China Law Insight : China Business and Intellectual Property Lawyers & Attorneys : King & Wood Law Firm : IP, Arbitration, Litigation, Securities, Foreign Investment

Instead of restricting participating Hong Kong companies to minority interests in CDM projects in China, according to the Supplementary Notes it is now possible for qualified Hong Kong companies to own all or a majority stake in CDM projects in China without the need for a local joint venture partner. This is because Hong Kong companies which are successful in obtaining approval from the EPD would be recognized as a Chinese enterprise when applying to China’s National Development and Reform Commission (NDRC) for CDM projects.

To be eligible under the Supplementary Notes, a Hong Kong company that meets the following criteria may apply for a letter of certification from the EPD:-

1. being a company registered and set up in Hong Kong, with its principal location of business operation or its headquarters situated in Hong Kong;

2. the executive director of the company should be a PRC national or a holder of a Hong Kong Permanent Identity Card; and that more than half of the board members should be PRC nationals or holders of Hong Kong Permanent Identity Cards; and

3. the ratio of non-tradable shares should be over 50% if the Hong Kong company is listed.

Under the Supplementary Notes, a Hong Kong company does not need to have a minimum number of years of business operation in Hong Kong. In addition, the Supplementary Notes do not contain any restriction on the shareholding structure of the Hong Kong company if it is not listed. In other words, as long as a Hong Kong non-listed company meets the first two conditions set out above, even newly incorporated Hong Kong companies wholly owned by a foreign party is eligible to apply for the letter of certification.

Companies meeting the above requirement will need to engage qualified China Appointed Attesting Officers when making the necessary declaration and for submission of the required documentary proof.

Further, a Hong Kong company when applying for the letter of certification must submit a business license of the CDM project company to the EDP. In other words, a CDM project company must have been established in China before its Hong Kong shareholder can enjoy the benefits under the Supplementary Notes.

In summary, the Supplementary Notes provides new and substantial opportunities for foreign investors to fully own and operate, through qualified Hong Kong companies, CDM projects in China, without the need for a local joint venture partner.

If you have any question on the above, you may contact Andrew Tan, Partner at Andrew.tan@kingandwood.com.hk or +852 2848 4848
 

2. Background

China has ratified the international legal regime created by the United Nations Framework Convention on Climate Change (“UNFCCC”)^[1] and the Kyoto Protocol (“Protocol”)[2]. Under the Protocol, CDM is a project-based mechanism under which Annex 1 Parties cooperate with non-Annex 1 Parties, including China, to reduce green house gas emissions. CDM allows Annex 1 Parties to acquire “certified emission reductions (“CERs”) generated by CDM projects implemented in non-Annex 1 Parties as one of the means to meet green house gas reduction commitments under the Protocol.  

With effect from May 2003, the UNFCCC and the Protocol were extended to Hong Kong after China’s notification to the United Nations.  Until the issuance of the Implementation Arrangements, there was no clear regulatory mechanism for the creation of green house gas reduction projects in Hong Kong that qualify as CDM projects. 

3. Qualifications

(a)    A Hong Kong company

Companies which are incorporated or established according to HKSAR’s laws and have obtained a valid Business Registration Certificate are entitled to the benefits available under the Implementation Arrangements.

(b)    CDM project located in Hong Kong

Emission reduction projects, including projects on energy efficiency improvement, development, utilization of new and renewable energy, as well as methane recovery and utilization, must be located in Hong Kong to qualify as CDM projects under the Implementation Arrangements. Such projects must also conform to the requirements of the UNFCCC, the Protocol and relevant decisions by the Conference of the Parties to the UNFCCC.

4. Application for the implementation of CDM projects in HKSAR

(a)    CDM project application shall be made to the EPD

EPD of the HKSAR is the liaison agency for CDM projects in Hong Kong. Any application, report and supporting information provided by project owner implementing CDM projects within Hong Kong must be submitted through EPD. EPD will forward the application to NDRC, which is the Central Government’s Designated National Authority, within 5 working days upon receipt of full documentations. NDRC will inform the project owner through EPD in case of any issue found.  

(b)    Documents required for CDM project application

The following documents must be submitted for the application:

·         Letter of Application for CDM project;

·         Application Form for CDM project activity;

·         CDM project design documents; and

·         Relevant information on engineering, construction, and project financing (including the approval of the environment impact assessment report, if applicable).

The format of documents submitted must conform to the specific requirements of NDRC and Chinese versions must also be presented.

(c)    Review of CDM project application

NDRC will engage relevant organization to provide expert review of the CDM project application. The CDM project application will also undergo review by the National CDM Board which will include representatives from EPD.

5. Operation of a CDM project

Project owners are requested to present to NDRC and the designated operation entity through EPD their project implementation and monitoring reports. EPD may also monitor the implementation of CDM projects in Hong Kong and present its findings to NDRC. 

In relation to CERs generated by CDM projects, if no foreign buyer of CERs is determined by the time a CDM project is submitted for approval and as a result the sale price of the CERs is not available, the emission reductions generated by the CDM project will be transferred into China’s national account. The project owner may transfer these credits from the national account upon notifying NDRC through EPD. 

Currently, no charges will be levied by the governments of China or the HKSAR on the revenue generated from the transfer of CERs of CDM projects implemented in Hong Kong, unlike for those generated from a PRC CDM project. 

6. Conclusion

Compared to China, the scope of greenhouse gas reduction projects that can be implemented as CDM projects in Hong Kong is smaller, given that most manufacturing activities have migrated to China for cost and other reasons. Nevertheless, the availability of CERs represents an additional revenue source and so could allow some otherwise marginal environmental projects to be implemented in Hong Kong. This should facilitate the improvement of the environment in Hong Kong.  However, this is unlikely to be the only tool needed to address all the environmental challenges of Hong Kong but is one of the many measures that can and should be encouraged.