China: Harsher legal liabilities under new environmental law regime in China

Last Updated: 24 March 2015
Article by Denning Jin and Yongqi Tao

In the past decades, explosive economic and industrial growth in China has led to significant environmental degradation. As a result, China is currently in the process of developing more stringent controls over environmental issues. Since the new leadership came into power, the government declared a "war against pollution" and embarked on the road to "ecological civilization" in the context of the rule of law reform it recently launched. Therefore, we expect that environmental law and its enforcement will surely be a critical part of Chinese legal reform.

At the beginning of 2015, several big issues received widespread attention. On 1 January 2015, China formally began to implement the updated PRC Environmental Protection Law ("Amended EPL"), imposing incredibly harsher legal liabilities to polluters. In addition, a public interest lawsuit that yielded a $26 million verdict was chosen by the Supreme People's Court as one of the most important cases of 2014. In this new era, these are clear signals that besides the improved administrative enforcement, new approaches, such as public interest lawsuits, will also become of importance in the regulation of environmental issues. Consequently, both enterprises' outdated production mode and outdated concepts shall be abandoned. In order to better prepare you, we hereby introduce to you the new environmental law regime from multiple perspectives through this series of articles.

Administrative Enforcement under the old EPL

The promulgation of the old EPL in 1989 reflected China's embryonic awareness of environmental protection. However, the EPL, China's first fundamental environmental protection statute, was widely criticized for its poor practicality in enforcement. Generally, its major problems are as follows:

First of all, discharging pollutants in excess of the pollutant emission standards is not defined as a violation by the old EPL. Enterprises only had the obligation to pay an additional fee, but no administrative penalty could be imposed. In December 1999 and in April 2000, the PRC Marine Environment Protection Law and the PRC Law on the Prevention and Control of Atmospheric Pollution were amended, categorizing the discharge of excessive pollutants into the ocean or air as a violation. However, in other areas, such as rivers or land, corresponding amendments lagged behind. Without support of the EPL, pollutant emission standards are mere decoration.

Secondly, the major liability the old EPL imposed on the polluters was to "eliminate and control the pollution within a certain period of time." Its Chapter V articulated polluters' specific legal liabilities under different circumstances. However, in most instances, enterprises would only be warned or fined. Suspension of operations applied only to very limited occasions.

"Harshest-ever" Administrative Enforcement under the Amended EPL

After sacrificing environmental quality in exchange for economic development over the past 25 years, the government is now giving priority to environmental protection. With the "harshest-ever" Amended EPL coming into effect on the first day of 2015, enterprises need to be well-prepared for the upcoming challenge. The new administrative measures are summarized and analyzed as follows:

Consecutive Daily Fines

Article 59 of the Amended EPL provides that, "[w]here an fined and ordered to make correction due to illegal discharge of pollutants but refuses to make correction, the administrative organ ("EPA") may impose the fine thereon consecutively on a daily basis according to the original amount of the fine commencing from the date immediately following the date when it is ordered to make correction." As a supporting regulation, Measures for the Imposition of Consecutive Daily Fines by EPA ("Fines Measures") was released on 15 December 2014, to draw detailed, bright lines for the implementation of Article 59.

Table I: Situations under which the EPA may implement consecutive daily fines

In terms of consecutive daily fines, we should pay particular attention to the following practical issues:

First of all, with regard to the scope of application, consecutive daily fines can only be imposed on enterprises when legal prerequisites are met, with one of them to be "discharging pollutants illegally." In order to define what constitutes the "illegal discharge of pollutants," the Fines Measures not only list four typical circumstances, but also provides a catch-all clause. In addition, the Amended EPL authorizes local regulations to provide additional types of the "illegal discharge of pollutants," which will be subject to the consecutive daily fines in light of their actual needs. Therefore, the actual scope of the application is expanded.

For instance, the Regulations of Guangdong Province on Environmental Protection ("Guangdong Regulations"), published on 13 January 2015, includes circumstances like "dismantling or leaving idle the installations for pollution control without prior approval," "violating compulsory disclosure requirements," or "starting construction before submitting environmental impact assessment documents," etc. into the scope of application.

In our understanding, the rationale behind the consecutive daily fines regime is that cumulative fines will bring more "pain" to polluters, impelling them to stop their ongoing illegal discharge immediately. However, some of the additional circumstances provided by the Guangdong Regulations, though they constitute as violations of law, have nothing to do with direct "ongoing" pollutions therefore the procedure requirements of the Fines Measures may not apply under those circumstances. Considering the catch-all clause and broad authorization, it is predictable that more and more local authorities will follow Guangdong's path and will introduce various types of violations into the scope of application "in light of their actual needs," leading to all kinds of non-compliant enterprises being exposed to an immense risk of huge fines.

