As the world’s fastest growing (and soon to be biggest energy consuming) economy, China is aiming to generate 15% of its energy from renewable sources by 2020. This offers significant opportunities for businesses experienced in the funding and realisation of renewable energy projects as well as the carbon financing of those projects.

This review outlines the Renewable Energy Law and the Measures on Administration and Operation of Clean Development Mechanism Projects and identifies some practical matters which should be carefully considered if you are involved or interested in renewable and clean development mechanism (CDM) projects in China.

The Renewable Energy Law

The Law took effect on 1 January 2006. The term “renewable energy” refers to non-fossil energy such as wind, solar, water, biomass, geothermal and ocean energy.

What does it mean for you?

The Law establishes for the first time a statutory framework for the development of renewable energy in China. It demonstrates the commitment of China to increasing the promotion and use of renewable energy.

The development of renewable energy is treated favourably under this framework. However, those with experience in the renewable energy business in China will appreciate that the success of the Law will depend on:

• clear and consistent national, regional and local policies
• clear and consistent implementation of the Law at national, regional and local levels
• the issue as well as the implementation of detailed rules and regulations to support the Law.

In addition, given the range of important questions which remain unanswered under the Law (for example, the availability of economic incentives), it is prudent for anyone considering participating or investing in the Chinese renewable energy market to obtain specialist legal assistance.

Key aspects of the Renewable Energy Law

• The development and use of renewable energy is described as a “state priority”.
• Relevant departments of the State Council will formulate nationwide middle and long term targets, guidance catalogues for renewable energy industries and technical standards for renewable power and renewable technology and products.
• Scientific and technological research in the development and use of renewable energy is listed as the preferred area for hi-tech development. Funding is to be allocated for research, demonstration and development of renewable energy to promote technical advancement and reduce production costs.
• Grid enterprises are required to enter into grid connection agreements with renewable power generation enterprises and to buy all electricity generated by approved renewable energy facilities at a price determined by the price authorities of the State Council. Civil liability may be imposed for failing to buy qualified grid-connected renewable power.
• Heat supply enterprises must allow qualified gas and heat operators using biomass to enter the grids or otherwise bear civil liability for any economic loss. Economic incentives to encourage the development of renewable energy will be offered - these include the allocation of special capital for assessments, research, surveys, loans and subsidies, as well as tax benefits.

The Measures on Administration and Operation of Clean Development Mechanism Projects

The Measures took effect on 12 October 2005 and replace the Provisional Measures on Administration and Operation of Clean Development Mechanism Projects. The Measures aim to facilitate the implementation of CDM projects in China in accordance with the United Nations Framework Convention on Climate Change and the Kyoto Protocol.

What does it mean for you?

If you are involved in the renewable energy and energy efficiency business and wish to invest or participate in CDM projects in China, the Measures provide a clearer legal framework on what is required to proceed with such a project. However, while the Measures are an improvement on the Provisional Measures they replace, they are not comprehensive and will no doubt be subject to further interpretation and refinement in due course.

Key aspects of the Measures

The Measures provide a specific legal basis for clean development mechanism projects in China and contain:

• conditions for the approval of a CDM project (articles 6 to 12)
• institutional arrangements for the management and implementation of a CDM project (articles 13 to 17) - article 16 states that the National Development and Reform Commission (NDRC) is the designated national authority for CDM project activity and sets out its main areas of responsibility
• implementation procedures (articles 18 to 20)
• miscellaneous provisions (articles 21 to 26).

According to the Measures, CDM project proponents must be Chinese invested or Chinese investment holding enterprises. While foreign cooperating parties are allowed to participate in Chinese CDM projects, they cannot be wholly or majority owned by foreign parties.

For CDM projects approved on or after 12 October 2005, the Chinese Government will impose a levy on revenues generated from the transfer of Certified Emission Reductions (CERs). The levies to be applied for different CDM projects are:

• 65% on the transfer of CERs relating to hydrofluorocarbons and perfluorocarbons
• 30% on the transfer of CERs relating to nitrous oxide
• 2% on the transfer of CERs for tree planting projects and projects relating to energy efficiency improvement, development and utilisation of new and renewable energy, and methane recovery and utilisation.

Broadly speaking, heavier levies are imposed on CDM projects that have more questionable sustainable development benefits and are not as encouraged as a matter of Chinese policy. The levy proceeds are to be applied to support activities relating to climate change, and in effect, sustainable development.

Flexibility for CDM project proponents to refer to the Law and Measures

In the Report of the 22nd meeting of the CDM Executive Board (Annex 3), the Executive Board confirmed that national or sectorial policies or regulations favouring less emissions-intensive technologies over more emissions-intensive technologies implemented since 11 November 2001 need not be taken into account when developing a baseline scenario. (“Baseline scenario” is the hypothetical “business as usual” position without the CDM project).

Arguably this clarification from the Executive Board covers the Law and Measures. Thus project proponents have the flexibility to decide whether to refer to the Law and Measures to demonstrate the baseline scenario.

The intention is that investors should still be encouraged to invest in CDM projects in countries, such as China, that have already taken steps to make less emissions-intensive technology more favourable.