National treatment for Hong Kong companies in CDM projects

As the largest emitter of greenhouse gases in the world, China’s efforts to combat climate change have received ample attention. Part of this attention concerns China’s position as one of the main destinations for clean development mechanism (CDM) projects.

The Operation of Clean Development Mechanism Projects Administrative Measures (the CDM Measures) were adopted by China’s national Coordination Committee on Climate Change and became effective in 2005. The CDM Measures have proved successful in providing a framework for CDM projects in mainland China.

The position of Hong Kong under the United Nations Framework Convention on Climate Change (UNFCCC) has received far less attention. However, Hong Kong’s ability to utilize China’s position as a non-Annex I country under the UNFCCC should not be overlooked.

Policy change

Since May 2003, companies incorporated in Hong Kong have been able to develop CDM projects within Hong Kong under the UNFCCC framework. To streamline the relevant approval procedures, the Arrangements for the Implementation of Clean Development Mechanism Projects in the Hong Kong Special Administrative Region took effect on 6 June 2008.

Under these arrangements, applications for CDM projects in Hong Kong must be submitted via the Hong Kong Environmental Protection Department (HKEPD) to the National Development and Reform Commission (NDRC) in Beijing for examination and approval per the requirements of the CDM Measures.

Until recently, however, Hong Kong companies were regarded as foreign entities for the development of CDM projects in mainland China itself. As a result, Hong Kong companies had to partner with a Chinese entity and could only own up to 49% of the equity interest in a CDM project. This policy changed on 1 December 2009 with the publication by the HKEPD of the Supplementary Notes on the Implementation of Projects under the Clean Development Mechanism by Hong Kong Enterprises in the Mainland (the Supplementary CDM Notes). The Supplementary CDM Notes set out the long-anticipated criteria and procedures for Hong Kong companies to apply for “national treatment” under the CDM Measures. This treatment allows a Hong Kong company to fully own and operate CDM projects within mainland China without the need to joint venture with a mainland Chinese partner.

Only a company satisfying all the criteria below can enjoy national treatment:

1. the company must be incorporated in Hong Kong and must have its main location of business or its headquarters in Hong Kong;
2. the company’s executive director must be either a PRC national or a Hong Kong permanent resident. If the company has established a board of directors, then more than half of its members must be either PRC nationals or Hong Kong permanent residents; and
3. for a listed company, more than 50% of its shares must be non-tradable.

In addition to information confirming that the company meets the relevant criteria, a copy of the business licence of the project entity that intends to apply to the NRDC must also be included in the application documents. It therefore appears not to be possible to obtain a blanket letter to cover projects that have not yet been identified.

Upon a successful application, the company will be issued a Letter of Certification for Hong Kong Enterprises relating to the Measures for the Operation and Administration of Clean Development Projects (Letter of Certification). The HKEPD should issue this letter within 10 days of receipt of the application documents. If the status of the company changes such that it no longer fulfils the criteria under the Supplementary CDM Notes, it should immediately inform the HKEDP of these changes. The Supplementary CDM Notes specifically state that the HKEDP has reserved the right to revoke any issued Letter of Certification upon such changes.

To prepare the various statements and documents that should be submitted as part of the application, the Supplementary CDM Notes stipulate that the applicant will need to engage a Hong Kong lawyer who is a qualified China-appointed attesting officer. The HKEPD has made public various sample documents as guides for this type of application.

One of those sample documents requires the applicant to fill in the identity of its shareholder(s). The document indicates that companies owned by neither PRC nationals nor Hong Kong permanent residents also can qualify under the Supplementary CDM Notes.

A greater role

To date, we understand that various companies have been successful in their applications and have been issued the Letter of Certification to proceed with the next step of obtaining the letter of approval by the NDRC under the CDM Measures. Granting Hong Kong companies this national treatment may help to reignite developers’ interest in CDM projects in mainland China, in particular for those projects which lack a local counterpart willing or able to make the equity investment required under the CDM Measures.

With the Supplementary CDM Notes, the role that Hong Kong and Hong Kong companies can play in China’s overall efforts in combating climate change has expanded. These developments indicate a closer cooperation between Hong Kong and mainland China. This cooperation was further emphasized by Hong Kong’s Secretary for the Environment, Edward Yau, on 3 March in a written reply in the Legislative Council. Yau indicated that Hong Kong will, together with mainland China, follow the Copenhagen Accord and the requirements of the UNFCCC to report every two years on the mitigation actions that have been taken in order to achieve China’s voluntary national target of reducing carbon intensity per GDP unit to 40-45% of 2005 levels. As a result, Hong Kong’s integration with mainland China’s climate change policies is likely to continue to increase, and with it, business opportunities to contribute to the sustainable development of China’s economy.

Harold van Kooten focuses on advising the energy sector on legal issues concerning the development and operations of renewable energy projects, climate-change initiatives and environmental compliance across Greater China.

Harold van Kooten
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