Secondly, in terms of the calculation of the fine amount, the Amended EPL and the Fines Measures provide that the original fines decision and consecutive daily fines decision are two separate penalties, while the latter's amount is the product of the former's amount and the number of days the polluter refuses to make corrections. Therefore, the amount of the first fines is of critical importance. However, the Amended EPL only generally provides that the amount shall be decided based on the operation cost of pollution control facilities, direct loss caused by the illegal act, illegal gains, etc. Take Guangdong Regulations as an example, it sets the maximum and minimum amount of fines for several violations. However, not all kinds of violations are covered, thus leaving those uncovered to the EPA's discretion. Such discretion will then be amplified by the consecutive daily fines system, causing greater damage to enterprises. To reduce or avoid such risks, enterprises, with the help of their professional advisors, should get fully prepared for and take action to rebut the EPA's method of calculation and provide evidence to establish their own numbers.

Moreover, a case in Shandong Province captures our attention. It is reported that an enterprise in Shandong "discharged pollutants in excess of pollutant discharge standards for 15 days from January 23 to February 27." As a result, it was fined 1.5 million RMB in total (100,000 RMB as the original amount of fines) by the local EPA. Nevertheless, pursuant to the Fines Measures, the number of days during which the enterprise is subject to consecutive daily fines shall be 35 days according to the facts. It is unclear why the EPA picked only 15 days – from "January 23 to February 27" – as the basis of calculation, but this reflects that different approaches are adopted by the local EPA in implementing new regulations. This gives us inspiration in dealing with similar cases in the future. For example, we might be able to reduce the amount of consecutive daily fines by proving to the EPA that there has been no "illegal discharge of pollutants" on several days of the number of days presumed by law.

Sealing-up or Seizure of Facilities or Equipment Causing the Discharge of Pollutants

Article 25 of the Amended EPL provides that, "if any of the enterprises...discharges pollutants causing or likely to cause serious pollution, EPA may seal up or seize the facilities and equipment causing the discharge of pollutants." As a supporting regulation, Measures for the Implementation of Sealing-up and Seizure by EPA ("Sealing-up and Seizure Measures") was released on 19 December 2014 to draw detailed, bright lines for the implementation of Article 25.

Table II: Situations under which the EPA may seal-up or seize facilities and situations under which the EPA must seal-up or seize facilities

With regard to sealing-up or seizure of facilities, we should pay particular attention to the following practical issues:

First, EPAs were not empowered by the old EPL to take compulsory measures, thus lacked the possibility to take effective measures for gaining temporary control. Now, the Amended EPL introduces such measures into the regime, allowing EPAs to seal up or seize facilities or equipment causing the discharge of pollutants, which definitely will have a huge impact on the concerned enterprises' daily operations. Consequently, enterprises are now facing more direct risks when failing to comply with the law.

Second, in order to implement the Sealing-up and Seizure Measures, the EPA needs to prove that the discharge of pollutants is causing or is likely to cause serious pollution. Accordingly, the definitions of "serious pollution," "causing" and "likely to cause" are vital. The Sealing-up and Seizure Measures not only lists five specific "behaviors," but also provides another catch-all clause, rendering the scope of application to be broadened. For example, when interviewed by Chinese Environment News about the Sealing-up and Seizure Measures, an official of the Ministry of Environmental Protection Supervision Bureau said that, "in terms of the definition of serious pollution, the Interpretations of Several Issues concerning the Application of Law in Handling Criminal Cases of Environmental Pollution ("Interpretations"), jointly released by the Supreme People's Court and the Supreme People's Procuratorate in June 2013, has already provided criterion." Therefore, "consequences" enumerated in criminal law judicial interpretations, such as "causing an interruption of 12 hours or longer in the centralized drinking water sources", "causing losses to public or private property of RMB 300,000 or more" etc. will all fall into the concerned scope of application. Further, any other environmental special law or local regulation can also broaden the scope.

Restricting Production, Stopping Production for Rectification and Stopping Operations or Closing Down

Article 60 of the Amended EPL provides that, "where an enterprise...discharges pollutants in excess of the pollutant emission standards or the control targets for total emission volume of major pollutants, EPA may order it to restrict production, stop production for rectification or take any other measures, or, if the circumstances are serious, may order it to stop operations or close down after such an order has been reported to the people's government with approval authority for approval." The Amended EPL adopts, for the first time, the concept of "control targets for the total emission volume of major pollutants," defines the consequences corresponding to the excessive emissions, and empowers the EPA to directly restrict or even stop the production of the offenders. As a supporting regulation, Measures for the Issuance by Competent EPA of the Orders on Restricting Production or Suspending Production for Rectification ("Restriction and Cessation Measures") was released on 19 December 2014, to draw detailed lines for the concerned implementation.

