renovation is financed from the companies’ own resources. The World Bank’s role is limited to purchasing partial or full emission reduction (ER) assets created by the proposed technologies. The Project 4. As a trustee of the Danish Carbon Fund, the World Bank intends to purchase certified emission reductions (CERs) resulting from BISCO’s adoption of coke dry quenching (CDQ) and dry-type top Gas recovery turbine (dry-type TRT) . The two technologies are concisely described in Box 1. BISCO’s energy efficiency and environmental improvement endeavor includes two major components: 1 International Iron and Steel Institute 2007-- www.worldsteel.org 2 Assuming a carbon intensity of 2.3 ton CO 2 e/ton raw steel production based on the analysis in “China Sustainable Energy Scenarios in 2020” – Energy Research Institute of China, 2003 SR11 Page 2 Box 1: Technology Description Coke Dry Quenching (CDQ) The CDQ process utilizes pure nitrogen gas to quench newly formed coke in a quasi- sealed quench chamber. The heated nitrogen is then circulated to a heat recovery boiler that raises steam to drive a turbine generator. Conv entional coke wet quenching (CWQ) is done in a virtually open system with water. There is no heat/energy recovery and substantial air pollution is incurred as the cooling water sprayed onto the coke instantly vaporizes to steam and entrains particulates and a variety of other pollutants (VOCs, H 2 S, phenols, etc.) formed as by- products of the coking process. The CDQ nitrogen quench cycle proceeds as follows: newly formed red- hot coke is pushed from the oven in the same manner as with CWQ. However, the coke now drops into a circular bucket shaped container with capacity for the full oven charge. The bucket filled with hot coke then moves on rail track to position adjacent to the nitrogen quench tower. The bucket is lifted mechanically to the top of the quenc h tower and then laterally until it is positioned over the tower inlet port. At this point, a cover is lowered over the top of the bucket and the bucket bottom opens, releasing the hot coke into the nitrogen quench tower. When the charge is completed, the empty bucket is moved back laterally to the lift position and is lowered to the rail track to receive a fresh charge of hot coke. Since there is direct contact between the hot coke and the nitrogen quench gas, any residual dust, VOCs etc. are transferred to the nitrogen quench gas. Build- up of these pollutants is controlled in three ways: (a) some nitrogen quench gas is purged during the charging of the hot coke at the top of the quench tower and the discharging of the cooled coke at the bottom of the to wer, (b) introduction of small amounts of air into the nitrogen recirculation system oxidizes any residual VOCs and (c) bag house dust collectors removes over 99.9 per cent of the dust in the nitrogen recirculation system. The hot nitrogen gas is then sent to a waste heat recovery boiler, generating high pressure steam to drive a turbine and consequently generate electricity. The system is far superior to the wet quench systems utilizing water spray where air pollutants are released in a completely uncontr olled manner. So in addition to the energy recovery benefits, there are unquestionable environmental benefits as well. The discharges of dust during the coke charging/discharging processes were the only environmental issue, and these emissions are far less than the releases associated with CWQ. Dry Type Top Gas Recovery Turbine (dry-type TRT) In this process, the higher pressure gas exiting from the top of the blast furnace is sent through a turbine to drive a generator and convert the excess pressure (~1.6 kg/cm 2 ) into usable electrical energy. Prior to introducing the gas to the turbine system, the gas stream, which contains between 25-30 grams/Nm 3 of dust, must be cleansed to protect the turbine system. There are two systems available for dust removal, wet or dry. For both systems, the first two stages of dust removal are equivalent, consisting of a settling chamber to remove larger particulates, and a cyclone separator, to remove successively smaller particulates. In the wet system, the gas exiting th e cyclone separator is fed to a Page 3 · Installation of CDQ in six coke ovens: Before the implementation of renovation and modernization program, BISCO had seven coke ovens numbered 1 to 7. The restructuring consisted of: (i) replacement of coke ovens number 1 to 4 by two new coke ovens with sixty 7.63 m deep holes; the new ovens were numbered 9 and 10; and (ii) rehabilitation of coke oven number 5, 6, 7 and 8 each with