Article

This year is critical for climate change policy and law. Proposals put forward by developed and developing countries foreshadow some far reaching changes in policy and law that will impact trade and investment globally. In this article, we consider the latest negotiation texts published by the United Nations and the China position paper on climate change negotiations.

Background

International climate change law negotiations are often hard for a non-specialist to follow. With the increasingly numerous proposals of the parties to make changes to the international climate law regime, it was timely for the United Nations to issue negotiation texts on 14 and 19 May 2009, prepared by the Ad Hoc Working Group on Further Commitments for Annex I Parties under the Kyoto Protocol (AWG-KP) and the Ad Hoc Working Group on Long-Term Co-operative Action Under the United Nations Framework Convention on Climate Change (AWG-LCA).

The negotiation texts summarise ideas and proposals of the parties submitted up to 5 May 2009, and are intended to be used as starting points for further negotiations at the sixth session of the AWG-LCA and the eighth session of the AWG-KP to be held in Bonn, Germany from 1 to 12 June 2009. The texts bring together for the first time details of negotiation positions, proposed approaches and obligations that would have very substantial impacts on climate change action if adopted.

Importantly, the proposals are drafted in such a way that they are ready for adoption (in other words, they are in treaty decision language). On 20 May 2009, the National Development and Reform Commission (NDRC) of China issued a position paper on the Copenhagen climate change conference in December 2009. The timing of the issue of this position paper is of particular significance, and it is no accident that it coincides with the issue of the negotiation texts.

Key aspects of the negotiation texts and the position paper follow.

The negotiation texts of the AWG-KP and AWG-LCA can be found at the following links:

http://unfccc.int/resource/docs/2009/awg8/eng/08.pdf

http://unfccc.int/resource/docs/2009/awg8/eng/07.pdf

http://unfccc.int/resource/docs/2009/awglca6/eng/08.pdf

The China position paper on the Copenhagen climate change conference can be found here.

Further commitments under the Kyoto Protocol

Although media reports have continually referred to the expiry or demise of the Kyoto Protocol, the work of the AWG-KP has been focused on establishing further emission reduction commitments on Annex 1 Parties to the Kyoto Protocol since the Conference of the Parties serving as the Meeting of the Parties to the Kyoto Protocol established the working group in December 2005. AWG-KP discussions include options on further commitment periods, base years, per capita intensity targets, sectoral targets and new commitments categories for developing countries.

Text 1: Proposals that require an amendment of the Kyoto Protocol*

This text sets out proposals requiring an amendment to the Kyoto Protocol. They include:

• amendments to the absolute emission reduction targets of the Parties to introduce a second commitment period from 2013 to 2017, 2018, 2020 or beyond and a third commitment period

• introduction of per capita emission targets

• changes to base year including different base years for different countries

• introduction of Annex C reduction targets for developing countries in the second and third commitment periods, and

• amendments to enter into force immediately upon the expiry of the first commitment period.

*Note that Parties must submit proposals for amendment by 17 June 2009 to meet the notice requirements for a decision in Copenhagen in December 2009.

Text 2: Other issues

Annex I to IV sets out proposals not requiring an amendment to the Kyoto Protocol. They include:

• extension of land use, land use change and forestry activities

• eligibility of carbon capture and storage

• eligibility of nuclear facilities

• crediting for nationally appropriate mitigation actions

• standardised multi-project baselines

• positive and negative lists for project activities under the CDM

• improving access for specific host countries, least developed countries and small island states

• promoting co-benefits

• multiplication and discount factors for CERs generated, and

• changes to borrowing and banking of credits.

Annex V sets out a compilation of proposals that require an amendment to the Kyoto Protocol as submitted by the relevant Parties. Note in particular sectoral crediting proposed by the European Union at pages 32-33 of the text.

Long term co-operative action

The work of the AWG-LCA is the other track of the Bali Action Plan or Road Map.

The negotiating text of this working group, which was released on 19 May 2009, includes:

1. a shared vision for long-term cooperative action, based on Parties’ proposals/submissions

2. enhanced action on adaptation, dealing more specifically with:

• objectives with respect to adapting to the impacts of climate change

• supporting and undertaking the implementation of adaptation actions

• addressing risk reduction, management and sharing of efforts to adapt to climate change

• institutional arrangements to assist in the implementation of adaptation actions, and

• monitoring and reviewing mechanisms for adaptation actions

3. enhanced action on mitigation, dealing more specifically with:

• commitments by developed countries:

• commitments by developing countries, which includes addressing:

• policy approaches and positive incentives on issues relating to reducing emissions from deforestation and forest degradation (REDD) in developing countries

• cooperative sectoral approaches and sector-specific actions

• approaches to enhance the cost-effectiveness of, and to promote, mitigation actions

• economic and social consequences of response measures, and

• objectives

• generation of financial resources

• institutional arrangements, and

• technology research, development, diffusion and transfer.

Having regard to the clear distinction between the contribution to be made by developed countries and that of developing countries, this negotiating text reflects, to a great degree, the position China’s NDRC has recently expressed as to how matters should proceed in relation to the fight against climate change. This is particularly the case with respect to the introduction of NAMAs, which clearly provides developing countries with considerable flexibility and places the onus on developed countries to commit to taking action against climate change on all levels, namely mitigation, adaptation, financing, technology transfer and capacity-building.

China, the official and unofficial positions

The position paper issued by the NDRC on 20 May 2009 (the Paper) contains few surprises but does contain more detail on specific matters which were not set out in the White Paper on Climate Change Action issued in October 2008.

