China Introduces More Stringent Environmental Laws and Regulations
Executive Summary
This report looks into two Chinese environmental laws introduced in recent years – the Revised Environmental Protection Law and Environmental Protection Tax Law – which have introduced a number of regulatory changes, including:
- Imposing a stringent requirement that all enterprises – both domestic and foreign ones – should undergo an Environmental Impact Assessment (EIA) approval process before business commencement.
- Introducing both an emission quota system and a pollution administrative system to regulate water, air and soil pollution emitted by companies.
- Strengthening legal enforcement mechanisms and imposing measures such as business license suspension, ongoing fines, detention and criminal charges on those who violate environmental laws.
- Introducing the environmental tax system.
The primary regulators are the Ministry of Ecology and Environment (生态环境部) Note 1 and its affiliated environmental departments at county, municipal and provincial levels (环境保护部以及县,市,省级下属部门). They are responsible for supervising the EIA approval process and implementing enforcement measures such as shutting down facilities and equipment and imposing continuous fines. Police departments (各级公安部门) and people’s courts (各级人民法院) at varying levels will also be responsible for enforcing legal measures such as detention and criminal charges. As will be further discussed, these increasingly stringent environmental laws and regulations could present both opportunities and challenges to Canadian business and investors.
Background
In 2014, China, a country that has endured decades of environmental degradation and pollution, declared a “war on pollution” and sought to begin the transition to a more environmentally sustainable economy.[1] The country has since introduced a series of more stringent environmental laws and regulations in order to hold heavily polluted manufacturers accountable and to restore the quality of its water, air and soil.[2] Two of the most notable regulatory changes to support this shift are the Revised Environmental Protection Law (REPL) and Environmental Tax Law.
What regulatory changes have been made?
Revised Environmental Protection Law (REPL)
The Environmental Protection Law was virtually unchanged from its introduction in 1989 until its amendment on April 24, 2014. The amended law, which came into force on January 1, 2015, [3] introduced a series of significant changes to impose much more stringent regulatory restrictions and supervision on both foreign and domestic businesses.
First, as compared to previous environmental laws and regulations, the REPL applies the “Environmental Impact Assessment (项目环境影响评价)” (EIA) approval process Note 2 in a much more rigorous and extensive manner. [4] In the original Environmental Protection Law, projects requiring an EIA process were limited to those that might cause pollution, [5] and projects that failed to undergo the EIA process were penalized with very small fines. [6] In contrast, the REPL – particularly Article 19 – requires that any project that has potential environmental impacts, including those at the planning stage, must undergo an EIA process. [7] The REPL has also increased the penalties for companies that fail to complete an EIA. Under this new law, any non-compliance with the EIA requirement will be punished with a “cease construction order, a significant daily penalty, and an order to restore the property to its original state.” [8]
Second, the REPL has introduced two important mechanisms to contain air, water and soil pollution. The first mechanism is a strict emission quota system on key pollutants, under which the State Council (国务院) and governments at varying levels (各县，区，市，省级人民政府) will assign pollutant discharge quotas to each business enterprise. In regions where pollutant emissions exceed the quotas, as noted by Article 44, environmental departments at or above the provincial level are required to suspend the EIA approval process for any projects that are likely to “increase […] total key pollutants emission in the region.” [9] Put differently, in these regions, no new project that has environmental impacts will be allowed to operate. The second mechanism is the pollution administrative permit system, which is supervised by Ministry of Environmental Protection and its affiliated departments at varying sub-national levels. According to Article 45, only those who have pollutant discharge permits are allowed to dispose their pollutants in accordance with the requirements of the permits. [10] Third, the REPL has established a stringent legal enforcement mechanism to hold violators accountable. In particular, articles 57 and 58 of the REPL confer the rights on the part of individuals and NGOs to initiate public interest lawsuits against business activities that are detrimental to the environment. [11]
Finally, the REPL has introduced a series of strict punishment measures on violators of environmental laws. In addition to the penalties already noted for acts of non-compliance with the EIA requirement, the REPL stipulates that any violations of environmental laws and regulations – including excessive pollution and emissions – could lead to the shutdown/suspension of facilities and business operations, continuous fines without limits, detentions of five to 15 days, and criminal charges. [12]
Environmental Protection Tax Law(EPT)