fifty 6 m deep 50 holes; and (iii) construction of three CDQ sets (one set for two ovens): the first for new number 5 and 6 ovens is in operation since November 2006, the second for ovens number 7 and 8 is in operation since December 2006, and the third for ovens number 9 and 10 is under construction and planned to be commissioned in October 2007. The first two sets of CDQ replaced coke wet- quenching(CWQ) sets used in BI SCO’s existing four coke ovens (No.5 to 8) and the third will be used for ovens number 9 and 10 which are under construction and planned to be commissioned in October 2007. The electricity generated from captured heat waste from these changes will replace coal based power generation purchased from the Inner Mongolia Grid. · Installation of dry-soot removing in six TRT sets: The existing five blast furnaces (BF) in BISCO are numbered: 1 with a capacity of 2200 m 3 , 2 with a capacity of 1800 m 3 , 3 with a capacity of 2200 m 3 , 4 with a capacity of 2200 m 3 and 5 with a capacity of 1500 m 3 . This component includes installation of five sets of dry-soot removing facilities on five blast furnaces feeding gas to existing TRT stations and a sixth dry-soot removing facility on a blast furnace that is to be commissioned in October 2007 and equipped with a new TRT station. The component would increase electricity generation from blast furnace top gas by around 155 GWh per year. The TRT systems for Furnaces 1 to 5 are all in operation. Dry dust collection systems have been installed for the TRT units in Furnaces 4 and 5, and dry systems are in the process of being installed in Furnaces 1, 2, and 3. Furnace 6 and the associated TRT system are under construction. The latter TRT unit is designed to utilize the dry dust collection system. The project has been assigned an environmental category B. Both the CDQ and dry-type TRT offer environmental benefits. The CDQ system offers both energy conservation advantages in addition to substantial reductions in air and water pollution from a very significant source of toxic pollutants (coke quenching). The dry dust collection scheme offers a small environmental advantage of reduced dust emissions that are already at very low levels, but significant energy conservation opportunities. Furthermore, installation of both CDQ and TRT also will replace electricity generated by coal fired power plants and thereby further reducing pollutant emissions. The project will not induce any land acquisition or relocation of population and would improve the workers’ well beings because of the expected dramatic reduction in emissions of particulates, SO 2 and NO x . Environmental Due Diligence 5. Environmental due diligence has been carried out to confirm compliance with relevant Chinese environmental laws and regulations. It was conducted in three steps: (a) Page 4 review of the environmental process related to the adoption of the CDQ and dry-type TRT technologies; (b) review of BISCO’s past environmental and operational practices; and (c) review of BISCO’s environmental management (including a meeting with local environmental officials). Finally, corrective measures have been defined to address the issues identified during the due diligence. Environmental Process Related to CDQ and Dry-type TRT 6. Overall, the Chinese environmental approval process relating to the adoption of the two envisaged technologies requires three phases as presented in table 1: (a) in the first phase, EA approvals are required prior to construction; (b) in the second phase, measurement and investigation are conducted by the agency which approved the EA after four months of steady operation after the “shakedown period”; and (c) a permit for pollution release is required from the Baotuo Environmental Protection Bureau (EPB). Table 1: Summary Status of Environmental Assessment for the Baotou CDQ Systems Coke Oven Number EA Documentation Requirement EA Approving Agency EA Approval Date CDQ Construction Start Date CDQ Operational Status 5 EA Table Baotuo EPB December 2004 June 2005 “Shakedown” completed April 2007 6 EA Table Baotuo EPB December 2004 June 2005 “Shakedown” completed April 2007 7 EA Report a Inner Mongolia EPB August 2006 October 2005 “Shakedown” completed May 2007 8 EA Report a Inner Mongolia EPB August 2006 October 2005 “Shakedown” completed May 2007 9 Section of EA b Report which addresses overall company Structural Adjustment program SEPA 1 . EA Outline Approved by SEPA in Aug 2005 2 . EA Report Submitted Dec 2006 3 . SEPA’s approval for overall company structural adjustment program was issued on June 18 2007 3 July 2006 