LAST WEEK Mallesons Stephen Jaques kicked off a series of client briefings looking at challenges for businesses arising from issues of sustainability and climate change.
The opening “sustainable enterprise seminar” was presented by Hong Kong-based partner Christopher Tung and Melbourne-based partner Louis Chiam. It focused on developments in the Asian carbon market and clean development mechanism (CDM) projects, as well as carbon trading internationally.
According to Tung, more than 75 per cent of CDM projects developed in 2007 were located in Asia, and this 12 billion euro market ($20 billion) was well and truly dominated by China. According to energy consultancy Point Carbon, China supplied 62 per cent of the world’s certified emission reduction certificates (CERs) from CDM projects last year, the next largest market being Indonesia, which supplied just 10 per cent.
Interestingly, this is the case despite the fact that the Chinese market throws up a number of hurdles for CDM project developers that some other Asian countries don’t. These include a restriction on foreign ownership of projects — a restriction which doesn’t exists in markets such Hong Kong, Indonesia or Singapore — and a CER levy, which is absent in all other major Asian countries.
Tung believes that the continuing popularity of China for CDM projects comes down to foreign investor confidence. “I think there is familiarity with investment in China. There’s a lot of foreign investors - there’s a greater critical mass — and there’s more economic activity. In any sector that seems to be of comfort,” Tung said.
“And, notwithstanding some of these hurdles, they have been quite systematic and quite determined to promote China and they’ve done really well with their policies.”
An important consideration for lawyers when it comes to negotiating CER trades for clients is that now, more than ever, suppliers have the upper hand. “It’s a sellers’ market essentially, and it’s much more of a sellers’ market now in China than it was even six to nine months ago,” Tung said. “It’s a big power craze and [sellers] are effectively saying: ‘We don’t need to contract on your terms, we’ll contract on our terms’.”
One of the main reasons for this, Tung explained, is that English law is now being replaced by Hong Kong law as the governing law of CER contracts.
“It used to be that the Chinese parties were more willing to accept whatever the buyer said: ‘We’ll live with English law because we don’t really understand the contract as yet.’ But in the last year they’ve been saying: ‘It’s got to be Hong Kong law’,” Tung said.
According to fellow presenter Chiam, clients wanting to purchase CERs also have to be aware of local laws and policies, such as local Chinese investment regulations, and they need to understand the risks associated with developing CDM projects.
“You typically sign emission reduction purchase agreements (ERPAS) before the project has developed, so you need to have formed a view about how likely the project is to get to completion and that sort of thing,” he said. “So a lot of the work we do with our clients is analysing the quality of the project, so that they can form a view of how it’s going to work.”
Another important consideration is that carbon contracts also tend to be “non firm” with respect to the volume of CERs to be supplied — meaning that the buyer will be required to purchase however many CERs the supplier is able to produce.
A final twist for lawyers advising on carbon trades is the fact that the continuing existence of the CDM and the values of CERs post-2012 depends on international agreement being reached. However, according to Chiam, trades have already been negotiated for CERs produced past this time by those optimistic that an international agreement can be negotiated. “It requires a leap of faith and some careful drafting,” Chiam said.