The EPT was adopted by the Standing Committee of National People’s Congress (全国人民代表大会常务委员会) on December 25, 2016, [13] and it officially entered into force on January 1, 2018. [14] In essence, EPT formally replaces China’s decades-long pollution discharge fee collection system with an environmental tax system. [15] The key difference between these two systems is that while business enterprises were often exempted from their fee payment obligations under the old system, they can no longer do so under the new tax system. [16]
This law provides a list of taxable pollutants (including those related to air, water, solid waste and noise), and it identifies taxpayers as those “who discharge taxable pollutants directly into the environment.” [17] The EPT also outlines how environmental tax will be calculated. [18]
Article 14 of the EPT clarifies that the new environmental tax system is regulated by Chinese tax authorities – particularly the State Administration of Taxation (国家税务总局) – and its affiliated taxation bureaus at provincial, municipal and county levels who are responsible for collecting the tax. The same article also states that Ministry of Environmental Protection and its associated environmental departments at lower levels are responsible for “monitoring and managing pollutant emissions.” [19]
The EPT outlines policies regarding environmental tax exemption. Tax exemption policies apply to cases where emissions are caused by agricultural production, motor vehicles and by facilities that are established to dispose of sewage and domestic waste. [20] The EPT offers tax incentives to encourage emission reduction, allowing for a 25% reduction of environmental tax in cases where “the density of the discharged air pollutants or water pollutants is lower than 30% of national and local pollutant emission standards.” [21]
What do these regulatory changes mean for Canadian businesses?
Opportunities for Canadian Cleantech Companies:
The REPL and EPT clearly signal that China is transitioning to a more environmentally sustainable economy –one whose development relies more on clean and innovative technologies than on traditional labour-intensive and heavily polluting manufacturing industries. As the following examples show, this offers opportunities in the clean-tech sector:
Renewable Energy:
China is the fastest-growing renewable energy market in the world. In 2014, renewable energy investment in China totalled US$89.5 billion, accounting for 29% of global renewable energy investment. [22] In 2017, this figure rose to US$126.6 billion, accounting for 45% of global renewable energy investment. [23] China has announced that by 2020 its renewable energy investment will reach US$360 billion. [24]
Such rapid development of China’s renewable energy sector reflects the Chinese government’s prioritization of this sector as the key to future economic development. In 2016, China announced that from 2015 to 2030, the share of non-fossil fuels used in primary energy consumption should increase from 11.4 percent to 20 percent[25] and that by 2050, non-fossil fuels should account for 50% of primary energy consumption. [26]
China plans to invite foreign investment to further develop its renewable energy sector. On February 1, 2019, the National Development and Reform Commission (发展与改革委员会) proposed the Draft List of Encouraged Industries for Foreign Investment, encouraging foreign businesses to invest in developing wind, solar, biofuel and hydropower plant projects and facilities. [27] Despite that it is not yet in effect, this proposed regulatory change means that foreign companies will likely obtain favourable government support when entering China’s renewable energy industries. Following the release of this list, on March 25, 2019, China’s state-owned enterprise China Energy Investment signed a deal with Électricité de France Group to jointly develop an offshore wind plant project in China’s Jiangsu Province. This
is the first time that China’s wind market has been open to
foreign investment. [28]
Green Building:
By 2017, China was the largest and fastest-growing building construction market in the world, [29] and it is is estimated that in the next 10 years, China will account for “nearly half of new construction globally.” [30] The National Statistics Bureau (国家统计局) estimates that by 2020, the total market size of China’s building construction market will reach 25 trillion RMB[31]. This huge market potential will also mean broad business opportunities in the green building sector, given that Chinese government authorities have set up ambitious targets for building construction (i.e., buildings whose design, construction or operation minimize the use of natural resources and reduce negative environmental impacts[32]). In its 13th Five Year Plan for Building Energy Efficiency and Green Building Development, China planned that by 2020, 50% of its new urban construction buildings would be green buildings. [33] Under the guidance of this plan, many of the government agencies at municipal levels – most notably Wuxi, Suzhou, Beijing, Shanghai and Shenzhen – have required that all new commercial buildings be green buildings, while more than 90% of China’s commercial building owners have also pledged to “have at least one net or near-zero energy building in the next ten years.” [34]
Despite the government’s ambitious green building plan, however, China’s green building industry remains young. By the end of 2016, “only 29 percent of new construction in China met the green building standards,” [35] and by 2018, only roughly 35% of building constructors in mainland China engaged in certain level of green building activities. [36] Given China’s green building ambition, and the lack of maturity of its green building sector, there is no doubt that foreign clean-tech companies – which possess advanced green building technologies and expertise – can play important roles in developing this emerging sector.