Under Construction Page 5 10 Section of EA b Report which addresses overall company Structural Adjustment p rogram SEPA 1 . EA Outline Approved by SEPA in August 2005 2 . EA Report S ubmitted Dec 2006 3 . SEPA ’s approval for structural adjustment program was issued on June 18 2007 July 2006 Under Construction a EA Report and Inner Mongolia EPB approval required because the project includes both the CDQ and the coke oven construction b EA Report and SEPA approval required because the project is an element of an overall structural adjustment program instituted by the iron and steel mill and the EA Report addresses the overall program 7. CDQ : All the CDQ sets are also included in the EIA report submitted for approval by SEPA in Nov 2006. Environmental assessment steps and approvals of the CDQ systems are presented in Table 2 above. The table shows that construction of the CDQ systems for coke ovens 7 and 8 started before securing approval of the EA report. Also, construction of the CDQ systems for coke ovens 9 and 10 has been initiated with no approval of the EA report. BISCO clarified that they interpreted the approval of their structural adjustment program was enough to initiate the construction work. However , SEPA has in the latter case requested BISCO to stop further construction during their EIA review process which started in early 2007 and BISCO complied with SEPA’s request. 8. The measurement and investigation, to be conducted by the agency which approved the EA after four months of steady operation after the “shakedown period, would be required around September 2007 for ovens 5 and 6, and October 2007 for ovens 7 and 8. For ovens 9 and 10, it is too early in the schedule to provide firm dates. The allowable emission levels have not yet been established by the Baotuo EPB (see discussion in paragraph 23 below). 9. Dry-type TRT : An EIA report, approved by SEPA in June, 2007 for an overall Structural Adjustment program of BISCO, includes the replacement of wet type dust removal from gas released by BFs number 1, 2, 3, and 5 by dry type dust removal, as well as construction of a new 2500 m 3 BF with a dry type TRT. · For Furnaces 1, 2, 3, and 4 there were no EA requirements specifically for the TRT systems. However, application for a special energy efficiency loan from the Chinese government required some form of EA. Thus EA Tables were prepared for these four TRT projects utilizing the wet system for dust collection. · For Furnace 5, an EA Report was required because the TRT was part of an overall project which included both the TRT and the blast furnace itself. The EA Report Page 6 for Furnace 5 and the dry type TRT was approved by the Inner Mongolia EPB on Dec 20, 2004 and construction started at about the same time. · Furnace 6 and the TRT is part of the EA for the overall Structural Adjustment program EA as described earlier. 10. All TRT systems for Furnaces 1-5 are currently operational. Dry dust collection systems related to furnaces 4 and 5 have been installed for the TRT units in Furnaces 4 and 5, and dry systems related to furnaces 1, 2 and 3 are under construction. Furnace 6 and associated dry dust collection system and TRT are under construction. This TRT unit is designed to utilize the dry dust collection system. As mentioned before the construction was started before the approval of EA. SEPA requested BISCO to stop construction until the EIA review is completed and the formal approval issued and BISCO complied. 11. There are no special Chinese EA requirements for the conversion of the TRT dust collection system from the wet type to the dry type. No other environmental licenses, permits etc. are required, and there were no specific environmental emission standards for TRT operation. Although there are no specific Chinese standards, dust emission levels currently experienced with the dry systems (~ 1 mg/Nm 3 ) are extremely low. Review of BISCO’s Environmental Practices 12. Coke Oven-Environmental Assessment : EA characteristics for coke ovens 5, 6, 7, 8, 9 and 10 associated with the CDQ systems are presented in the following table 2: Table 2: EA for Coke Ovens Coke Oven Number EA Requirement Approval Authority Approval Date Construction Start Date 5 EA Report a SEPA 1999 2000 (Estimated) 6 EA Report a SEPA 1999 2000 (Estimated) 7 EA Report (included CDQ) b Inner Mongolia EPB August 2006 March 2004 8 EA Report (included CDQ) b Inner Mongolia EPB August 2006 February 2005 9 Section of EA Report which addresses overall company Structural Adjustment program SEPA EA Outline Approved by SEPA in August 2005 EA Report Submitted