Implementation of China’s Climate Change Plan

April 16, 2015 | Energy, Natural Resources & Utilities


As noted in prior Alerts, on September 17, 2014, China officially approved a five-year National Plan on Addressing Climate Change (2014-2020) (the “National Plan”). The Plan, submitted by the National Development and Reform Commission (the “NDRC”), is the product of both increasing pressure for China to fulfill the Kyoto Protocol emission reductions commitments and calls by national advisors for climate measures, which will help fight increasingly severe threats to infrastructure (including low flows over the Three Gorges Dam), failing crop yields, and dwindling water supplies. Beijing exceeded the air pollution standards by two fold last year, leading to an announcement last month that it will close its remaining four coal-fired power plants next year. Several current developments are summarized below.

Reducing GHG Emissions

The National Plan sets forth major greenhouse gas (“GHG”) emission reduction goals to be achieved by 2020, including: (i) reducing carbon dioxide emissions by 40-45% below 2005 levels; (ii) increasing usage of non-fossil fuels to around 15% of the consumption of all primary energy; and (iii) increasing forested areas by 40 million hectares (100 million acres) and available forest stock by 1.3 billion cubic meters from 2005 levels. Achieving these goals will require a significant increase in the use of renewable and zero emission energy resources, such as wind, water, nuclear, solar, and biomass. In terms of energy conservation, the total consumption of primary energy will be controlled at around 4.8 billion tons of coal equivalent. While the National Plan calls for control of carbon emissions in a variety of sectors, it focuses on reductions in industrial sectors and the construction industry. Specifically, the National Plan provides that by 2020, China’s carbon dioxide emissions per unit of industrial added value should be reduced to 50% of 2005 levels, and the emissions from steel and cement sectors should stabilize at 2015 levels. In addition, the National Plan calls for formulating GHG emission standards for key areas such as electricity, steel, nonferrous metals, construction, petro-chemicals, chemicals, transportation, and construction.

Developing National Carbon Emission Trading System

The National Plan introduced a national carbon emission trading system, which is expected to be officially launched in 2016, to lower the cost of achieving GHG reduction goals.

Carbon emission pilot programs

In advance of the official launch of the national carbon emission trading system, seven municipalities and provinces in China (Beijing, Shanghai, Shenzhen, Tianjin, Chongqing Guangdong, and Hubei) have consecutively implemented their respective regional pilot programs to trade carbon emission. In addition to these regional pilot programs, several regions in China have implemented cross-regional carbon emission trading pilot programs. Below are two examples of such cross-regional trading schemes.

  • On December 19, 2014, Beijing municipality and Chengde City of Hebei province announced the launch of China’s first cross-regional carbon emission trading pilot program. Under the program, carbon emission quotas/credits and carbon emission reductions are traded among entities with at least 10,000 tons of emissions in 2014, and other qualified institutions and individuals can also voluntarily participate in the program. Currently, participants from Chengde City are limited to the cement industry. The same announcement notes plans under way to provide for trading of forest carbon sink emission reduction credits. 
  • On January 29, 2015, Guangzhou Carbon Emissions Exchange, Hong Kong Emission Exchange, and Guangzhou CEPREI Certification Body Co., Ltd. announced similar plans to jointly develop a cross-regional carbon emission trading market between Guangzhou and Hong Kong.

Overall administration for carbon emission trading

According to the Measures, market participants will comprise entities with large emissions as well as institutions and individuals who satisfy the trading rules and voluntarily participate in the trading. The initial products to be traded on the national carbon emission trading market will only include the emission quotas/credits and voluntary emission reductions certified by the government. More products will be added to the market in the future.

According to the Measures, entities with large emissions as well as institutions and individuals who satisfy the trading rules and voluntarily patriciate in the trading will be the participants in the market. The initial products to be traded on the national carbon emission trading market will only include the emission quotas/credits and voluntary emission reductions certified by the government. More products will be added to the market in the future. 