Recognizing the importance of foreign expertise, China has encouraged foreign businesses and investors to participate in green building projects. For example, the US-China CERC Building Energy Efficiency consortium, which is a collaborative partnership between “leading U.S. and China researchers at national laboratories, research institutes, universities and 48 industry partners,” [37] has promoted green building innovation and commercialization in China. The aforementioned Draft List of Encouraged Industries for Foreign Investment also encourages foreign investment in the area of green building innovation and commercialization. [38]
Challenges:
For companies operating in the natural resource (e.g., oil, gas and mining) or heavy manufacturing sector, RPEL and EPT will probably give rise to serious challenges and concerns. Indeed, one of the most serious challenges is the potential regulatory burden increase that could make the country less attractive for foreign mining companies. According to the 2016 Mining Survey of the Fraser Institute, China is one of the most attractive destinations in Asia for foreign mining companies, [39]partly due to the fact that China’s taxation regime in the mining sector has been relatively low compared to other Asian jurisdictions. [40] However, with the imposition of the new environmental tax under the EPT, it will be likely to become more challenging for foreign mining companies to manage their tax burden when operating in China.
Furthermore, the fact that government authorities often arbitrarily punish business operations exacerbates regulatory burdens on foreign enterprises active in the heavily polluting natural resource extraction and manufacturing sectors. The European Chamber of Commerce reports that since meeting emission targets is a criterion for evaluating officials’ performance, local governments have even shut down compliant manufacturers “without warning in order to meet targets.” [41] The US-China Business Council further reports that: “A lack of manpower and a desire to impress higher officials has led to situations where some foreign companies felt they were being targeted unfairly on environmental compliance.” [43]The increasingly stringent environmental regulations, paired with the arbitrary penalization by government authorities, has made it challenging for foreign companies involved in resource exploitation and heavy manufacturing to survive in China.
Conclusion: What is the next step?
The impact of the REPL and the EPT will includes both market opportunities as well as serious challenges to Canadian businesses and investors. To better understand the impact of these regulatory changes, we recommend that Canadian businesses and entrepreneurs:
- Consult with a law firm to understand the potential cost of compliance with new Chinese environmental laws/regulations/policies.
- Attend public conferences organized or sponsored by Chinese government authorities, especially the Ministry of Commerce and Ministry of Environmental Protection. These conferences disseminate government policy updates and often aim to promote clean-tech development. For example, two clean-tech conferences were hosted in June 2019: “Future Energy Conference (未来能源大会暨第十五届中国能源战略投资论坛)” and “Guangzhou International Environmental Protection Industry Expo (广州国际环保展)”. Attending these conferences and engaging in discussions with government authorities can be a useful way to understand how China is going to enforce environmental protection and identify opportunities for entering the market.
