Welcome to the fourth edition of the China Green Paper. In this edition, we focus on the newly announced formal arrangements for the implementation of clean development mechanism (CDM) projects in Hong Kong and their implications for companies that wish to pursue CDM projects in Hong Kong.
The Hong Kong Environmental Protection Department (EPD) announced formal arrangements for the implementation of clean development mechanism (CDM) projects in Hong Kong on 6 June 2008 (the 'Implementation Arrangements'). The Implementation Arrangements were issued after several years of discussions between the Hong Kong Special Administrative Region (HKSAR) government and the central government, and they will pave the way for the implementation of CDM projects in Hong Kong.
The EPD's role
Under the Implementation Arrangements, the EPD has been appointed as the liaison agency for CDM projects located in Hong Kong. The EPD does not play the role of Designated National Authority (DNA), which, under the Kyoto Protocol, is the national authority responsible for approving CDM projects hosted in their countries.
The National Development and Reform Commission (NDRC) acts as China's only DNA, and is responsible not only for mainland China, but also for Hong Kong. The national CDM board (National CDM Board), a board consisting of representatives from seven ministries including the NDRC, is the body in China responsible for reviewing CDM project activities. Its activities include reviewing the participation qualifications, project design documents, baseline methodology, carbon credit price and so on.
In Hong Kong, the EPD will collect applications, reports and supporting information provided by project owners 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 when the National CDM Board reviews applications from CDM projects located in Hong Kong.
Key features of CDM project approvals in China
In China the approval of Chinese CDM projects has unique features. The key national legal framework for the approval and implementation of CDM projects is set out in the Measures for the Operation and Management of CDM Projects in China ('CDM Measures').
Compared with the other host countries, China is unique in that it:
- sets a minimum price for certified emission reductions
- requires that the project owner be Chinese funded or
- specifies a maximum chargeable consultancy fee
- charges a levy on CER revenues, which varies depending on
the type of project ('CDM Levy').
The main purpose for the above stipulations is to protect the interests of Chinese sellers and to ensure that the Chinese party is the largest beneficiary from the CDM projects.
CDM project owner qualification
The CDM Measures require that CDM project owners that engage in CDM projects within the territory of China must be Chinese-funded or Chinese-controlled enterprises, and there have been some calls for expanding the application of 'Chinese-funded' or 'Chinese-controlled' to include companies registered in Hong Kong.
The Implementation Arrangements state that companies that are incorporated under Hong Kong law and have a valid Business Registration Certificate are eligible to implement CDM projects taking place in Hong Kong,
There have been lengthy negotiations between the NDRC and the EPD regarding whether a Hong Kong-funded or Hong Kong-controlled company can be treated as 'Chinese' for the purpose of conducting CDM projects in mainland China, but the Implementation Arrangements still remain silent on this point.
However, our recent enquiries with the NDRC show that it will continue to treat Hong Kong companies as not being Chinese funded for the purpose of implementing CDM projects in mainland China. Further, an NDRC official has indicated to us that, when reviewing CDM projects based in Hong Kong, they may consider the actual owner of each project with the aim of preventing the majority of the revenue from the sale of CERs flowing to a foreign party. It will be interesting to see how the NDRC exercises such powers in practice in the near future.
Limitations on CER floor price
The NDRC has adopted a policy of requiring the CER price for all projects to be above a certain minimum price (although the NDRC has not always been ready to acknowledge the existence of this minimum price requirement in practice). The NDRC also sets a maximum price that project consultants can charge for their work on a project, to prevent project and payment structures that may circumvent this floor CER price.
The Implementation Arrangements are silent on the issue of CER floor price, but we anticipate that limitations on CER floor price are likely to apply to Hong Kong CDM projects.
Unilateral CDM projects are projects that are implemented without the involvement of a foreign buyer (normally as a buyer of the CERs has yet to be found). To encourage the development of CDM projects, Hong Kong companies may implement a CDM project unilaterally, but the CERs produced by the project will need to be transferred to China's national CER account. These CERs can then only be transferred out of the account with approval from the DNA.
CDM Levy not to apply
In addition to the different criteria for project owners' qualifications, another major difference for Hong Kong-based CDM projects compared to those based in mainland China is that no charges will be levied by either the central government or the HKSAR government on CER revenue from Hong Kong-based CDM projects. This exemption from CDM Levy is tentative and it is obvious that this is intended to help companies to build momentum in pursuing CDM projects in Hong Kong.
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