In essence, China maintains the position that as a developing country and consistent with the principle of common by differentiated responsibilities, it cannot be expected to adopt binding emission reduction or intensity targets at this stage of its national development. It also reiterates that a range of strong policies, measures and actions have been taken to address climate change in China in the context of sustainable development under the National Climate Change Programme of 2007.

The assertion is that collectively, these measures have yielded and continue to yield substantial reductions in China’s emissions. Notwithstanding this official position, it is well known to those in the China carbon market that research and discussions have been ongoing within China as to how it might adopt binding intensity-based or sectoral emissions targets. Accordingly, it is not entirely inconceivable for China to take an active position on targets come December 2009.

The Paper outlines China’s position on:

• negotiation and climate change policy principles

• the objectives of the Copenhagen climate conference

• issues relevant to enhancing long-term co-operative action under the United Nations Framework Convention on Climate Change (UNFCCC), and

• further commitments under the Kyoto Protocol.

Negotiation and climate change policy and law principles

China emphasises that the basis and mandate of the negotiations are the UNFCCC and the Kyoto Protocol with the Bali Roadmap as the focus. The dual track of the Bali Roadmap requires parties to progress negotiations in order to establish the methods and means of achieving the goals and objectives of the UNFCCC and clarify and confirm Parties’ respective commitments in the post-2012 era.

The principles of sustainable development and common but differentiated responsibilities justify the contention that China takes climate change actions that are within its own means while enabling it to pursue economic development and poverty eradication. Given the potential adverse impacts of climate change on China’s economic, social and environmental development, fresh impetus is given to adaptation action, as the threats to China are seen as real and urgent. The call for technology transfer and financial support from developed countries is maintained.

Objectives of the Copenhagen climate conference

Given that the ultimate objective of the UNFCCC is clear, China considers that the overriding task of the international community is to implement concrete and comprehensive actions without any further delay (indeed, recent China submissions [e.g. submission included in AWG-KP consolidation of parties’ submissions entitled “Views on possible improvements to emissions trading and the project-based mechanisms” dated 8 May 2009] go as far as to say developed countries should not use delaying tactics). China asserts that developed countries should, as a whole, reduce their GHG emissions by 40 per cent below their 1990 levels by 2020.

Issues relevant to enhancing long term co-operation

Of particular significance are comments made on NAMAs, mitigation commitments by developed countries, adaptation actions, technology transfer and capacity building, REDD and funding. Specifically, the Paper objects to the use of emission reductions achieved in NAMAs and REDD as offsets by developed countries and a means to impose emission reduction commitments on developing countries.

Further commitments under the Kyoto Protocol

China strongly supports the continuing application of the Kyoto Protocol mechanisms and a second commitment period imposing quantified emission reduction targets on developed countries to run from 2013 to 2020 (an eight year rather than a five year period to give greater policy and investment certainty).

In the meantime, some further developments to the CDM policy and legal regime in China and Hong Kong

Two significant recent developments were the introduction of tax relief to the China Enterprise Income Tax for enterprises implementing CDM projects and the announcement by the Hong Kong Secretary for Environment of the qualifying criteria for Hong Kong companies to be treated as Chinese enterprises under the PRC Measures for the Operation and Management of Clean Development Mechanism Projects (CDM Measures).

Enterprise Income Tax relief

On 23 March 2009, the State Administration of Taxation and the Ministry of Finance issued Cai Shui [2009] No. 30 (Circular 30), which addressed enterprise income tax incentives to Chinese companies engaged in the sale of certified emission reductions (CERs). Circular 30 confirms that the following portion of revenue, to be paid to the Government from the transfer of CERs, for the following projects is tax deductible:

• the PRC Government’s 65 per cent share of revenue for hydro fluorocarbon (HFC) and per fluorocarbon (PFC) projects

• the PRC Government’s 30 per cent share of the revenue for nitrous oxide (N2O) projects, and

• the PRC Government’s two per cent share of the revenue for energy efficient improvement, development and utilisation of new and renewable energy, recovery and utilisation of coal bed methane and CDM reforestation projects.

Also, a three plus three scheme exists from the first year the project generates sale revenue so that projects in the first two categories above are eligible for a three year tax exemption and a 50 per cent reduction in the tax rate for the fourth to sixth years of the project.

Further, the following revenue of the China CDM Fund (the Fund) is exempt from enterprise income tax:

• income from the transfer of greenhouse gas emission reductions in CDM projects which is turned over the state treasury

• grants from international financial organisations

• deposit interest on the capital of the Fund and interest on the treasury bonds purchase by the Fund, and

• contributions from domestic and foreign institutions, organisations and individuals.

Circular 30 applies retroactively from 1 January 2007 but the exact manner in which this will be carried out is yet to be determined.

Qualification criteria for Hong Kong companies engaging in China CDM projects

On 8 April 2009 it was reported that companies:

• registered and established in Hong Kong

• whose executive director is a PRC national or Hong Kong permanent resident or where at least half of the members of the board of directors are PRC nationals or permanent residents, and

• that are publicly tradable companies where at least 50 per cent of its shares are non-tradable

may be CDM project developers in China for the purposes of the CDM Measures.

While implementing arrangements still have to be issued and there are problems in respect of the applicability of non-tradeable shares to listed companies under Hong Kong law, this development is a step in the right direction to ramp up Hong Kong investment in China CDM projects and carbon finance. For existing and prospective investors in China CDM projects, real consideration can now be given to using Hong Kong companies to gain full control of a CDM project vehicle.