The Copenhagen Accord called on Annex I countries to make their climate change pledges, and on Annex II countries to identify their nationally appropriate mitigation actions by 31 January 2010.
In this edition of the Asia Pacific climate change policy series we examine the Copenhagen Accord commitments made by China, a non-Annex I country to the Copenhagen Accord. We also examine the regulatory framework that China intends to implement to meet its Copenhagen Accord commitments, and the climate change investment opportunities that are available in China.
Key points on China:
- energy use doubled between 2000 and 2007
- is the largest emitter of greenhouse gases accounting for over 20 per cent of all emissions
- significant pledge to lower emissions by 40-45 per cent by 2020
- recent moves signal a strong commitment to meet these reductions, and the object of pricing carbon has been included in China's 12th Five-Year Plan (2011-2015)
- more renewable energy is coming on line in China than anywhere else in the world. While currently elusive for foreign investors, this situation looks ripe for change as China pushes forward with plans to boost its renewable sector.
Copenhagen Accord commitments
China's greenhouse gas emissions have increased beyond expectation and in 2007 it became the world's largest greenhouse gas emitter, accounting for over 20 per cent of all emissions. While some consider China dragged its feet at the international climate negotiations1, it has made the following commitments to the Copenhagen Accord:
- to endeavour to lower its carbon dioxide emissions per unit of GDP by 40-45 per cent by 2020 compared to the 2005 level
- to increase the share of non-fossil fuels in primary energy consumption to around 15 per cent by 2020
- to increase forest coverage by 40 million hectares and forest stock volume by 1.3 billion cubic meters by 2020 from the 2005 levels.
China's submitted intensity target should result in emission reductions of nine per cent below business-as-usual in 20202. The Chinese government is determined to meet these targets and early reports are that China is at present exceeding them.
China has not specified its policy approach to meeting its Copenhagen Accord commitments however on 27 August 2009, China's top legislature, the Standing Committee of the Eleventh National Peoples' Congress, approved a resolution to "actively deal with climate change" though also reiterating that development comes first and foremost. However China, as the largest emitter of greenhouse gases accounting for over 20 per cent of all emissions, has policy and legislation in place to reduce emissions, particularly focussed on promoting renewable energy and reafforestation.
Senior Chinese officials have declared China's intention to put a price on carbon within five years and recently the object of pricing carbon has been included in China's 12th Five-Year Plan (2011-2015). We understand that China is presently looking at developing a number of options, including several regional emissions trading schemes and industry specific taxation of emissions or carbon intensive resources. If these follow the tried and tested route for policy development in China, it is likely that a number of different schemes will be developed in several provinces and the Chinese government will encourage the various schemes to compete with each other until ultimately the authorities select the most successful and appropriate option for the Chinese economy. The discussions as to what those regional schemes will look like are still preliminary, with no design set in stone. It is therefore still too early to say whether or how these regional schemes will link into any international framework. A pre-emptive view on this however is that China will use these schemes as a tool to meet its domestic energy intensity targets and, in the early stages at least, foreign investors will have little opportunity to participate in these emerging market mechanisms.
The big five generation companies in China (Huaneng, Huadian, Guodian, China Power Investment and Datang) must satisfy internal renewable energy targets that require three per cent of their total installed capacity to be from non-hydro renewable projects by 2010, increasing to eight per cent by 2020. China's central government is now preparing plans for a substantial increase in its use of wind and solar power over the next decade, aimed at meeting its Copenhagen Accord commitment (i.e. 15 per cent by 2020).
China's Renewable Energy Law in 2006, amended in December 2009, promotes renewables through free grid connection and requiring the grid to take all power generated by a clean energy project. These regulations are backed up by a regulatory framework that provides for renewable energy targets for local governments, preferential tax treatment and access to cheap credit for clean energy developers. It also provides preferential tariffs for wind, biomass and solar power.
However, the renewable regulatory framework imposes the core burden for the promotion of renewable energy on the grid and relies upon project companies enforcing rights against the grid. China's grid is ultimately owned by two very powerful, but under-resourced, state-owned grid companies which operate the grid through local subsidiaries in each province. The latest amendments to the Renewable Energy Law focus on strengthening the grid but this will not resolve the underlying implementation issues. Policy revision has also resulted in the following:
- the removal of the requirement for 70 per cent of the equipment for any Chinese wind farm project to be domestically produced
- the introduction of a benchmark system for feed-in tariffs for onshore wind power
- an interim measure on the development and construction of offshore wind power projects (filling a gap as previous legislation did not address offshore projects)
- the establishment of a National Energy Commission.
On top of the incentives for renewables there is possibly an even stronger focus on energy efficiency and plans have been put into place across the country to increase energy efficiency.
For further information regarding China's renewable energy framework please refer to our Asia Pacific renewable energy manual.
More renewable energy is coming on line in China than anywhere else in the world. It is estimated that 130GW of wind power is in the pipeline, more than 130 GW of hydro power is operational, and 2009 saw solar energy gathering some momentum. Yet the market remains elusive for most investors and few of the names that dominate European and US renewables have a foothold in China. However the market is formed around a core base of onshore wind, biomass, hydro and some limited solar assets. The big five generation companies dominate the wind market while smaller private operators and the grid have invested in biomass and hydro energy. Solar photovoltaics manufacturers are emerging as key developers of solar projects.
With China's plans to boost the country's renewable energy sector, coupled with its Copenhagen Accord commitments, it is generally expected that foreign market players will be well placed to benefit from the ongoing growth and significant investment in the renewables sector.
China's reafforestation initiatives may also create same investment opportunities although these have not yet been put in place and there is limited investment in that sector at the moment.
Norton Rose Group has offices in Beijing, Shanghai and Hong Kong. A selection of our recent climate change related work in China includes:
- Acting for a fund on the purchase of CERs from a 3.5GW hydro project in Sichuan Province of China, the second largest hydro project in China. We advised on the carbon financing of the installation of energy efficiency system and drafted the ERPA.
- Advising Barclay's in relation to the proposed acquisition of CERs from 17 waste heat recovery projects in Anhui province, Hunan province and Jiangxi province China. We conducted the legal due diligence in relation to the projects and drafted the ERPAs.
- Advising Gazprom on offtaking CERs from a portfolio of CDM projects in Guangdong province, Inner Mongolia and Beijing. These projects include wind, CMM, LNG and landfill projects and we conducted the legal due diligence on the primary ERPAs in relation to the projects and advised on PRC legal issues in relation to CDM projects.
- Assisting ADB on their first financing of a wind farm in China. This project won 'Asia Pacific Renewables Deal of the year'.
- Assisting Standard Chartered for its financing of a wind project in Inner Mongolia. If this project closes, it will be the first non-recourse financing of a wind project in China.
- Assisting Enfinity with the first foreign invested solar project in China.
2 www.umweltdaten.de/publikationen/fpdf-l/3954.pdf p15
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