Government Regulations

In light of the growth of the PRC economy and rising consumption of energy, the PRC government encourages the development and use of renewable energy resources. According to the Medium-and Long-Term Development Plan of the PRC, the share of renewable energy used in primary energy consumption will be increased to roughly 10% by 2010 and nearly 15% by 2020, up from 7.5% in 2005. The PRC government expects that the renewable energy sector in China will experience rapid expansion in the next few years.

The Law of Renewable Energy Resources of China

The use of renewable energy sources has gained widespread support from the PRC government. The "Eleventh Five-Year Plan" of the PRC encourages the development of petroleum substitutes, including bioliquid fuel.

The newly amended Energy-Saving Law of China which came into effect on April 1, 2008 also encourages the development and utilization of petroleum substitutes. Pursuant to the Law of Renewable Energy Resources, which came into effect on January 1, 2006, the PRC government encourages the manufacturing and application of bioliquid fuel and mandates petroleum-selling enterprises to include bioliquid fuel that meets the PRC national standards into their fuel-selling systems.

If any petroleum-selling enterprise fails to do so, it will be liable for the economic loss suffered by the manufacturers of bioliquid fuel. Financial institutions may provide government-subsidized interest loans to renewable energy projects that fall within the National Guidance Catalogue for Renewable Energy Resources Industry Development and meet relevant credit requirements.

The PRC Law of Renewable Energy Resources also provides that the PRC government shall set up a special fund for the development of renewable energy resources (the "Special Fund"). On July 16, 2006, the PRC Ministry of Finance issued the Temporary Regulation on the Management of the Special Fund for the Development of Renewable Energy Resources, which came into effect on May 30, 2006. Pursuant to this regulation, the Special Fund shall mainly provide assistance to the development and use of renewable energy resources, including petroleum substitutes.

On September 30, 2006, the Implementation Opinion on Financial and Taxation Supportive Policy for the Development of Bioenergy and the Biochemical Industry was jointly issued by the PRC Ministry of Finance, National Development and Reform Committee, Ministry of Agriculture, State Administration of Taxation, and State Forestry Administration. The Implementation Opinion proposed various supportive policies for enterprises engaging in the bioenergy and biochemical industries, including government subsidies and preferential tax treatment.

The Newly Established National Biodiesel Standard in ChinaOn January 5, 2007, the General Administration of Quality Supervision, Inspection and Quarantine and the State Standardization Supervision Committee jointly promulgated the National Standard of Biodiesel Blend Stock (BD100) for Diesel Engine Fuels, which took effect as of May 1, 2007. Currently this standard is deemed to be a recommended standard which biodiesel manufacturers are encouraged to comply with pursuant to relevant laws and regulations.

Stringent Standards for the Disposal of Used Cooking OilUnder the Rules on the Management of Waste Grease for Food Producers promulgated on April 15, 2002, food producers must sell used cooking oil to waste grease processing entities or waste collection entities rather than discharging used cooking oil into the environment or reusing it for human consumption. Any entity or individual that purchases waste grease and utilizes it to process and sell food will be subject to penalties by the regulatory authorities. Further penalties will be imposed for any harm suffered by consumers resulting from consumption of food prepared with used cooking oil.

The misuse of used cooking oil, such as in connection with the production of food for sale and consumption, also violates the PRC Food Hygiene Law, which came into effect on October 30, 1995. The PRC Food Hygiene Law imposes penalties on violations relating to food hygiene, including the suspension of food production by the violating entities.

Environmental ProtectionVarious PRC national and local environmental laws and regulations govern the energy industry, including regulations which govern the use, storage, discharge and disposal of hazardous substances in the ordinary course of manufacturing processes.

According to the PRC Environmental Protection Law, the State Environmental Protection Administration sets national pollutant emission standards. Provincial governments may set stricter local standards, which are required to be registered at the State Administration for Environmental Protection. Enterprises are required to comply with the stricter of the two standards. The relevant PRC laws and regulations generally impose discharge fees based on the level of emission of pollutants. These laws and regulations also impose fines for violations of laws, regulations or decrees and provide for possible closure by the central or local government of any enterprise which fails to comply with orders requiring it to rectify the activities causing environmental damage.

Tax IncentivesOn December 9, 2008, the PRC State Administration of Taxation and Ministry of Finance jointly issued Policies for Products Generated from Comprehensive Utilization of Resources (Cai Shui [2008] No. 156), a circular on Value-added Tax ("VAT"), which stipulated that a VAT refund upon levy would be applicable to enterprises that produce biodiesel by making use of wasted animal oil or plant oil as at least 70% of their raw materials. This VAT incentive policy is effective from July 1, 2008. To obtain the VAT refund, an enterprise must first apply for and obtain the relevant "Comprehensive Utilization of Resources Verification Certificate" and then apply for the VAT refund.

According to article 33 of the New Enterprise Income Tax Law issued on March 16, 2007 and article 99 of the Implementation Rules on Enterprise Income Tax Law issued on December 6, 2007 and the relevant circulars on "Comprehensive Utilization of Resources EIT Incentive" (Cai Shui [2008] No. 47 and Cai Shui [2008] No. 117), enterprises that make use of wasted biomass oil or wasted lubricant as 100% of their raw materials can be entitled to a 10% reduction in taxable income. To qualify for this reduction, an enterprise must first apply for and obtain the "Comprehensive Utilization of Resources Verification Certificate" and then apply for the tax reduction.