China: China’s Green Leap Forward: Recent Developments In China’s Move Towards Cleaner Energy

Last Updated: 14 December 2007
Article by Carl Hinze and Monica Mo

In 1959 Mao Zedong's infamous "Great Leap Forward" had reached its pot-and-pan-melting climax in an effort to transform with unprecedented haste China's agrarian economy into an industrialised nation to rival the United States. As we now know Mao's plan amounted to a momentous step in the wrong direction. Ten years later, Neil Armstrong became the first human being to set foot on the Moon and famously declared it to be "a small step for man, but a giant leap for mankind". Now, in these early years of the second millennium, it is clear to one and all that China (and for that matter, the rest of the world) must proceed with unprecedented haste towards cleaner energy production. It is fair to say that China's efforts to revamp its approach to energy production have been more akin to "small steps" than "giant leaps". Yet, as the famous Chinese aphorism declares, "a journey of a thousand miles begins with a single step". For everyone's sake, China needs to travel "a thousand miles" very quickly in what would truly be a "giant leap forward" for humankind.

The pace of China's move towards a cleaner energy regime has accelerated during the new century. This is evident in the numerous developments that have occurred in the legal structure underpinning the creation of sustainable economic growth in China. This paper provides a brief summary of the latest key advancements that China has made in respect of its legal framework for cleaner energy production. The paper also considers the challenges that lie ahead for Chinese law makers as they race against the sun-dial to lay down the legislative foundations for China's future development. Such development is certain to have an ineradicable impact on the future of the entire planet.

The legal environment prior to the new millennium

China's first uncertain steps toward a legislative framework for cleaner energy production began in the final twenty years of the last century. In 1983, the Chinese government issued a policy directive to increase the use of renewable energy in rural areas. After a long hiatus, the Standing Committee of the China's National People's Congress ("NPC") passed the Electricity Power Law in December 1995, which set quotas and feed-in incentive payments for renewable generators. Building some momentum, the NPC issued the 1998 Energy Conservation Law. This was followed by the 1999 government circular on renewable energy projects, subsequent to which the Chinese government decided to give certain renewable energy projects (in particular wind energy schemes) a fiscal subsidy of two per cent.

Beyond 2000

In August 2002, the Chinese government approved the Kyoto Protocol (almost at the same time as the European Union and before Canada), triggering the need for national regulatory measures for monitoring the operation of the clean development mechanism ("CDM") in China. Indeed, the Interim Measures for the Operation and Management of CDM Projects were promulgated on 30 June 2004. These were subsequently repealed by the Measures for the Operation and Management of CDM Projects in China (the "Measures"), which were issued on 12 October 2005. Under the Measures priority is given to energy efficiency, renewable energy (China has an energy policy for developing renewable energy and diversifying its energy mix), and methane recovery and utilization.

Also in October of 2005, the Sixteenth Central Committee of the Communist Party of China approved its Eleventh Five-Year Plan for the national economy and social development. Largely steered towards providing for a "harmonious society", the Eleventh Five-Year Plan includes the principle of "giving priority to energy saving, focusing on domestic resources, seeking multi-faceted development on the basis of coal, optimising production and consumption structures, and establishing a stable, economical, clean and safe energy supply system."

In a major legislative development, the Renewable Energy Law was promulgated in 2006. Around this time, the Chinese government also formulated the "Medium- and Long-Term Special Energy Saving Plan", and the State Council approved the release of the "Comprehensive Plan for Energy Saving and Emissions Reduction". The Renewable Energy Law is intended to make renewable energy more attractive to foreign and domestic investors. In addition to the Renewable Energy Law, a confusing morass of provincial and local rules and regulations are also in place to "aid" the creation of a sustainable economy in China. Indeed, the Renewable Energy Law is the latest in a long series of government initiatives designed to increase clean energy production, though none of the previous efforts have the same legal force as the Renewable Energy Law.

Anticipating the new Energy Law

On Monday 3 December, China's Office of the National Energy Leading Group ("ONELG") announced the release for public comment of its fifth draft Energy Law. The Chinese government will collect opinions on the draft until 1 February 2008, following which the draft is expected to be presented to the National People's Congress for approval. The law is not expected to take effect until some time in 2009. The pending Energy Law represents the latest step in China's progress towards cleaner energy production. The draft law, like numerous laws in China, acts as a general statement of broad principles and leaves the practical measures and detailed regulations to be promulgated by the relevant governmental agencies at an unspecified date in the future. Nonetheless, it is possible to glean from the draft law key insights into the issues that the Chinese government will, in the coming years, place at the top of its policy agenda concerning cleaner energy.

Energy security

One can easily conceive that the types of issues which might keep China's leaders awake at night could include securing access to sufficient natural resources to feed, shelter and comfort the nation's enormous population. Indeed, what has come to be known as "energy security" lies at the heart of the draft Energy Law. China's increasing dependence on imports of oil, coal, iron ore and other key commodities has been well-documented in the international media. Accordingly, the draft Energy Law calls for the country to keep larger reserves of oil, uranium and other important resources.

