Italian Trust Fund for Environmental Protection in China

Final

Italian Trust Fund for Environmental Protection in China

Annual Report

(July 1, 2005 – June 30, 2006)

Prepared by the World Bank

June 30, 2006

Summary

During the report period from July 1, 2005 to June 30, 2006,the four study projectshave been progressingwell, with the following salient features. (1) The Circular Economy Law has been formally added into the 2007 work program of NPC and the schedule for drafting the law has been advanced. (2) The National Climate Change Program White Paperhas been finalizedby the consulting team after two revisions and is under the internal review of NDRC. Afterclearance by NDRC management, the report will be issuedfor broad consultation and review and eventually adopted and released by the State Council. (3) The Green National Accounting Project has completed its framework and methodology reports and is gearing up towards the calculation and release of the results of pilot projectsby the end of 2006.

Although the design of the $5.5 million climate change co-financing component in the Heilongjiang Dairy Project was completed in the fall of 2005, the grant could not be activated because of delays in preparing the $100 million loan. The co-financing component,together with its parent Heilongjiang Diary Project, was finally approved by the World Bank of Executive Directors in January 2006. The loan and grant agreementswere signed by the World Bank and the Government of Chinain April 2006 and has been declared effective on June 22. The technical committee of the component has been created with the participation of an Italian expert. Some tasks of the component have already been under implementation by local governments and retroactive disbursement is expected.

The 2005 Annual Meeting of the Italian TF Steering Committee (SC) was successfully organized in November 2005 in Beijing. Prior to the annual meeting, there was a workshop to review the progress of the projects of the first tranche. At the annual meeting, the SC members further reviewed the progress of the first tranche, endorsed the continuation of the TF program, suggested better alignment of the future TF with WB lending and Italian bilateral programs, and requested the TF secretariat to organize technical meetings to discuss how to deepen the collaboration and evaluatenew funding proposals from GOC for the second tranche. A series of technical review meetings were held in January and February 2006. Italian experts evaluated and supported the new proposals. The second tranche however is still pending on the funding decision of IMET.

The disbursement of the TF is summarized in the table below.

Progress of First TrancheProjects

Thanks to the great efforts of project implementing agencies, especially project coordinators, and active participation and contribution of experts from IMET/SICP and WB staff, the four studies are progressing well. This section provides some details of what have been done in each project. The outputs and next steps are further summarized in a table at the end of the section. The team composition can be found in attachment.

Green National Accounting Study

The project leading group has been established and is headed by SEPA Vice Minister Pan Yue and joined by officials of National Bureau of Statistics. SEPA (through its Foreign Economic Cooperation Office and Planning and Budgeting Department) is responsible for project coordination and implementation. The consulting groups are the China Academy of Environmental Planning (CAEP),the Statistics Institute of Renmin University, and the PolicyResearchCenter for Environment and Economy (PRCEE). Anhui Province,GuangdongProvince, BeijingCityand ShennongjiaCounty(HubeiProvince)have been selected for case studies. The TF secretariat has been trying hard to promote the cooperation betweenthe project and other projects funded by other donors (Canada,Norwayand China Council for International Cooperation in Environment and Development) in the same area.

The project has producedan inception report and studies on international experience, domestic experience, framework for green national accounts and valuation methodology as well as newsletters. Major activities conducted to date include:(1) inception workshop held in July 2005;(2) first international workshop on international and domestic experience in green accounting on Nov 24-25, 2005in Beijing;(3) working group meeting inMarchin Beijing;(4) a symposium in Shennongjia in April; and(5) participation in Italian TF technical review workshopinNovember2005 and the Sino-Norwegian conference and training on green accounting held by NBS and SEPA in February 2006.

Next steps include training and project review meeting in July, completion and release of the pilot project results in late 2006, and the final international conference in December 2006.

National Climate Change Program Study

The NCCP project is implemented by the National Climate Change Office(NCCO) of NDRC. The leading group is established and headed by Director General of the National Climate Change Office Mr. Gao Guangsheng. The consulting team, led by the Energy Research Institute (ERI), consists of over 20 experts from ERI, ChineseAcademy of Agricultural Science, Ministry of Water Resources and National Oceanic Administration. Hubei, Shannxi, Yunnan, Jilin have been selected as the local provinces for the outreach component, which aims to disseminate the project findings to provinces.

The National Climate Change Program study report was drafted in December 2005 and has been revised twice since then. The report has been finalized by the team and is under the review and clearance by NDRC. In addition, the project produced 5 issues of project newsletters and the international consultant has completed a report on international experience in national climate change programs. The major activities conducted so far included: (1) inception workshop in Sept 2005; (2) a workshop with international consultant in December; (3) regular team meetings and workshops to discuss and revise the NCCP Report from January to March 2006.