Table III: Circumstances under which production may be restricted, stopped for rectification or closed down

In terms of the restriction and cessation of production and closure, the new concept of "control targets for the total emission volume of major pollutants" is crucial:

First, in order to implement the aforesaid measures, the EPA must prove that the concerned enterprise is discharging pollutants in excess of the "pollutant emission standards ('PES')" or "the control targets for the total emission volume ('Control Targets') of major pollutants." Actually, PES is not a new concept, as it is articulated in the old EPL. The national standards for the PES are made by the Ministry of Environmental Protection ("MEP"), while the provincial governments may make more stringent local standards or make new standards for uncovered areas. The national standards for the PES for various industries are available on the official website of the MEP (e.g., GB28937-2012 – Emission Standards for Water Pollutants for the Wool Spinning Industry).

However, the Control Targets system of major pollutants is new to the EPL, which requires the targets to be issued by the State Council and implemented by each province. Then, a specific target will be assigned to each enterprise. In fact, the Law on Prevention and Control of Water Pollution and the Law on the Prevention and Control of Atmospheric Pollution have already touched upon the Control Targets system (with regard to water and air pollutants), accompanying the adoption of a pollutant emission approval system. In practice, enterprises complying with law will be allocated with initial pollutant emission rights and Control Targets of concerned pollutants, along with a Certificate of Pollutant Emission. Normally, initial pollutant emission rights will be determined by the applicable pollutant emission standards or the environmental impact assessment approval. Therefore, as long as the enterprise complies with law, the targets allocated to it are not likely to affect its existing production. It is anticipated that the Control Targets of the major pollutants system will be conducted in a similar way but on a much larger scale. If an enterprise has different views on the Control Targets allocated to it, it may resort for remedies to administrative review and administrative litigation.

The underlying thought is that the total number of permits for a region cannot exceed the cap. New projects cannot be launched without pollutant emission right trade (internal adjustment) or elimination of pollutant sources, while elimination can only be achieved by restriction of emission, closure, relocation or upgrading enterprises' facilities. Under the provisions of the Amended EPL, the EPAs are forbidden to approve any construction of new projects that will result in emissions exceeding the control targets. Accordingly, investment in such a region will be restricted and the local government is given an incentive to take measures in order to reallocate the Control Targets or to "vacate the cage for a new bird," to ensure the construction of big projects. It seems inevitable that the local government and enterprises will be dragged into new games and contradictions. The lack of rules of due process for the allocation and reallocation of Control Targets will create huge uncertainties for enterprises.

For example, the closing down of Company X's old factory in 2014 is one of the complexities. Hong Kong investors invested in the factory with an investment up to 1.7 billion RMB. After the establishment, the local EPA frequently penalized the company due to pollutions, so new environmental protection equipment and facilities were added with huge costs. In 2013, it was noted by the local government to make way for the establishment of a state-owned petroleum company's petrochemical project, the government concluded an agreement with Company X to shut down the factory. According to the government document, the closing down of the old factory will annually deduct the emission of sulfur dioxide for 2189.6 tons, chemical oxygen demand (cod) for 150.56 tons, soot for 90.457 tons, ammonia nitrogen for 0.286 tons, representing respectively 61.7%, 16.5%, 4.7% and 0.46% of the control targets for the region. The adverse impact could be learned from this case.

It can be anticipated that more and more enterprises will face restrictions stemming from the Control Targets system in the nations' process of reinforcing its environmental protection policies. Regional Control Targets assigned to the local government will eventually be transferred to those non-compliant enterprises.

Protect Your Lawful Interests of Businesses

In a nutshell, due to the reinforcement of EPL enforcement, many enterprises will start to feel the pain brought by EPA's harsh and serious measures. On the other hand, the good news is that, simultaneously a rule of law reform has been launched by the government; therefore, the law will be enforced by the EPA in a more professional and legal manner. This has two consequences. Firstly, enterprises may resort for remedies that are predictable in both procedure and substance. Secondly, with the environmental law issues becoming increasingly professional, complex and elaborate than before, help from professional advisors becomes necessary.

Environmental lawyers will advise and help their clients in the interaction with the government. Their job encompasses: to investigate and collect evidence, to defend against penalties, to apply for government review, to represent clients in oral hearings for cessation of business, revocation of business license or huge amount of fines, to apply for release of administrative compulsory measures, to petition administrative review and to file administrative litigation. Enterprises should keep in mind that the new environmental law regime established in China will not be deemed as a tool for the authorities to suppress them under the name of environmental protection; the authorities are to strike a balance between the enterprises and the public welfare by the rule of law. The emphasis on the importance of the rule of law in tackling environmental issues is unprecedented, but as long as investors master the "rules of the game," they will successfully navigate through the storm.

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.

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