China's economy and GDP numbers have been the envy of the rest of the world for many years, but not without a serious cost. Economic losses resulting from environmental pollution in 2010 alone is estimated to have reached up to RMB 1.1 trillion, accounting for 2.5% of GDP in 2010. Despite China's growing wealth, its people are plagued by polluted air, toxic soil and contaminated water.
Commentators have blamed the worsening environment on the poor enforcement of China's environmental law regime. Indeed, while China has promulgated dozens of environmental regulations, enforcement has been far from satisfactory. In many ways the law has been a "paper tiger", with enforcement efforts frequently compromised by economic priorities. Despite the law, non-compliance has been rampant.
This is likely to change. Since the new leadership came into power in early 2013, the Chinese government has declared "war against pollution" and embarked on the road to sustainable development and "ecological civilization". A series of new measures and actions have rolled out over the last year (and more are expected in the near future) to reform problematic enforcement by reinforcing government accountability and improving compliance.
We set out below some of the highlights of the new measures and actions and draw attention to the possible impact to investors doing business in China.
Increase of government accountability
Government officials are increasingly being held accountable for tackling environmental pollution and for ensuring compliance with environmental regulations.
According to the amended Environmental Protection Law (promulgated in April this year and effective at the beginning of 2015, "Amended EPL"), environmental targets will be included in overall government plans. Whether and to what extent these environmental targets are fulfilled will be a major consideration during the performance assessment of government officials. Failure to meet environmental targets may result in disciplinary action against the responsible officials, which could include suspension of promotion or compulsory resignation. In addition, upper-level governmental authorities may also limit the power of lower-level counterparts to approve new projects if the latter do not perform well in controlling and reducing environmental pollution.
As a result of these new requirements, and the resulting pressure on government officials, it is expected that there will be more frequent, systematic and stringent environmental enforcement action against non-compliance and violations in the near future. This is especially so in industries that will potentially hinder the satisfaction of environmental targets.
Use of modern technology to ensure compliance
Modern technology has been deployed to improve the collection of environmental data and control of illegal discharge.
In Hebei Province, for instance, electronic devices have been installed in manufacturing plants to monitor discharge density and total discharge volume of plants on a real time basis. These devices are connected to the supervising terminal controlled by the environmental authority. If either the discharge density or the total discharge volume exceeds the pre-set quota, then the environmental authority will have the power to suspend or shut down the discharge points.
The use of advanced monitoring and control measures, if rolled out nationwide, would likely significantly improve enforcement. Previously, there were no technical means to control the discharging of pollutants beyond the statutory quota, although punitive fines would be imposed for the excess amount. With the new technology in place, it will be more difficult for companies to simply "pay to pollute".
New compulsory disclosure requirements
Since 2013, the MEP has issued a number of regulations to improve disclosure of environmental-related information.
According to the new requirements, the regulatory authorities must disclose the full text of environmental impact assessment reports submitted to them before approving the reports. The only exceptions are when the information contains national or commercial secret or infringes personal privacy. Furthermore, details in relation to corrective measures and fines on non-compliant companies will be disclosed to the public within 20 days of the issuance of decisions by the authority. Non-compliant companies will be blacklisted if they refuse to implement corrective measures or pay fines. In addition, MEP is drafting comprehensive rules regarding the disclosure of environmental-related information. It is expected that more information will be required to be disclosed for key polluters.
The regulatory authorities are also required to disclose other information obtained during their daily inspection and supervision, including, but not limited to, pollution sources, quota control, results of data monitoring, pollution prevention measures and collection of discharge fees.
Harsher liabilities for non-compliant companies
Harsher economic and legal liabilities have been imposed to further deter companies from non-compliant activities. According to the Amended EPL, a company may be penalized with cumulative daily fines (instead of the current one-off penalties) if corrections are not properly made.
Moreover, the Amended EPL sets out for the first time certain situations in which the management of a company could face administrative detention for up to 15 days. These situations include:
(i) failure to conduct an environmental impact assessment on a project and refusal to cease construction of the project after it has been ordered to do so;
(ii) failure to obtain discharge permits and refusal to cease the discharge of pollutants after it has been ordered to do so;
(iii) illegally discharging pollutants through concealed drains, seepage wells or pits, high pressure perfusion, or attempting to evade supervision through falsifying monitoring data, operating facilities abnormally or other means; or
(iv) producing or using prohibited pesticides and refusal to make corrections after it has been ordered to do so.
These new provisions lower the threshold of personal liability. Previously, for most corporate environmental non-compliance, individuals would only be liable for monetary fines. Criminal prosecution for non-compliance proved difficult as the old criminal rules set a high threshold for prosecution, requiring that the non-compliance must result in "serious environmental pollution" before an individual could be criminally liable. The Amended EPL and the new criminal rules no longer focus on the results, meaning that prosecution will be more straightforward.
The environmental authority will work closely with the public security authority to ensure that personal liability will be strictly enforced.
Observations and recommendations
The steps taken over the last two years demonstrate the firm determination of the Chinese government to fight against environmental problems. The emphasis on the role of the government and the enhancement of technical capacity in tackling environmental concerns are unprecedented. Businesses can expect more frequent, intensified and professional inspections. This may well result in a significant increase of economic, legal and reputational risks of operations in China being penalized, challenged or publicly shamed due to environmental non-compliance. Individual employees will also have greater risks of personal liabilities.
To avoid these risks, investors, with the help of their professional advisors, should get fully prepared for and take action to comply with the changing environmental regime. For investors planning a new investment, a full due diligence on the environmental status of the target is strongly recommended before committing to any particular investment. For those already having operations in China, it is necessary to regularly review and assess existing compliance programs and operating practices against the most updated statutory requirements. Tailor-made training for individual employees (senior management in particular) may also be considered with a view to preventing those individuals from causing, and being held personally liable for, any environmental non-compliance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.