WALTER WANG ADJUNCT PROFESSOR OF LAW UNIVERSITY OF SAN DIEGO SCHOOL OF LAW

1. GREENINGTHE DRAGON: ENERGY TAX POLICYIN CHINA – IS IT NATIONALISMOR PROTECTIONISM? WALTER WANG ADJUNCT PROFESSOR OF LAW UNIVERSITY OF SAN DIEGO SCHOOL OF LAW

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

3. Facts and Figures • 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 • 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 • 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 • 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 • 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 • What to take away from the Renewable Energies Law, Circular Economy Promotions Law, and Energy Conservation Law?

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

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

12. Moving the Transportation Sector Forward • 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 • 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 • 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 • 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 • 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 • 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 • 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 • 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? • 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?