Alert

The Hong Kong Environmental Protection Department (EPD) today announced formal arrangements for the implementation of Clean Development Mechanism (CDM) projects in Hong Kong.

The Implementation Arrangements are a significant breakthrough in that they pave the way for the implementation of CDM projects in Hong Kong. However, Hong Kong companies will still not be treated as “Chinese” for the purpose of implementing CDM projects on the Mainland.

The EPD’s relationship with China’s Designated National Authority

All countries participating in the CDM are required under the International Rules to designate a national authority (DNA) to approve CDM projects hosted in their country. The responsibilities of China’s DNA, the National Development and Reform Commission (NDRC), include:

• accepting CDM project applications;
• approving CDM project activities;
• issuing the Letter of Approval for CDM projects on behalf of the Chinese government; and
• supervising the implementation of CDM projects.

The EPD has been appointed as the liaison agency for CDM projects in Hong Kong. The EPD will collect applications for Letters of Approval in respect of CDM projects taking place in Hong Kong; and then forward these to the NDRC for processing and approval. Representatives of the EPD will also participate in the work of the National CDM Board, which is responsible for final review of CDM approval applications.

Regulation of CDM projects in China

The NDRC will assess Hong Kong-based CDM projects against the same laws and policies applicable to CDM projects in China. China has developed a detailed regulatory and policy framework for the approval and implementation of CDM projects. The key law is the Measures for the Operation and Management of CDM Projects in China (CDM Measures).

China is unique amongst CDM host countries in that it:

• sets a floor price for CERs
• specifies the maximum number of CERs that may be transferred to the buyer in any transaction
• requires that the project sponsor be majority Chinese-owned, and
• charges a levy on CER revenues, which varies with the type of project (CDM Levy).

The rules in the CDM Measures, as well as other policies applied by the NDRC, are designed to protect the interests of Chinese sellers and provide for effective management and operation of CDM project activities. The Implementation Arrangements suggest that, apart from the majority Chinese ownership rule and the CDM levy, these will apply equally to Hong Kong-based projects.

Limited exception to the majority Chinese ownership restriction

The CDM Measures require that a company be majority Chinese-funded or held in order to participate as a seller in a Chinese CDM project. “Chinese” ownership has been interpreted to mean Mainland Chinese, and does not include Hong Kong companies. The question of whether Hong Kong-funded or held companies could be treated as “Chinese” for the purpose of operating CDM projects in Mainland China was one of the topics negotiated between the EPD and the NDRC. Under the new arrangements, Hong Kong companies will be able to implement CDM projects within the HKSAR, but they will still not be treated as “Chinese-owned” for the purpose of implementing CDM projects in Mainland China.

CDM Levy not to apply

At least initially, no charges will be levied by either the Central Government or the HKSAR Government on CER revenue from Hong Kong-based CDM projects.

Continuing restrictions on CDM projects in Hong Kong and China

The following restrictions apply to CDM projects in China, and are likely to apply equally to projects implemented in Hong Kong:

CER floor price
The NDRC has adopted a policy of requiring the CER price to be above a certain minimum, though this is not specified in any law. This floor price is subject to change. Project and payment structures that may circumvent this floor price (including payment of consultants in CERs) are not permitted.

Unilateral projects
Hong Kong companies may implement a CDM project unilaterally (i.e. without the involvement of a foreign buyer). The CERs from these projects will be issued to China’s national account. Notably, the NDRC’s approval will not be required before these CERs are transferred to a foreign buyer; though the project owner must notify the NDRC, via the EPD, of the transfer.

Sustainable development
Under the International Rules, it is the prerogative of the Host Country to confirm whether a CDM project activity assists it in achieving sustainable development. The CDM Measures specify that CDM projects must be consistent with China’s sustainable development strategies and policies. It is unclear how this requirement will be applied to Hong Kong, which has its own independent sustainable development strategy.