The carbon emission trading department under the State Council (the “National Authority”) will determine the trading venues and emissions quotas/credits. The emission quotas/credits will initially be distributed free of charge by the government to entities with large emissions. As the market develops and matures, a portion of the quotas/credits will be distributed for free and such percentage will be increased gradually. The free quota/credit distribution method and standard will be determined by the National Authority, based on the different industries’ profiles and needs and on advice provided by relevant government agencies. The National Authority will issue in due course the categories of GHG and the scope of industries to be included in the carbon emission trading market, as well as the standards to identify the entities with large emissions.

Furthermore, the National Authority will establish a Carbon Emission Trading Registration System and the information recorded therein will be the final evidence for determining the ownership of the emission quotas/credits. The National Authority will also publish a list of any participating institutions and individuals that materially violate the law. The provincial authority will inform the provincial administration for industry and commerce, the tax authority, and finance authority if any entities in its province are so listed.

Promoting Low-carbon Development

The National Plan also calls for the promotion of low-carbon projects (e.g. projects or services producing low-level carbon emissions) and highlights six low-carbon pilot cities (towns) established to facilitate low-carbon pilot projects, each with a different focus. For example, the International Low-Carbon City in Shenzhen mainly focuses on low-carbon service and technology application, while the Ecological New Town in Wuhan puts its emphasis on expanding low-carbon industries, such as software R&D, port and bonded logistics, travel, and health care. In addition, approximately 1,000 low-carbon pilot commercial institutions will be established before 2020. These pilot commercial institutions, which include shopping malls, hotels, restaurants, and tourist attractions, are expected to significantly reduce carbon emissions by adopting new energy conservation and renewable energy technologies. In addition, the National Plan requires the establishment of a low-carbon product certification system and promulgation of various preferential tax treatments for low-carbon technologies and products.

Promoting the Recycling of Important Resources

Resource recovery is targeted as a strategic emerging industry, which can support long term GHG reduction and energy conservation goals. The resource recycling sector provides strong fundamental and technical support for energy conservation, development of a circular economy, realization of comprehensive use of waste, and environmental protection. According to the National Plan, the added value of strategic emerging industry is expected to account for 15% of GDP in 2020.

In a related development, China’s six ministries jointly issued the Implementation Scheme for Important Resources Recycling Projects (Promotion of Technologies and Industrialization of Equipment) (the “Implementation Scheme”) on December 31, 2014. The Implementation Scheme provides that, by 2017, China will develop a number of key and advanced recycling-related technologies and will be able to produce an integrated set of recycling-related equipment.

The Implementation Scheme focuses on the recycling of urban mineral resources, the re manufacture of used products, the resource utilization of industrial waste, and the establishment of the waste recycling system as detailed below.

  • Recycling of urban mineral resources. The Implementation Scheme seeks to establish, among other things, integrated recycling demonstration centers to recycle discarded mobile phones, waste lithium, nickel cadmium, and zinc-manganese batteries.
  • Re-manufacture of used products. The Implementation Scheme emphasizes promoting new technology R&D (such as technology in connection with the disassembling, cleaning, nondestructive testing, and assembling of old parts) and facilitating the development of relevant service industries.
  • Resource utilization of industrial waste. The Implementation Scheme requires developing integrated recycling equipment in areas such as associated mineral resources, tailings, coal gangue, coal ash, flue gas desulfurization gypsum, red mud, construction waste and waste mineral oil, and to promote the utilization of equipment that is able to produce construction materials from tailings.
  • Establishment of a waste recycling system. The Implementation Scheme proposes building intelligent recycling systems and encourages waste products processing enterprises to utilize modern sorting and separation equipment, especially those related to PET bottles, PS foamed plastic, and mulch.

The Implementation Scheme also provides that incentives will be offered, relevant laws and regulations will be promulgated, and an evaluation system will be established with the aim of encouraging more enterprises to participate in recycling projects.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Eric Rothenberg, an O'Melveny partner licensed to practice law in Missouri and New York, Li Qiang, an O'Melveny partner licensed to practice law in New York, Alan Bao, an O'Melveny associate licensed to practice law in California, and Xiaoyu Xu, an O'Melveny legal consultant licensed to practice law in China, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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