December 2006 EIA approval from SEPA was issued in June 18, 2007 March 2006 Page 7 10 Section of EA Report which addresses overall company Structural A djustment program SEPA EA Outline Approved by SEPA in August 2005 E A Report Submitted December 2006 EIA approval from SEPA was issued in June 18, 2007 March 2006 a One EA report was prepared for both coke ovens 5 and 6 b One EA report was prepared for both coke ovens 7 and 8 As can be seen from the Table, construction for coke ovens 7, 8, 9, and 10 all started prior to receiving EA approvals. However, all EA approvals have now been secured and BISCO stressed that it initiated construction only after clarification meetings with Inner Mongolia EPB during which the measures presented in its EIAs were recognized as compliant with Chinese environmental regulations. Formal processing took some times longer than expected. 13. Coke Oven-Environmental Performance : Coke oven wastewaters are first pretreated separately and then combined with the overall plant sewage treatment system. Although the pretreated wastewaters do not meet the Chinese discharge standards, it is not critical, since this effluent is not discharged. Wastewater monitoring is done three times per month at the company level and the effluent from the main treatment plant was always found to be in compliance with the Chinese discharge standards. Baotou EPB also monitors the effluent monthly, and the company has never received any penalties or fines for wastewater discharges exceeding standards. Although there are Chinese air emission standards for coke ovens, emission measurements are not made by the company. Baotuo EPB performs ambient monitoring annually. Again, the company has never received any penalties or fines for any air pollution violations. 14. Blast Furnace-Environmental Assessment : EA characteristics for blast furnaces 1, 2, 3, 4, 5 and 6 associated with the TRT systems are presented in the following table 3: Table 3: EA for Blast Furnaces Furnace EA Approval Approval Construction Page 8 Number Requirement Authority Date Start Date 1 EA Report a SEPA 1999 1959 2 EA Report a SEPA 1999 1960’s 3 EA Report a SEPA 1999 1960’s 4 EA Report a SEPA 1999 1995 5 EA Report Inner Mongolia EPB August 2004 August 2004 6 Section of EA Report which addresses overall company Structural Adjustment program SEPA EA Outline Approved by SEPA in August 2005 EA Report Submitted December 2006 EIA approval from SEPA was issued in June 18,2007 May or June 2006 a One EA report was prepared for furnaces 1-4 as part of an overall plant-wide EA report which was approved by SEPA in 1999. Construction of furnaces 1, 2, and 3 predated the Chinese EA regulations, so the EA that was prepared was part of the new government requirement for retrospective EAs on all industrial processes . Only blast furnace 6 started construction without an approved EA report. However, that approval is now in place. 15. Blast Furnace-Environmental Performance : The conversion of all TRT units to dry dust collection systems will dramatically reduce water use and therefore waterwaste entailing significant environmental improvement. As mentioned earlier the air emission standards for the blast furnace top gas is in full compliance with dust emission standards. There are separate Chinese dust emission standards for the section of the blast furnace where the molten pig iron is discharged and the furnaces have all met these standards. There are no special environmental permits, licenses, etc. required, and the company has never received any environmental fines or penalties for their blast furnace operations. BISCO’s Environmental Management 16. BISCO has a corporate level Department of Environmental Protection and Production Safety. There are six divisions in the Department, three for environmental protection and three for production safety. The environmental protection divisions Page 9 include: environmental protection management (seven staff members), resources/waste utilization (three staff members) and landscape activities (three staff members). 17. The environmental protection management division is of chief interest. The two managers and five professionals are trusted each with responsibility for different plant operations. One staff member is responsible for coke, iron, and sinter plant operations, another for rolling mills and steel production, the third for utilities and off-sites (water and gas supply, power, etc.). The two other staff are responsible for rare earth production and iron mining operations. The chief responsibilities are to assure that environmental measures are implemented and equipment is operating in accordance with design. They are also responsible for reporting any deficiencies to plant management for corrective actions. 