Lehman Lee Xu s Beijing office June 23

Lehman Lee & Xu’s Beijing office June 23 th 2008 Clean Development Mechanism DOING BUSINESS IN CHINA abonidenobili@cplex. it aldo@lehmanlaw. com Aldo Settimio Boni de Nobili Associate - China desk - Beijing

DOING BUSINESS IN CHINA Clean Development Mechanism FACING GLOBAL WARMING EFFECTS IPCC Increase in the temperature of Earth’s surface and oceans Established in 1998 by WMO and UNEP Sea level 1990 -2100 = 1. 4° C – 5. 8° C TASK: Precipitations and extreme weather events evaluate the risk of climate change Agriculture ACTIVITY: Glaciers reports about UNFCCC implementation Species extinctions 2 2

DOING BUSINESS IN CHINA Clean Development Mechanism UNFCCC • UNCED Rio de Janeiro 1992 • Signed in 1992 by 154 nations • Parties = 192 countries • 1994 entered into force • COP • Aim: stabilizing GHG to prevent dangerous interference with the climate system • “Common but differentiated responsibilities” • Non-binding Annex 1 NO RESTRICTIONS Developed countries Non-annex 1 Annex 2 Developing countries OECD Provide financial resources to Non-annex 1 3 • report annual emissions and sinks • submit annual inventories

DOING BUSINESS IN CHINA Clean Development Mechanism KYOTO PROTOCOL • COP 3 Kyoto 11 Dec 1993 • In force 16 Feb 2005 • June 2008: 182 parties • 36 Annex 1 + EU = reduce GHG (61. 6%) • Cyprus, Malta and Kazakhstan intend to participate • 137 Non-annex 1 ratified: no obligation • US not ratified 1° committment period = 2008 -12 • 1. 3 emission allowances in 2 nd commitment period for every ton of GHG exceeding GAINING CREDITS BY UNDER-POLLUTING • suspension from transfers of credits Emissions cap reduce national emissions 5. 2% below 1990 baseline Governments Credits $6 0 in bi 20 lli 07 on Industrial entities other parties brokers Buy credits carbon projects developers exchanges 4 Actual emissions Buy credits

DOING BUSINESS IN CHINA Clean Development Mechanism EMISSIONS OFFSET Emissions exceeding OFFSET CO 2 emissions cap Carbon credits Emissions allowed JI CDM ET 5 5

DOING BUSINESS IN CHINA Clean Development Mechanism KYOTO PROTOCOL’S FLEXIBLE MECHANISMS Emissions Trading (ET) • Article 17 Kyoto Protocol • Annex 1 – Annex 1 Joint Implementation (JI) • Article 6 Kyoto Protocol • Annex 1 – Annex 1 Clean Development Mechanism (CDM) • Article 12 Kyoto Protocol • Annex 1 – Non Annex 1 6 6

DOING BUSINESS IN CHINA Clean Development Mechanism CDM MARKET IN CHINA INTENDED WHY CERs BUYERS and facilities costs PROJECT TYPES Competitive labour WORLD BANK SAYS: POTENTIALITIES 50% of CERs 2 -8 bln US$ per year 1197 projects nationally approved (April 2008): +400% 2006 CURRENT STATUS 210 projects internationally registered: + 500% 2006 1449 projects are being nationally approved 625 approved hydro projects: 50% of the total approved projects 7 7

DOING BUSINESS IN CHINA Clean Development Mechanism LAWS The United Nation Framework on Climate Change (UNFCCC) • United Nation Conference on Environment and Development (UNCED) Rio de Janeiro 1992 • China ratified 1993 The Kyoto Protocol • COP 3 11 December 1997 • China ratified 2002 The Marrakech Accords CDM Measures • 12 October 2005 • NDRC + MOST + MFA + MF Promoting Clean Production Law • 19 June 2002 – 1 January 2003 Energy Conservation Law • COP 7 November 2001 • way to ratify the Kyoto Protocol • CDM issues Others INTERNATIONAL LEVEL • November 1997 – 1 January 1998 • PRC Environmental Law • Environmental Impact Assessment Law • Renewable Energy Law • financing, foreign investment, taxation NATIONAL LEVEL 8 8

DOING BUSINESS IN CHINA Clean Development Mechanism AUTHORITIES National Coordination Committee on Climate Host governments + Designated Change • (NCCCC) national approval National Authorities (DNA) Chair NDRC Designated Operational Co-Chairs • approving Board’s members • validation (outset) • examination • making publicly available the PDDand approval National CDM Project Board comments and stakeholders’ • receiving public Entities (DOE) • reporting to NCCCC on comments progress in CDM activities • verification and certification of CERs NDRC - MOST (operation) • making reccomendations Vice Chair Board • reviewing national CDM policies, rules and standard SEPA – CDM Executive Board (EB) MOFA on the amendments of the CDM Measures • recommendations to the COP/MOP • approve new methodologies CMA – MF - MA • DOEs accrediting and suspending • reviewing accreditation procedures • make publicly available CDM activities and procedures • accepting applications DNA • CDM project registry • final approval • reviewing CR and VR NDRC • issuing CERs. 9 9

DOING BUSINESS IN CHINA Clean Development Mechanism CDM REQUIREMENTS • China’s legal system, sustainable development strategies and policies • not introduce new obligations • promote the transfer of environmentally sound technology PROJECT Funding for CDM projects from the developed countries shall be additional to their current official development assistance and their financial obligations under the Convention. Additionality (Marrakech Accords) “Chinese funded or Chinese-holding enterprises within the territory of China are eligible to conduct CDM projects with foreign partners” (art. 11 CDM Measures) • 100% Chinese • 51% Chinese (at least) PROJECT OWNER • FIEs? • Hong Kong / Macau? 10 10

DOING BUSINESS IN CHINA Clean Development Mechanism TYPICAL INVESTMENT STRUCTURE 2% (Priority areas) 65% (HFC – PFC) Other chinese taxes Government 30% (N 2 O) TAXES CERs Broker RMB/t. CO 2 Company CERs purchaser RMB/t. CO 2 CDM Project Private company 100% Chinese FIE 51% Chinese (at least) Domestic company Foreign investor Governmental body Financial institution NGO Project owner 11 11

DOING BUSINESS IN CHINA Clean Development Mechanism CDM PROJECTS TYPES Energy efficiency Industrial process changes Renewable energy Methane recovery Cogeneration Afforestation and reforestation Agriculture Transports priority areas PRC 12 12

DOING BUSINESS IN CHINA Clean Development Mechanism PROCEDURES Project owner DNA + N Board DOE NDRC PIN Documents: --application form PDD --enterprise status --general information Approval --project financing Validation Expert review procedure (30 days) EB Project owner DOE’s designation DOE EB National level Registration Implementation and monitoring Decision from National CDM Board Project review Verification Certification and issuance LOA (20 -30 days) 13 • stakeholders • LOA • DOE ‘s designation • consultation • validation report • filing of VR and LOA • 8 weeks (potential review) • EB files decision to PO • PO files decision to NDRC • object • modality: monitoring plan PDD • submitting reports to NDRC and DOE Validation Report • DOE’s designation to the EB • Verification Report • Certification Report • CERs: 15 days after reports • send to participants’ accounts at request International level

Lehman Lee & Xu’s Beijing office June 23 th 2008 THANK YOU FOR YOUR ATTENTION DOING BUSINESS IN CHINA Clean Development Mechanism abonidenobili@cplex. it aldo@lehmanlaw. com Aldo Settimio Boni de Nobili Associate - China desk - Beijing 14