1. WALTER WANG ADJUNCT PROFESSOR OF LAW UNIVERSITY OF SAN DIEGO SCHOOL OF LAW G REENING THE D RAGON : E NERGY T AX P OLICY IN C HINA – IS IT N ATIONALISM OR P ROTECTIONISM?

2. Direction Facts & Figures Guiding Principles Moving the Transportation Sector Forward Energy Efficiency and Renewable Energy Nationalism or Protectionism? 2

3. Facts and Figures 3 China is the world’s largest energy consumer Coal accounts for approximately 70% of total energy consumption Oil consumption in June 2010 amounted to 8.98 million barrels per day (10% higher than in June 2009) 16 of the 20 most polluted cities in the world are in China

4. Guiding Principles 4 Renewable Energies Law  Goal: Promote the development and use of renewable energy as a means to increasing energy supply, improving the energy structure, and ensure energy security.  Requires electricity grid enterprises to strengthen construction of grids  Purchase of power from renewable energy sources is guaranteed.  Establishment of “renewable energy development fund”  Compensates the electricity grid provider if the fixed price for renewable energy is greater than the cost for energy from conventional sources.  Fund renewable energy R&D, rural projects, and equipment manufacturing

5. Guiding Principles 5 Renewable Energies Law  Financial institutions authorized to issue discounted loans  State Council to develop tax incentives for projects listed in renewable energy industry development guidance catalogue

6. Guiding Principles 6 Circular Economy Promotions Law  Reduce resource consumption and waste generation  Increase recycling and resource recovery  Government is to provide tax preferences for industrial activities that promote the circular economy  Tax policy to be used to encourage the importation of technology, equipment, and products that further the circular economy  Typical projects include:  Water conservation, energy efficiency, recycling of industrial goods, waste treatment, and seawater desalinization

7. Guiding Principles 7 Energy Conservation Law  Promotes energy conservation in manufacturing, building, consumer products, and transportation  Government to enact tax policies to encourage energy resource conservation and importation of energy conservation technologies and equipment

8. Guiding Principles 8 What to take away from the Renewable Energies Law, Circular Economy Promotions Law, and Energy Conservation Law?

9. Moving the Transportation Sector Forward 9 Economic Growth in the Auto Industry  2009 action plan to restructure the auto industry  Reduction in Vehicle Purchase Tax  10% down to 5% for passenger cars with 1.6L displacement or lower  January 20, 2009 – December 31, 2009  After 2009, the vehicle purchase tax increased, but only to 7.5% for passenger cars with 1.6L displacement or lower

10. Moving the Transportation Sector Forward 10 Economic Growth in the Auto Industry  Changes to consumption tax rates favor smaller vehicles and penalizes larger vehicles

11. Moving the Transportation Sector Forward 11 Economic Growth in the Auto Industry  Policy considerations on changes to tax structure in the auto industry

12. Moving the Transportation Sector Forward 12 Finally, a fuels tax!  Initially proposed in 1994, finally effective January 1, 2009  Tax rate = 1 yuan/liter for gasoline and 0.8 yuan/liter for diesel  Replaces commodity tax on fuels  Replaces certain tolls for road maintenance and management  Higher than the U.S. (18.4 cents/gallon), but lower than the UK ($3.36/gallon)  Policy challenge: Is the government trying to reduce consumption or are they really replacing other taxes to make collection more efficient?

13. Moving the Transportation Sector Forward 13 The Shanghai Methodology  Need to control the number of cars on the road  Monthly new plate quota and auction  Cost at auction can be as high as $5,905  Perceived Success  Number of registered vehicles in Shanghai (720,000)  Number of registered vehicle in Beijing (2.48 million)  Fines in Shanghai are minimal (200 yuan)

14. Energy Efficiency & Renewable Energy 14 Preferential Treatment under the Enterprise Income Tax  EIT standard tax rate = 25%  EIT Article 25 – Preferential treatment granted to industries and projects which the government supports or whose development it encourages  Environmental protection  Energy and water conservation  Technology transfers

15. Energy Efficiency & Renewable Energy 15 Preferential Treatment under the Enterprise Income Tax  The 3 + 50% Rule  Tax holiday for the first 3 years and 50% reduced tax rate for the following 3 years Enterprises engaged in the development and utilization of energy conservation and emissions reducing technologies  Circular 166 (2009) – This treatment applies to ESCO’s Applies to revenue from energy performance contracts Revenue is also exempt from the Business tax and VAT Transfer of equipment to customers will not result in deemed income to the ESCO.

16. Energy Efficiency & Renewable Energy 16 Preferential Treatment under the Enterprise Income Tax  EIT Article 34 – Enterprises who derive revenue from the production and sale of certain energy efficiency equipment can exclude 10% of the revenue for purposes of determining EIT liability  Enterprises which purchase such equipment can claim a 10% credit for such purchases

17. Energy Efficiency & Renewable Energy 17 Preferential Treatment under the Enterprise Income Tax  High & New Technology Ventures  Preferential EIT rate of 15%  Must satisfy certain requirements  Includes enterprises engaged in new energy and energy conservation technology ventures  Anecdotal evidence of widespread fraud  Shanghai supportive of new-energy automobile companies and new energy enterprises in their efforts to qualify for preferential treatment

18. Energy Efficiency & Renewable Energy 18 Preferential Treatment under the Enterprise Income Tax  Project companies engaged in CDM projects  Benefits from the transfer of CER’s belong to both the government and the project company in varying amounts  2009 guidance provides that project companies may currently deduct the government’s share of the revenues  HFC, PFC, and N2O projects qualify for the 3 + 50% treatment  Will this spur additional CDM related projects?

19. Energy Efficiency & Renewable Energy 19 Specific Measures Targeted at Wind Energy  Reduced VAT on the sale of wind generated electricity  17% to 8.5%  Refund on import duties and import VAT related on certain key components and raw materials for developing and manufacturing wind turbines  Must have capacity to manufacture wind turbines with a minimum capacity of 1.2 MW  No more import tax exemption on wind turbines with a maximum power capacity of 2.5 MW  Encourages domestic manufacturing  Supports domestic content policies

20. Nationalism or Protectionism? 20 Nationalism - “territorial ideology which is internally unifying and externally divisive”  Guiding principles seek to galvanize the people around economic growth in an environmentally aware state.  National focus on a goal  Not inherently bad, but in the framework of global competition, may be externally divisive. Protectionism – “economic policy of restraining trade between states”  Unequal treatment of imported wind turbines and domestically manufactured wind turbines  WTO, where are you?