18. At the plant level there are three to four full time associate environmental protection engineers responsible for daily activities at each of the following operations (15-20 staff total): coking plants, iron production, steel production, sinter plant and mining operations. 19. The company maintains a laboratory for environmental monitoring. Water effluents are monitored three times per month at the coking plants and once per month at the steel mill. Other effluents are monitored either quarterly or annually. Air quality monitoring is performed semiannually at the coke plants and quarterly at the steel mill and blast furnaces. Solid wastes are monitored semiannually. 20. However, the environmental laboratory is old and primitive: utilizing wet methods that were common about fifty years ago. The only sign of any modern analytical capability is a rather primitive spectrophotometer. 21. As part of the due diligence effort, the World Bank met with the EPB. The EPB staff who were involved in the discussions are listed below. Mr. Shizhong Wu, Deputy Head of EPB Mr. Guang Zhang, Chief of the Pollution Control Division Ms. Zhihong Liu, Deputy Chief, Monitoring Department Ms. Zhe Bai, Deputy Division Chief, General Business Department Mr. Liang Shen, Chief, Public Relations and Internal Administration Department 22. These officials indicated that BISCO has done a substantial amount of work for pollution control in the last five years. The chief areas of improvement were in fluoride control in iron ore, wastewater treatment for the iron mill and coke plants and overall water pollution control and reuse. 24. In the past five years no environmental fines or penalties have been levied against the company. There have been no complaints from local residents regarding the plants’ Page 10 pollution discharges, primarily because the local people have witnessed these recent improvements. 25. The Deputy Head of the EPB (Mr. Wu) explained the process of establishing permissible emission levels. He indicated that on a national basis, in July, 2006, SEPA established regional/provincial emission levels across the country, and that the Provincial EPBs were then required to establish overall emission levels for the cities within their jurisdiction and then assign the local EPBs (e.g. Baotuo) to allocate these overall emission requirements among the various major sources city-wide. The Baotuo EPB just received their allowable emission limits from the Provincial EPB in December 2006 and they expect to establish source specific emission limits by the end of 2007. Summary of World Bank Requirements 26. Baotuo EPB officials are not very concerned with the initial lapses in following Chinese EA approval and regulatory procedures. In the past companies, companies were often informed about the conformance of their EA with Chinese regulations as soon as they are approved orally to avoid delaying their project while the procedures are finalized and the approvals fully documented. SEPA and EPBs took steps to speed up the approval and documentation process and do not allow initiation of the construction before reception of the approval documents. BISCO has been ordered to stop construction until the formal approval and they complied. Baotou EPB stressed the remarkable progress BISCO has made in the last five years controlling their pollution and have every confidence that the company would resolve their few remaining issues. 27. The World Bank however requested and BISCO agreed to: · complete the EA process and obtain all relevant clearances with formal approvals from related environmental authorities for conversion/construction of all the new CDQs and dry-type TRTs prior to signing of ERPA; · Submit to the Bank all the required operational approvals by concerned environmental agencies for equipment that has been monitored after the commissioning period; · submit to the Bank a statement from the Baotou EPB attesting their full compliance with all Chinese environmental requirements of all operational equipment; 28. BISCO stressed its commitment to strengthen its energy and environmental management systems. The World Bank strongly recommended and BISCO agreed that part of the CDM funds directly support a substantial modernization of the environmental laboratory and environmental procedures, including routine monitoring plans for emissions and effluent discharges to assure compliance with Chinese standards. Page 11