Article 65 of the draft law specifically requires Chinese oil companies to build up their own government-managed reserves to supplement existing corporate reserves and government stockpiles that began filling last year.1 The Chinese government clearly hopes that building such reserves will cushion against unexpected future shortages. China's state-owned oil producers have been irritated by the proposed measures because the costs of building the required reserves will be borne by the oil companies themselves. The balance sheets of China's oil refiners have already been hit by the nation's state-mandated price ceilings on refined oil. The ceilings are well below the market price of crude oil, which China's refiners have to purchase as inputs.

Energy pricing

Under Article 87 of the draft law, markets are expected to be the "leading factor" in China's energy pricing systems. However, in an archetypal example of China's espoused "socialism with Chinese characteristics", the government will continue to control the ultimate price of energy. ONELG has explained that energy pricing should reflect "the scarcity of resources and the costs of damaging the environment" (see also Article 87 of the draft law).

As mentioned above in respect of oil prices, China currently maintains strict control over energy prices as it fears higher prices will lead to further inflation. China's inflation rate hit an eleven-year high of 6.9 per cent. in November 2007,2 a level that the government is determined to contain so as to ward off fears of social unrest.

In November 2007, the Chinese government raised the retail prices of petrol, diesel oil, and aviation kerosene by around ten per cent. to entice refiners to release more product to ease a wave of nation-wide fuel shortages.3

New energy department

Article 12 of the draft law heralds the establishment of an energy department under the direct control of the State Council (China's Cabinet) to oversee relevant industries. The department would not have ministry-level status, but it is expected that it would unify the management of the country's energy industry, with smaller independent departments to be established for overseeing specific sectors.

China previously had an Energy Ministry, which was created in 1988, but it was abolished in 1993 during a bureaucratic overhaul. An energy bureau within the National Development and Reform Commission ("NDRC", China's main planning agency) was set up in 2003 to oversee oil and gas, coal, electricity and alternative energy sources, but power over those sectors is divided between various ministries and state-run entities.4 In 2005, the Chinese government set up ONELG as an energy "working group" of top leaders from various ministries, headed by Premier Wen Jiabao.

In response to extensive criticism of China's lack of a centralised government body for overseeing and coordinating the nation's various energy policies, the Chinese government has made improved management of its energy sector a strategic priority. Critics continue to claim that China should establish a ministry dedicated to energy in order to show that it is serious about tackling the need for cleaner energy, and to avoid further fuel shortages, price gouging and other problems. However, the Chinese government's current position is captured in the words of Si Posen, a senior official with the China Coal Information Institute, who has stated that an Energy Ministry would have to deal with the interests of too many parties, and that a lot of work still needs to be done before such a ministry could be put in place.5

The new department proposed under the draft law is expected to exercise stronger control over market entry and pricing than the energy division that is now part of the NDRC. ONELG recently announced the establishment of an expert-led advisory commission that will assist with energy-related policies, planning and other energy issues.6

Protecting the environment

Perhaps not surprisingly, the draft law makes little mention of specific measures for tackling climate change. However, Article 5 calls for China to adjust its energy use to help protect the environment. The government would also support recycling, emissions reductions and the development of "clean" energy resources such as solar, wind and tidal power and other changes "effective against climate change".vii Article 132 of the draft also suggests that, among other penalties, enterprises which over exploit energy resources would face a fine of up to five times their illegal gains.

The draft also indicates that the Chinese government is committed to furthering its rural energy plan. Specifically, the draft points to the extension of the electricity grid to rural areas and calls for the promotion of the use of renewable energy in such areas.

The draft Energy Law is another small yet significant step in China's progress towards cleaner energy production. Whilst it lacks details on how China will uphold its pledge to raise energy efficiency and reduce carbon emissions, it lays useful groundwork for further developments in this area.

Channelling foreign investment toward cleaner energy production

The most recent version of the Guidance Catalogue for Foreign Investment Industries ("Catalogue") came into effect on 1 December 2007.8 Foreign investors in China are required to comply with the limitations on foreign ownership interest in different industries as outlined in the Catalogue. It divides industries and investment projects into three main categories; namely, encouraged, restricted, and prohibited. According to the Catalogue, foreign investors are not allowed to conduct equity or asset acquisitions involving those PRC domestic companies that are engaged in industries in which foreign investment is "prohibited". Also, for a number of the "restricted" industries, M&A transactions can only be carried out if the majority ownership interest or control remains with Chinese domestic shareholders after the acquisition. Investments not specifically set out in the Catalogue are deemed to be "permitted".

