The air pollution situation in Hong Kong has become worse since the beginning of the 21st century. In 2002, the Hong Kong Government and the Guangdong Provincial Government agreed, on a best endeavour basis, to reduce sulphur dioxide, nitrogen oxides, respirable suspended particulates and volatile organic compounds by 40%, 20%, 55% and 55%, respectively, in 2010, using 1997 as the base year. Emissions trading between Hong Kong and the Pearl River Delta Region were proposed for the energy sector to reduce emissions. Emission caps would be introduced to the power stations, in which emission allowances could be traded between Hong Kong and the Pearl River Delta Region. Most of the electricity generation equipment in Hong Kong was built in the 1980s and 1990s, and this 'conventional' equipment could not meet the new emission requirements. Emissions trading was a new concept in this region. It challenged power stations to decide on whether to adopt trading emissions or to enhance their own equipment to meet the emission requirements. Emissions trading is one of the more general classifications of market-based policy instruments promoted as a way to achieve additional reductions in air pollution in a least-cost fashion. This study reviewed the emissions situation in the region, the emissions trading systems in USA and Europe, the technologies of electricity generation and the new emission-reduction technologies. A simulation model was developed to compare the effectiveness of emissions trading with the upgrading of the existing emissions technologies for the power plants in Hong Kong. The simulation model consisted of four functional modules, namely the equipment module, the load-despatching module, the emissions module and the financial module. The equipment module simulated the function of the power plant according to its fuel use, combustion technology, energy conversion to electricity and emissions production. The load-despatching module would despatch the electricity demand to different power plants based on priority of emission performance. The electricity despatched and the emission characteristics obtained from the equipment module led to an estimation of the emissions produced. The combined emissions from all of the power plants equalled total emissions. The emission module would then compare these total emissions with the emission caps to confirm whether there was any exceedance. If emissions exceeded the caps, the power station could either buy emission allowances from the emissions market or improve its equipment to reduce emissions. The financial module would calculate the cost of emission reduction by through equipment improvement based on the technology of emission-reduction, the required capital cost, the associated depreciation cost and operating cost. This module could also estimate cost of buying emission allowances according to the principle of emissions trading. The total operating cost would be the sum of the costs for buying emission allowances and for operating the upgrading the emission-reduction equipment in the power stations. Two power stations in Hong Kong were chosen for the 10-year simulation, which began in 2006. The model was built using the parameters of the power stations. Different emission-reduction options were simulated, and the most appropriate choice was revealed based on linear programming analysis of the total operating cost. The recommended option was then further reviewed and compared with the actual implementation by the power stations. The simulation model could be used to analyse complicated emissions situations in the power stations, including what technology should be used for electricity generation and emission-reduction, how emissions could be estimated for future years, should emissions be traded to meet the emission caps or whether investment in emission-reduction should be provided. By using this model, the power stations could properly plan their future emission-reduction strategies. Such a comprehensive simulation model for emissions trading is not available in existing literature. This study has provided a useful tool for the power stations to evaluate alternative means of emissions control.