The Draft Energy Law: a Possible Legal Protocol to Help China Go Green

The PRC and India together have already accounted for 45% of the increase in global primary energy demand, according to the International Energy Agency [IEA]. If no implementation is made for the current policies, it is estimated that both countries' energy usage will be more than double between 2005 and 2030, according to the IEA. As of to date, The PRC is already a global leader in the use of solar thermal energy for hot water, with 60% of the world's installed systems, according to the Carbon Disclosure Project. Yvo de Boer, UNFCCC executive secretary, even emphasized at the opening of the Bali conference that developing countries, particularly in Asia, will be among the worst affected regions due to lack of sufficient resources to protect themselves. With its rapid industrial growth, the PRC may possibly overtake the US as the largest emitter of greenhouse gases.

THE DRAFT ENERGY LAW

As part of President Hu Jintao's commitment to building a harmonious society, the government's regulators have boosted their efforts in tackling environmental problems and contributing to the well-being of China's citizens. Early in December, the National Energy Leading Group (NELG) officially published the draft Energy Law on its website, stating that the nation is addressing climate change through a legislative approach.

The latest draft calls for keeping larger reserves of oil, uranium, and other key resources, while local governments are to encourage the development of energy-efficient production processes and consumption approaches. Regional governments, according to the draft, are to encourage the improvement of energy consumption structures and to replace fossil fuels with renewable energy sources and replace high-carbon with low-carbon energy.

The draft legislation, according to Peter Murray, chief representative of Ince & Co in Shanghai, provides a solid and adaptable framework for both the central and local governments to work out sector and regional energy policies.

“Efficiency of energy utility determines whether this developing country could sustain the current pace of development,” he said.

The draft also divides energy into four key categories, including primary energy for coal and crude oil, secondary energy for electricity and gas, new energy for bio-energy, and renewable energy for solar and thermal power. Among these categories, clean energy is for the first time being defined in legislation.

“Until recently, no restrictive regulation for the enterprises to reduce energy usage existed, so energy conservation policies were essentially voluntary,” said Sarah Stokoe, senior associate of Gide Loyrette Nouel. “The recently promulgated PRC energy Conservation Law may henceforth serve as a guideline, sometimes as a minimum standard, for the companies to reduce energy usage.”

The draft law also requires all manufacturers to put energy efficiency rating labels on their home appliances. Colin Chung, chairman of the Energy Institute of Hong Kong, said that such a requirement is beneficial to the domestic manufacturers in the PRC and may help in promoting the nation's energy efficiency products. Since the PRC has some of the largest home appliance manufacturing companies in the world, obtaining an energy efficiency label may boost the sales of such products in both domestic and foreign markets, he said. [See PRC Energy Saving Law
(Amended) in CLP December 2007/January 2008].

ENFORCEMENT AND MEASUREMENT

The draft also focuses on sustainable development for new construction projects. However, for buildings and infrastructure that already exist, it does not provide any measures on sustainability. “In China, there are a lot of old and existing buildings,” Chung said. “In order to make the rules [the draft Energy Law] more global, it's better to not only govern those new buildings but also those existing buildings.”

Heavy penalties are imposed on enterprises, government officials, and those who refuse to comply with the efficient energy utility rules, but it remains unclear how local governments should exercise their authority. Very often, Stokoe said, the policy of encouragement could end up as preferential tax and customs duties treatment, which can also apply to wind, solar, biomass, and other renewable energy projects.

One recent example is that the Chinese government is working on a taxation plan to promote enterprises' awareness of environmental protection. According to Xinhua, the first plan suggested that energy-consuming companies pay tax in accordance with the profits they earn, while the second plan proposed that companies pay tax according to how much pollutant they have discharged.

Whether this plan would be an effective method of enforcement is still unknown. But such a taxation plan would improve efficiency in the energy field, Murray said. By increasing companies' possible tax burden, the plan will be able to push energy-consuming companies towards becoming more energy-efficient.

On the question of whether such a plan would encourage officials to take money under the table rather than report them as profits, Murray said, “if the central and local governments could enact good laws to implement the spirit of the draft legislation, we do not think that the present shadow market of money-for-pollution will survive for too long. In general, energy-efficiency means tax-efficiency which leads to cost-efficiency, and finally you have the overall efficiency.°®It is true, however, that enforcement is currently the most crucial problem that is hindering the government's progress, yet it is improving, Tung said.

“A number of years ago, flagship construction projects would have gone ahead no matter what, now they [the State Environmental Protection Administration; SEPA] will suspend them,” he said.

The government had checked more than 2,400 projects in 2006 that had been approved since 2000, said Zhang Lijun, vice minister of SEPA at a speech at the News Briefing of “June 5 World Environment Day” in June last year. In 2007, he said, they suspended or rejected the approval of 163 projects, 3.6 times the number in 2006.¹

HIGH-EMISSION SECTORS AND RENEWABLE ENERGY PRODUCERS

High-emission sectors such as aviation and construction companies will undoubtedly be the first to experience changes under the government's environmental reform. Plants that consume large amounts of resources may be forced to shut down while factories that emit too much greenhouse gas are subject to be fined. In the first 11 months of 2007, around 365 coal-burning power plants had been ordered to terminate operations, according to the Wall Street Journal.