The new Catalogue aims to direct foreign capital towards helping China upgrade its industrial structure and improve unsound aspects of its economic growth. A key focus of the new Catalogue is on resource conservation and environmental protection. In particular the new Catalogue reflects the Chinese government's determination to eliminate "backward" production techniques and capacity, realise energy-saving and emissions reduction, synchronize foreign investment with improvements to China's domestic industrial structure, and encourage foreign investment in recycling, clean production techniques, renewable energies and environmental protection methods.

The new Catalogue also aims to strictly control market access to heavy-polluting industries that involve high energy consumption. Foreign investment is no longer encouraged in projects involving important and scarce mineral resources or non-renewable energy production, such as the mining and sifting of low-grade metallurgical ores. The production and supply of electricity, gas and water is now off-limits to foreign investors. Exploration for, and mining of, ores of tungsten, tin, antimony, molybdenum, fluorspar, and the smelting of electrolytic aluminium, copper, lead, zinc, tungsten, molybdenum, stannum (stannum compound excluded), antimony (including antimony oxide, sulfureted antimony) and other rare metals have been moved from the "restricted" category to the "prohibited" category.

In respect of small-scale power grids in Tibet, Xinjiang and Hainan, the construction and operation of condensing steam coal-fired power stations with a single generator capacity of 300,000 kW or less and coal-fired heat and electricity cogeneration power stations with extracting and condensing steam turbine generators, of which the single generator capacity is 100,000 kW or less, was previously "permitted" but is now "restricted". Outside the scope of small-scale power grids in Tibet, Xinjiang and Hainan, such construction and operation activities are now "prohibited" whereas they were previously "permitted". The utilization of mine gas; the development of new technology for increasing the utilization rate of mine gangue and the application of technology for recovering mine ecology; the exploration for, and exploitation of, non-conventional oil resources, such as oil shale, oil sand, heavy oils, extra heavy oils, which were all previously "permitted", are now explicitly "encouraged", though in most the aforementioned cases foreign investment must take the form of a joint venture with a Chinese party.

Further to the guidelines set forth in the Catalogue, in the near future the Chinese government is expected to strictly set and apply standards on energy consumption, environmental protection and safety, resource recovery and quality control in respect of applicable technologies and project construction.

Conclusion

At the time of writing the United Nations Climate Change Conference is being held in Bali, Indonesia. World leaders are seeking a breakthrough in the form of a roadmap for a future international agreement on enhanced global action to fight climate change in the period after 2012, the year the first commitment period of the Kyoto Protocol expires. The roadmap needs to be drawn up immediately so that nations across the globe can stride forth in confident pursuit of cleaner energy production. Quite apart from the position of the United States, China's role in constructing the roadmap is crucial. The world can only hope that China's legislators are prepared to take the green leap forward that is necessary to save our planet. The draft Energy Law, and the other legislative developments discussed in this paper, are initial steps in a long journey that must be travelled in great haste.

Carl Hinze

Carl is an associate in the Shanghai office of Eversheds' China Business Group, and is a member of Eversheds' Renewable Energy team. Qualified to practise in New South Wales, he has worked as a legal adviser in China since 2005 in the fields of renewable energy, financial services, mergers and acquisitions, corporate restructuring, and equity and asset acquisitions of foreign-invested enterprises. Prior to becoming a legal practitioner, Carl completed a BA (Hons), LLB and PhD in Chinese sociolinguistics at the University of Queensland, where he lectured in Chinese studies and sociolinguistics.

Monica Mo

Monica Mo is a researcher in the Shanghai office of Eversheds' China Business Group. She has received a Bachelor of Laws degree from Chongqing Business and Technology University and is currently completing a Master of Laws degree at Shanghai's Fudan University.

Footnotes

1 Kurtenbach, Elaine, "China's Draft Energy Law to Up Reserves", available at http://www.topix.net/content/ap/2007/12/chinas-draft-energy-law-to-up-reserves, accessed on 12 December 2007.

2 MacGregor, Richard, "Chinese inflation at 11-year high", Financial Times, 12 December 2007, available at http://www.ft.com/cms/s/0/55c38970-a857-11dc-9485-0000779fd2ac.html, accessed on 12 December 2007.

3 "China releases draft energy law", The Straits Times, 2 December 2007, available at http://www.straitstimes.com/print/Latest%2BNews/Asia/STIStory_182982.html

4 "China's draft energy law to up reserves, boost controls; scant mention of climate change", International Herald Tribune, 4 December 2007, available at http://www.iht.com

5 Wang, Terry, "China releases draft Energy Law for public comment", available at http://www.interfax.cn

6 "China's State Council establishes energy advisory commission", 7 December 2007, available at http://www.interfax.cn

7 Kurtenbach, Elaine, "China's Draft Energy Law to Up Reserves", available at http://www.topix.net/content/ap/2007/12/chinas-draft-energy-law-to-up-reserves, accessed on 12 December 2007.

8 The Catalogue is jointly issued from time to time by the Ministry of Commerce and the NDRC.

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