The next step is to get the NCCP study report cleared by the NDRC management, conduct broader consultation and finalize the report as the China National Climate Change White Paper, and have the White Paper approved and released by the State Council. In the meantime, NCCO is contacting provincial DRC and preparing four regional workshops in the summer to reach out provincial governments and promote the awareness of the NCCP. The first regional workshop will be on June 28-30 in Wuhan; the second on July 5-7 in Xi’an; the third on July 19-21 in Kunming; and the fourth on August 2-4 in Changchun.

Circular Economic Legislation Study

The Environment Protectionand Natural Resource ConservationCommittee (EPNRCC) of NPC is implementing the project. The project leading group is headed by Mr. Mao Rubai, Chairman of EPNRCCand consists of vice ministers from NDRC, SEPA and MOST. A team of experts led by TsinghuaUniversityis carrying out the study, with the support of international legal experts hired by NPC.

During the report period, the project has completed inception report, international experience report, project interim report, review of Chinese laws related to circular economy, and, most importantly, the first draft of the China Circular Economy Law. The team has been ahead of schedule in drafting the China CE law, which the team plans toshare and discuss at the 2006 CE annual forum scheduled for November in Wuhan.

The major activities completed to date include: (1) the 2005 annual CE forum organized by NPC, NDRC, SEPA and MOST held on Nov 5-6, 2005 in Xiamen with about 200 participants; (2) a workshop on international experience held in December 2005 in Beijing; (3)fourteam meetingsfrom February to May; and (4) the Interim Workshop on May 11-12, 2006 in Beijing. Domestic consultants also attended a series of seminars and workshops organized by other groups on circular economy in China and abroad and conducted field trips. The project website has been created at (under the website of China Environmental and Natural Resources Laws).

The next steps includethe revision of the draft law and the broader review and discussion of the draft. The 2006 Circular Economy Annual Forum will be held in Wuhan in November. The final study report will be prepared early next year.

Circular Economy Policy Study

SEPA (through its Foreign Economic Cooperation Office andPolicy and Regulatory Department) is responsible for project coordination and implementation. The consulting group is the PolicyResearchCenter for Environment and Economy (PRCEE) in association with the ChineseAcademy of Social Sciences and Chinese Research Academy of Environmental Sciences. The TF secretariat has advised SEPA to enhance its collaboration with other key government agencies responsible for circular economy-related policies and strengthen the team of experts.

The project focuses on policy and institutional aspects through the following sectoral and case studies: improving resource utilization efficiency in cements and paper industries, waste recycling and reuse of the electronic industry, and ecological zoning in Shenyang. The draft report of international experience is completed as well as the draft study reports of some sub-tasks plus six project news letters.

The major activities conducted so far include: (1) inception workshop in September 2005; (2) training and internal workshops in November, March and April; (3) a workshop on pollution control and structural adjustment of key industries in January 2006.

The next steps of the project include: completion of the interim report of each sub-task by the end of June; finalization of draft report of each task by the end of September; two more internal technical workshops; delivery of the synthesis report, training, and the final international workshop.

The outputs and next steps by project are further summarized in the following table. The working schedule of each study can be found in Annex.

Summary of the Reports and Working Plan for Next Steps:

• The study report of green accounting methodology (draft Chinese).
• Reports of international and domestic experiences in green accounting.
• The Framework of System of Green National Accounting in China (Draft).

• Improve the environmental cost model, compile the technical guidelines, and train local staff.
• Finalization and use in training.
• Complete the national and local environmental and economic accounts and related technical guidelines.
• Submit the final study report and organize the final international workshop.

• Final Report of National Climate Change Program (Chinese).
• Review of International Experiences (Final English) with a CD-ROM.
• 5 News letters.

• NDRC review and clearance of the NCCP report; broad review and consultation.
• Finalize the report, obtain the approval of the State Council, and publish it as the China NCC White Paper.
• Launch the outreaching program with 4 regionalkickoff workshopstargeting provinces.

• Inception report (final)
• International experience report (draft).
• Project interim report (draft Chinese and English).
• Review report of Chinese laws related CE (draft Chinese).
• China Circular Economy Law (first draft Chinese).

• Review and revision of the draft CE Law, and prepare explanation report for the draft law.
• Suzhou CE Expo and Workshop.
• Wuhan CE Annual Forum.
• Prepare final study report.