Meanwhile, the draft law will most likely generate new type of industries. “While some intensive emission industries would receive tighter monitoring, industries like renewable energy producers, manufactures of renewable equipment, and professionals in designing ways for energy conservation may spring up and become the most desired industrial sector,” Stokoe said.

To name a few, wind farms, biomass, and solar power are the three key renewable energy technologies that the nation has widely promoted and implemented in both rural and urban areas. The country's wind farm capacity is the second largest in the world, Chung said.

“In China, they've got a lot of opportunities [to use] renewable energy,” Chung said.

Though the PRC missed the target that aimed for improvement of each dollar of national income by 4%, its involvement in forward-thinking energy legislation dates back to 1983, when the PRC Law on the Prevention and Control of Water Pollution was promulgated.² Several years later, the PRC Law on Prevention and Control of Atmospheric Pollution and the Environmental Protection Law were also adopted.

The National Climate Change Program (NCCP), established in June 2007, is the country's first climate change plan for curbing environmental problems. The plan promised to adopt measures to increase power efficiency while promoting greater public knowledge and awareness of environmental issues.

Meanwhile, the Renewable Energy Law, which was introduced in 2005 and took effect in 2006, has established a framework for the Energy Law. While the former aims to have renewable resources account for 16% of the total energy portfolio by 2020, the expected Energy Law will mostly focus on energy conservation policies. As Stokoe said, “the Energy Law is more part of an ongoing process to improve the Chinese environmental legal framework.”³

CLEAN DEVELOPMENT MECHANISM

Another legal tool for building sustainability is the Clean Development Mechanism [CDM] Project Operations Administration Regulations, which the government enacted in October 2005. Because the PRC is not bound by any emissions reduction obligations under the Kyoto Protocol, CDM projects allow companies to sell emissions-reduction credits by investing in energy sustainable projects for certain target countries. Regulations have been successfully encouraging greenhouse gas-reducing projects in the PRC ever since they were enacted.⁴

For example, one recent large-scale CDM project activity in the nation took place at Muyuan Swine Farm Henan Province. This Methane Recovery and Utilization CDM project by Muyuan Livestock Feeding Co., Ltd and Marubeni Corporation would reduce 110,461 metric tones CO² equivalent per annum, according to UNFCCC.

As of to date, the PRC is not only home to the largest number of registered CDM projects, together with Brazil, India, and Mexico, but also accounts for more than half of the certified emissions reductions under the CDM framework, according to the Carbon Disclosure Report and the UNFCC respectively.

THE NATION'S OBSTACLES

However, problems remain despite the PRC's continuous involvement in environmental protection. Air pollution, for example, is one of the biggest challenges China must confront. According to the World Bank, the PRC is the world's third largest consumer of coal, which is highly polluting, and the air quality in most parts of the country is considered not acceptable by the European Union.

“It's hard for China to switch from coal to gas, because China has so much coal but not a lot of gas,” Tung said.

But the PRC is planning to launch its first large-scale liquefied coal plant in Mongolia, expecting to have a daily output of 20,000 barrels and 100,000 barrels a day in the future, according to the Wall Street Journal.

The downside, however, is that the production process would generate a large amount of carbon dioxide [CO²], which also seriously harms the environment globally.

“If it [the project] produces a lot of CO², that might not be a good way for China,” Chung said. The government, he said, is already aware of their excessive CO² production, and they are aiming to reduce emissions. “I don't think that [liquefied coal] is the wisest method to do that,” he said.

Furthermore, the lack of transparency in regulations is a concern for foreign investors who are interested in CDM projects. Unlike Hong Kong, where both legal and financial markets provide a flexible environment for global investments, the PRC's currency restriction is an issue, Tung said. “Obviously, that's something that's going to be changed, but that's not going to happen next year,” he said.

Meanwhile, the imbalance of ownership in a CDM joint venture is one obstacle to the PRC's environmental reform. Starting from this year, the PRC has tightened joint venture regulations: a foreign party's ownership in a CDM joint venture has been reduced to 35% from 49%. Such an amendment could reduce companies' interest in developing CDM projects in the PRC.⁵

Yet, if the new Energy Law is enacted as it stands in current draft form, the government would appear to be taking its environmental problems seriously. Though it is still uncertain when the draft legislation will be ready, the Energy Law will surely put pressure on energy producers and local governments to make power production more efficient and sustainable. “This law would be a welcome step in the right direction,” Stokoe said.

Endnotes

1 See China Tightens its Environmental Law Control over new Investment Projectsin CLP April 2007.

2 See Beijing Municipality, Implementation of the PRC, Prevention and Control of Water Pollution Procedures in CLP September 2002 and PRC, Prevention and Control of Water Pollution Law Implementing Rules in CLP September 2001.

3 See Renewable Energy Law Encourages a Hundred Flowers to Bloom in CLP April 2006 and PRC Renewable Energy Law in CLP April 2005.

4 See A Guide to Clean Development Mechanism (CDM) Projects in China in CLP November 2007 and Implementation of New Clean Development Mechanism Measures in CLP March 2006.

5 See Foreign Investment Industry Catalogue: New Revisions & Alignment with National Development Strategy in CLP December 2007.