Over the last two months, China has taken three important steps towards defining its energy policy: the first being the publication of a draft new energy law on 1 December 2007, the second being the publication of its first ever energy white paper on 26 December 2007 by the Information Office of the State Council and the third being an announcement by an official of the State Administration of Taxation on 10 January 2008 that the Chinese government is preparing a radical overhaul of the resource taxation system. This e-bulletin discusses these policy changes and their potential impact.

The energy law

Framework

The draft law will create a much needed general framework for the energy industry in China with an aim of regulating the development, use and administration of energy resources in China. The current energy laws and regulations are inadequate to deal with these concerns due to the fact that many of the provisions are out of date and contain numerous inconsistencies. The plethora of existing legislation includes the Energy Conservation Law, the Renewable Energy Law, the Mineral Resources Law, the Coal Industry Law and the Electric Power Law. These laws may need to be updated to be consistent with the overall foundation that will be set by the new energy law.

For the past two years, a taskforce overseen by the National Energy Leading of Group of the National Development Reform Commission (NDRC) made up of Chinese government ministries and commissions as well as experts has been developing the draft law. The draft law has now been published for public comments and it is anticipated that a new energy law will become effective in 2008. Not only does the draft law address the conventional sources of energy such as coal, crude oil and natural gas, but it also covers the less conventional sources of energy such as wind, solar, geothermal and biomass energy.

The intention is that the new energy law will be a comprehensive foundation for a wide range of issues affecting the energy sector. Therefore the framework set out in the draft law provides general guidelines but no detailed measures. It is likely that further detailed measures will take the form of additional regulations or legislation issued either by central government, government agencies or local legislatures.

Despite China being the world's second biggest consumer and producer of energy, the per-capita average of China's energy is very low compared to that of other nations and it has been a net importer of petroleum since 1993. Last year China imported 47% of its requirements. As a result, the draft law focuses on energy efficiency and security which are viewed as being key to China's continued development. Consistent with China's 11th five year programme, the development of the economy in coordination with the environment is also an important principle.

Separate ministry

Central to the new framework will be the creation of a unified department of energy, which will directly report to and be under the supervision of the State Council. China currently divides authority to regulate and manage the energy sector among various ministries and commissions: for example, the NDRC is responsible for research, planning and price setting and the Ministry of Land and Resources licenses the use of natural resources.

A unified department of energy is part of China's continued drive to improve energy regulation and therefore improve energy development, efficiency, supply and security. The new energy law will provide a legislative basis for the creation of this unified entity but the draft law does not identify or establish the relevant body. We have yet to see whether this will be a new Ministry or an existing body such as the NDRC. The decision on this matter will be taken by the National People's Congress.

Energy security

Over recent years, China has aggressively built up its strategic energy reserves. More recently, the major State-owned enterprises have also developed storage facilities. The draft law goes a step further and requires oil enterprises operating in China to build up their reserves (being both energy resources and petroleum products) in accordance with figures to be pre-agreed with the Chinese government. In addition, energy storage used in the daily operation of the enterprise may not be counted towards its energy reserve obligation and if an enterprise fails to meet its reserve obligation, its illegal income will be confiscated and it will be fined with an amount equal to one to five times of its illegal income. Where such failure to reserve is serious, the enterprise may be ordered to cease its operation or its business licence may be revoked. It is unclear whether this provision would be interpreted as applying solely to state-owned oil companies or also to privately-owned enterprises and foreign contractors. Given the underlying purpose of the provision it is unlikely to apply to foreign contractors. Although the issue is still open as the draft law does not provide guidance on this matter.

Energy pricing

Energy pricing is also addressed in the draft law. China has recently shown a willingness to move towards market pricing, but most prices remain regulated. The draft law reinforces the general principle of market access and endorses a move to free market pricing whereby the level of government control will eventually decrease. Overall pricing of energy transmission services and any energy which is important to public welfare will nevertheless continue to be closely regulated by the Chinese government.

Clean energy

There is little in the way of specific provisions regarding non-conventional clean energies (although they are, as mentioned above, within the scope of the draft law). The draft law calls for a reduction in energy use to preserve the environment and recommends that new energy resources replace the traditional energy resources, renewable energy replace fossil fuels and low-carbon resources replace high-carbon resources. There is also provision for preferential pricing support to be given to assist the establishment of non-conventional clean energies and the Chinese government will encourage more importation of clean energy and related technology.

Energy investment

The draft law seeks to encourage more investment into the energy industry primarily to add to competition in the energy supply market and to stimulate increased efficiency and service quality. The draft law stipulates that the Chinese government will allow and encourage non state-owned enterprises to invest in the energy industry. There are however certain exceptions such as major investments in the energy industry and investments relating to national security, which must be controlled by state-owned enterprises. The draft law does not specify what will be the criteria for determining major investments.