• Draft international experience report.
• Draft report of resource utilization rate and pollution intensity in key pollution sectors (Chinese).
• Draft report on improving resource efficiency and promoting circular economy for cement-making industry (Chinese).
• Draft report on improving resource efficiency and promoting CE for paper-making industry (Chinese).
• Draft evaluation report on current situation of wastes recycling and reuse and management policy in China (Chinese).

• Finalize thosetask reports.
• Hold two internal workshops.
• Draft project policy notes.
• Training.
• Final international workshop.

Implementation of the climate change co-financing componentof Heilongjiang Dairy Project

The design of the co-financing component was completedby the fall of 2005. But the project was put on holdwhile waiting for the resolution on an on-lending terms issue between the Bank andGOC with the parent $100 million Heilongjiang Dairy Project. Project negotiations were finally completed on November 21, 2005 and the WB Board approvalwas on January 24, 2006. The loan and grant agreements were signed by WB and GOC on April 26, 2006, and has been declared effective on June 22, 2006.

The first 18-month procurement plan, which includes the initial procurement of manure processors and research packages, has been reviewed by the Bank before negotiations. The Borrower is now working on the preparation of bid documents. The first meeting of the Italian Grant/Climate Change Research Committee was held on June 19, 2006 at the end of the first project supervision to review the first set of research proposals to be financed under the Grant. Plans for developing and improving pastures were reviewed at the supervision mission. According to the Heilongjiang Project Management Office, the project has already invested in training, researches, and other preparatory works at the amount of about $350,000 and expects retroactive financing when the grant becomes activated.

2005 annual meeting of the TF Steering Committee

The 2005annual meeting of the Steering Committee (SC) was held in Beijing, China on November17, 2005. It was attended by all SC members plus other representatives of China MOF, NDRC, SEPA, the Italian Ministry for Environment and Territory (IMET), the Sino-Italian Cooperation Office (SICO), and the World Bank (WB). The meetingreviewedthe progress and discussed strategic priorities and future plans of the TF.

The GOCrepresentatives praised the TF program for its relevance to the GOC strategic development goal of building a “resource-saving and environmentally-friendly society” and its importance to China’s environmental protection. The SC members were pleased with the progress to date, the serious commitmentof all parties, and the quality of the partnership. They noted that the implementation of the co-financed component was behind schedule andthat this was causing a low disbursement rate of the TF. Theyrequested moreefficiency in processing TF activities.

With respect to the future direction and new activities of the second tranche, alignment with GOC priorities and integration into the WB lending and Italian bilateral programs for maximum synergy and outcomes were agreed by all parties at the SC meeting. The GOC representatives further suggesteda broader scope for the TF program and involvement of local governments. They also hoped more funds would be available. IMEThoped that new TF activities would play a role in facilitatingbilateral projects and align with IMET’s vision to work with China to design and implement technical programs for protecting local and global environment in focal areas such as climate change, sustainable agriculture, and water resource management. IMET also expected that Italian experts be involved in projects and suggested joint expert committees be established. To scale up the impact of the TF, the WB suggested continuing to focus on existing themes and deepening and piloting some of the concepts emerging from the current program in next step.

New funding proposalssubmitted by Chinese government agencies for the second tranche were briefly presented at the meeting. The SC meeting decided to hold technicalmeetings to review and evaluate the proposals in early 2006.

Prior to the 2005 annual meeting, a technical review workshop was organizedon November 16, 2005 in Beijing for the Steering Committee and others to review the progress of the first tranche project and promote technical discussions and inter-project communications. Over 70 participants from Chinese government agencies, research institutes, IMET/SICP, WB and other international organizations as well as the representatives of Heilongjiang Dairy Project PMOattended the workshop. The workshop was useful for information sharing across teams and quality control. The participants were happy with the progress.

Preparation of the second tranche of the TF and technical review meetings

Six funding proposals were submitted by the Chinese agencies prior to the SC meeting. They are: (1) Xi’an sustainable transport and air quality management (AQM); (2) Energy efficiency and air emission reduction in the railway sector; (3) Urban AQM strategy; (4) Eco-compensation mechanism; (5) National strategic planning for circular economy promotion; and (6) Circular economy pilot project. A brief description of each proposal was circulated in advance of the SC meeting. At the SC meeting, SEPA submitted its third proposal of rural environmental protection. The seven proposals are summarized in the following two tables below.

List of New Funding Proposals

Requested by the SC at its annual meeting in November, the technical review meetings were held on January 23-24, 2006 in Beijing and follow-up meetings on Xi’an and MOR proposals and SEPA’s air quality proposal in February. About 40 participants, representing IMET, SICP-PMO, SEPA, MOF, NDRC, the Ministry of Railway (MOR), Xi’an Municipality, the World Bank, and other agencies attended these meetings.