China and Hong Kong: Building Low Carbon Economies
Authored by Chistopher Tung (Hong Kong)
“One country, two systems”, has been the guiding constitutional and policy blue print for Hong Kong since the return of the territory to China in 1997. This principle guaranteed the common law legal system of Hong Kong within the Chinese civil law system for 50 years until 2047. Over a decade later, it is increasingly clear that the economies and communities of Hong Kong and Mainland China have integrated and converged. While “One country, two systems” broadly holds true, so that Hong Kong remains a distinct legal jurisdiction, both legal systems have been exerting increasing influence on each other over the years. It is therefore crucial for investors to understand the real policy and regulatory dynamics in both places to successfully navigate through business opportunities and risks straddling both jurisdictions.
2010 is a watershed year in this continuing convergence and there is no single policy and development issue that is more pressing than the transition of the Mainland Chinese and Hong Kong economies to a low carbon basis.
Supporting the transition: low carbon policies and law
China
China’s National Climate Change Programme of 2007 was the first comprehensive policy document to address climate change. Only since last year have senior Chinese government policymakers started to evaluate seriously specific policy to transform the economy to a low carbon basis, as a key pillar of national economic and social development. The key catalyst for action was the announcement by the Chinese government in late November 2009 that it would target a 40-45% cut in carbon intensity by 2020 (adopting a 2005 baseline).
Although no national low carbon economy policy has yet emerged, the State Council and key government ministries such as the National Development and Reform Commission (NDRC), the Ministry of Finance, the Ministry of Housing and Urban-Rural Development, researchers at Tsinghua University and the Chinese Academy of Social Sciences, are doing a great deal of work to formulate low carbon policies for inclusion in the 12th Five Year Plan (FYP)(2011-2015), China’s highest national development policy document. The 12th FYP will mandate the promulgation of new laws and regulations to support the development of a low carbon economy. As national policy evolves, the governments of Chinese cities, provinces and special economic regions have wasted no time to announce and issue their own low carbon plans. In marked contrast to the position in the United States, the low carbon economy drive has reignited the interest of senior policy makers in introducing domestic carbon trading, as a market based tool to encourage domestic carbon market growth. In the event that domestic carbon trading adopts a baseline and credit model, rather than a cap and trade model, or a hybrid of the two, there would be substantial potential to develop emission reduction projects to generate domestic Chinese carbon credits. Carbon market commentators indicate a domestic Chinese carbon credit market value between US$500 million and US$2 billion is realistic and achievable. Plans for domestic carbon trading pilots are expected in the 12th FYP. It is important to emphasize that plans to develop a Chinese domestic carbon market is only one part of a much broader array of economy wide and sector based initiatives to encourage action and investment in clean and low emissions technology, alternative energy and energy efficiency. Estimates of the scale of investment needs for China vary considerably, and must be treated cautiously, but McKinsey’s have estimated a range of US$35 billion to US$250 billion for 2010-2030.
Hong Kong
The Hong Kong Government has been pursuing a low carbon economy policy now for two years. However, unlike Mainland China, Hong Kong does not have a separate overarching climate change policy. To date, climate change policy and action in Hong Kong have been led by the Environment Bureau and Environmental Protection Department.
In May 2010, Edward Yau, the Hong Kong Secretary for Environment, indicated that Hong Kong would “seek to follow if not excel” on the China national carbon intensity reduction target of 40-45% by 2020. This marked a substantial shift from the previous policy commitment of a 25% reduction in energy intensity by 2030 (that also adopted a 2005 baseline), which unimpressively reflected a business as usual position. The new commitment to meet or exceed the China national target is significantly more aggressive. A recent study conducted by the Energy Research Institute of the NDRC suggests additional investment and energy expenditure up to 2020 of around US$1 billion to over US$5 billion.
Preparations are now underway in Hong Kong to develop a low carbon strategy and action plan that will both align with the China national carbon intensity reduction target, and co-ordinate action with Guangdong Province to create a low carbon and green Pearl River Delta. Ideally, this low carbon strategy and plan will be formally incorporated into the Hong Kong Chief Executive’s Policy Address and Agenda in October this year. In the event that an integrated low carbon strategy and plan are not included in the Policy Address and Agenda, Hong Kong’s commitment to the China national carbon intensity reduction target and the impending inclusion of Hong Kong in the 12th FYP, will still provide strong impetus for low carbon investment and action in Hong Kong.
Recent developments under The Closer Economic Partnership Arrangement between Mainland China and Hong Kong have extended the ability of Hong Kong businesses to set up wholly-owned enterprises to provide environmental protection services in Mainland China. And since 1 December 2009, Hong Kong companies have been able to fully own and control Clean Development Mechanism projects in China. These two key examples of preferred access provided to Hong Kong based investors (which can be foreign owned) compared to foreign investors in the China low carbon and green market, gives Hong Kong a strong competitive advantage. Importantly, policymakers in Mainland China and Hong Kong are firmly committed to providing further preferred market access for Hong Kong based companies and investors.
What it means for you
The greatly increased co-operation between Mainland China and Hong Kong in low carbon and green economic development means that foreign investors can establish or acquire operations in Hong Kong and benefit from the strength of Hong Kong’s legal system and courts, while taking advantage of the preferred access afforded to Hong Kong based companies and investors in Mainland China across a range of industries. Further policy and legal incentives are likely to emerge to encourage foreign investment in clean technology and alternative energy in both Mainland China and Hong Kong. Careful attention will need to be paid to the scope, interaction and implementation of these policies and initiatives to ensure that an investor gains maximum benefit while keeping risks to a minimum.