Rural areas

The supply of energy to rural areas can be costly (often due to increased transportation costs and less demand and population density) and result in higher energy prices for consumers. The draft law provides for the supply of energy to rural areas to be subsidised by the Chinese government, using preferential financial, tax and price policies to guide and encourage companies to invest in rural energy supply. There is also provision for renewable sources of energy, such as wind and solar power, to be widely applied in these rural areas.

The energy white paper

The energy white paper provides a high level discussion of China's energy policies and ties in specifically with President Hu Jintao's scientific outlook for economic development. As with the draft law, the white paper concentrates on improving energy development, efficiency, supply and environmental protection in China and the strengthening of international co-operation in the energy sector.

Good governance, energy efficiency and technological advancement are cited as being important to overcome the challenges China faces in the energy sector. There is also much discussion of structural adjustment (improving governance/management structures) and the acceleration of the development of new technologies. The discussion is lacking in detail and it is yet to be seen how the policies and reforms discussed will in fact be effectively implemented. Indeed, some of the proposals do not sit together well, such as tackling climate change whilst simultaneously further developing its coal industry. That said, there is an emphasis on the development of clean coal and co-generation technologies, cleaner and more efficient coal-fired power plants and the development of coal bed methane. It is likely that the Chinese government will also look to other means and technologies to off-set China's emissions or clean up so called "dirty" energy by virtue of advancements in clean energy technology, such as carbon capture and storage. The main policies are summarised below.

Energy conservation

The Chinese government announced a number of ongoing specific energy conservation policies in the white paper including petroleum substitution, building more energy efficient buildings, replacement of energy inefficient vehicles, ships and technology, more rigorous energy conservation monitoring and technical support and better public education regarding energy efficiency.

Increase in domestic energy supply capacity

In order to become some self sufficient, China wishes to increase its domestic supply capacity across the board by further developing, consolidating and making safer the coal industry, by developing more efficient electric power stations and building and strengthening regional power grids, enhancing the exploitation of oil and gas reserves, promoting renewable energy and improving energy development in rural areas.

Accelerating progress of energy technologies

In conformity with President Hu Jintao's scientific outlook, the white paper looks to the improvement of technology to achieve further energy efficiency as well as the promotion of existing energy saving technologies. Encouragement of research and development activities to make technological advancements, improvement on current technological and environmental standards and giving increased support to frontier technology research are each seen as key governmental policies to this end.

Co-ordinating Energy Environment Development

Whilst China is often criticised for being among the world's largest polluters, the Chinese government takes the opportunity in the white paper to promote its green credentials by highlighting four key policies which are intended to produce a 10% drop in the emission of major pollutants by China over the period from 2006-2011. The first is to utilise resources and recycle by-products of energy production; the second is to tackle environmental pollution; the third is to take action to prevent vehicle emissions by enforcing environmental standards for vehicle emissions and forbidding the manufacture, sale and import of vehicles exceeding emissions limits; and the fourth is to strengthen the environmental management of energy projects.

Deepening Energy System Reform

The white paper endorses the proposal for a new energy law and recognises the need to strengthen energy and safety legislation to create an environment which fosters good management and more open and competitive markets.

Strengthening International Co-operation

It is fitting that in the year that China is to grace the world stage at the Beijing Olympic Games, China is also continuing its desire to embrace the international energy sector. The main drivers quoted for increased international co-operation include utilising the talents of companies and individuals, including technical and managerial expertise, improving policies for fair trade, utilising advanced technology of third parties, procuring expertise in developing unconventional and advanced technologies and promoting world energy security through co-operation. The white paper sets out continued support for overseas investment by the State-owned enterprises and encourages their participation in international energy co-operation and investment in overseas energy infrastructure and engineering technology.

Resource taxation

Currently, resources in China which include crude oil and natural gas, among other mineral resources, are taxed with reference to quantities of the resource and a charge per unit fixed by the Chinese government, subject to given exceptions.

A windfall gain levy was introduced on 26th March 2006 in addition to the resource tax. The purpose of this levy was to enable the government to mitigate the disparity between rising crude oil prices and the lower downstream (and regulated) prices for refined oil products. The windfall gain levy applies only to domestic crude oil production and is determined on the basis of price using to determine the applicable production sharing allocations. The levy is calculated monthly and payable quarterly and is only payable for that portion of the sales price exceeding USD 40 per barrel at a rate from 20% to 40%.

A statement made by an official with the State Administration of Taxation on 10th January 2008 confirmed that the Chinese government is currently considering a shift in the mode of taxation of resources. At this stage, there have been no specific announcements other than that the State Administration of Taxation has submitted a proposal to the State Council to change the taxation of resources from a charge per unit to a more sophisticated amount which takes into account the prevailing prices of the resources. It is not clear what resources will be affected nor whether this proposal will supplement or replace either or both of the resource tax and the windfall gain levy.