Copyright © 2010 by K&L Gates Solicitors. All rights reserved.

Christopher Tung, Partner, Hong Kong

September 2010

Clean technology and alternative energy investments, a brief overview of policy and legal considerations for investors in China

2

Overview

What are the key drivers? Supporting policies and laws Sustainable development policy & law timeline Who dares wins (or loses) Preferred sectors? Trends

3

What are the key drivers?

Rapid economic growth: no.2 economy No.1 greenhouse gas (GHG) emitter Serious environmental degradation Actual & potential social instability Desire to be world class in clean tech & alternative energy – “leap frog” potential Low carbon economy objectives Planned and focused policies and law with long term objectives in line with sustainable development Institutional control: State Council and the NDRC

4

Supporting policies & laws

China has systematically gone about developing policies and laws to support: greater energy efficiency reduced localised pollution reduced GHGs encourage the deployment of renewables and clean technology solutions the development & growth of domestic capacity and know-how higher value foreign investment to reinforce domestic action

5

Supporting policies & laws 11th Five Year Plan (FYP) – energy efficiency focus Cleaner Production Promotion Law 2002 Environmental Impact Assessment Law 2003 Clean Development Mechanism Measures 2004 Renewable Energy Law 2005 China National Climate Change Programme, 2007 Circular Economy Promotion Law 2009 National carbon intensity reduction target, 40-45% by 2020 (base year 2005) 12th FYP and 13th FYP – low carbon economy, clean tech and alternative energy focuses New Energy Law 2011?

6

Sustainable development policy & law timeline

1992 1997 2001

2005 2007 2009 2010

2012 2015 2020 2030 2050

China ratifies Kyoto Protocol (KP)

Kyoto Protocol Marrakech Accords

Kyoto operationalEU ETS Phase I in forceCOP 13 MontrealChina RE Law

2008CNCCPCOP-13 BaliBali Action PlanNational Leading Group on Climate Change formed

China climate position paperCOP-13 BaliBali Action Plan1st Commitment Period starts

COP-15Copenhagen AccordChina national carbon intensity target proposed

China RE target 10%20% reduction in energy intensity of GDPCOP-16 Cancun

1st Commitment Period ends

China RE target 15%Review of Copenhagen AccordEnd of 12th FYP

40-45% national carbon intensity reduction targetEnd of 13th FYP

Objective for China peak emissions (CAS 2009)

80% emission cuts by Annex I countries

2002

Rio Earth SummitUNFCCC

2004 Introduction of China CDM Measures

2011Start of 12th FYP

2016Start of 13th FYP

China ratifies UNFCCC

1993 1994

China Agenda 21

2003NDRC designated China DNANC4 establishedKP extended to Hong Kong

7

Who dares wins (or loses) SAS motto unthinkable for a well advised investor Access to local RMB markets improving BUT Constant risks (new, immature, changing M&A rules, anti-monopoly law, Foreign Invested Partnerships and tax avoidance policies. Note risk of retroactive effect) Consolidated and detailed national regulations to facilitate PE investments still required Scrutinise critically: “We did it before, so it’s ok” In clean tech, even in tried & tested technologies there can be challenges (note wind power: clear feed–in tariffs and earlier local content requirement, abolished in 2009)

8

Who dares wins (or loses) – cont’d

A cavalier attitude to environmental liability and risks, increasingly untenable (developments in disclosure, enforcement and litigation – class actions) Advisers with strong local knowledge, a grasp of commercial and technical, as well as policy and law in practice heavily preferred but rare Reliable local partners can also be difficult to identify or attract but essential in practice Intellectual property protection patchy Pioneering domestic carbon trading and finance

9

Preferred sectors?

Industries: FYPs and foreign investment catalogue foreign participation in clean tech broadly encouraged http://www.fdi.gov.cn/pub/FDI_EN/Laws/GeneralLawsandRegulations/MinisterialRulings/P020071121358108121219.pdf

Locations: clean tech areas and PE friendly – Beijing, Chongqing, Shanghai, Tianjin, Shenzhen (Growth Enterprise Board or ChiNext) Local incentives: vary widely (consistency with national policies & regulations should be carefully checked)

10

Preferred sectors? Clean tech investments with carbon finance:

Compliance carbon market: Kyoto Protocol – Clean Development Mechanism (CDM) & the EU Emissions Trading Scheme

Voluntary carbon market: verified emissions reductions under internationally recognised certification standards (Voluntary Carbon Standard, VER+ & the Gold Standard)

China domestic carbon market (Panda Standard)Since 1 December 2009 HK companies can wholly own & control Chinese CDM projects (foreign ownership is otherwise restricted to 49%)

11

Preferred sectors – cont’d

12

Trends Clean tech & alternative energy investments will continue to increase (US$700 billion over next 10yrs)PE investments will accelerate (clear regulations for foreign invested RMB funds will help significantly) Other locations in China will compete with Beijing, Shanghai and Tianjin Environmental taxes and price on carbon (carbon tax and domestic emissions trading) will emerge Opportunities will need to be carefully balanced against risks Proper strategy, execution and continued evaluation/adaptation required to ensure success

13

Contact details and article

Christopher Tung, PartnerK&L Gates44th Floor, Edinburgh TowerThe Landmark15 Queen’s Road Central, Hong Kongchristopher.tung@klgates.com

China & Hong Kong: Building Low Carbon Economieshttp://www.climatelawreport.com/2010/06/articles/financing-investing/china-and-hong-kong-building-low-carbon-economies/