July 3, 2019
Notes:
Note 1 Both the Revised Environmental Protection Law and Environmental Protection Tax Law were introduced before the renaming of “Ministry of Environmental Protection” (In 2018, this Ministry was renamed as “Ministry of Ecology and Environment”). Thus, in this report, “Ministry of Environmental Protection” and “Ministry of Ecology and Environment” are interchangeable terms.
Note 2: The EIA approval process involves the Ministry of Environmental Protection and its sub-national-level environmental departments examining and determining whether businesses comply with the government-set emission standards. Only those business projects that comply with the standards will obtain EIA approval and can begin operating. With regard to the actual detail of how the EIA approval process operates, please refer to Environmental Impact Assessment Law, which was originally introduced in 2002 and amended in 2016.
References:
[1]USCBC, Environmental Compliance for US Companies in China: Challenges and Best Practices, March 2019, p.3.
[2] USCBC, “Environmental Compliance for US Companies in China: Challenges and Best Practices”, March 2019, p. 3, www.uschina.org/reports/environmental-compliance-us-companies-china
[3] Wolters Kluwer,中国关于环境保护的最新立法.
[4] USCBC, USCBC Administrative Licensing Report 2016, April 2016, p.3.
[5] Wolters Kluwer,中国关于环境保护的最新立法.
[6] USCBC, USCBC Administrative Licensing Report 2016, April 2016, p.3.
[7] Wolters Kluwer,中国关于环境保护的最新立法.
[8] USCBC, USCBC Administrative Licensing Report 2016, April 2016, p.3.
[9]Language Tips, Chapter IV Prevention and Control of Pollution and Other Public Hazards, May 20, 2014.
[10]Language Tips, Chapter IV Prevention and Control of Pollution and Other Public Hazards, May 20, 2014.
[11]Lexology,《环境保护法》 2015年最新修订概览, December 2014.
[12] Wolters Kluwer,中国关于环境保护的最新立法.
[13] The National People’s Congress of the People’s Republic of China.
[14] Xinhua Net, China Focus: Chinese Polluters Start to Pay Environmental Tax, April 4, 2018.
[15] China Law Insight, 环保税即将开征，你准备好了吗？, December 27, 2017.
[16] Chinadialogue, China cleans up its act on environmental enforcement, June 12, 2017.
[17] Lexology, Environmental protection tax law finally passed.
[18] Lexology, Environmental protection tax law finally passed.
[19] Lexology, Environmental protection tax law finally passed.
[20] Lexology, Environmental protection tax law finally passed.
[21] China Briefing, China’s Environmental Protection Tax, January 18, 2018.
[22] Deloitte, 2015清洁能源行业报告：迈向新主流, December 2015, p. 3.
[23] UN Environment, the Frankfurt School-UNEP Collaborating Centre, Global Trends In Renewable Energy Investment 2018, June 25, 2018, p. 11.
[24] Asia Pacific Foundation of Canada, China’s Clean Tech Commitment, May 29, 2018.
[25] Asia Pacific Foundation of Canada, China’s Clean Tech Commitment, May 29, 2018.
[26] 能源生产和消费革命战略（2016-2030）, p. 9.
[27] Newenergy.in-en.com, 风电入选国家鼓励外商投资产业目录, February 21, 2019.
[28] China Electricity Council, 外资首度参与中国海上风电项目, April 2019.
[29] World Economic Forum, China’s Clean, Green Buildings of the Future, June 21, 2017.
[30] World Economic Forum, China’s Clean, Green Buildings of the Future, June 21, 2017.
[31] Sohu News, 住建部：2020年建筑总产值将突破25万亿!, May 5, 2017.
[32] World Green Building Council, What is Green Building?
[33] World Economic Forum, China’s Clean, Green Buildings of the Future, June 21, 2017.
[34] World Economic Forum, China’s Clean, Green Buildings of the Future, June 21, 2017.
[35] Asia Pacific Foundation of Canada, China’s Clean Tech Commitment, May 29, 2018.
[36] Dodge Data & Analytics, World Green Building Trends 2018, p. 48.
[37] World Economic Forum, China’s Clean, Green Buildings of the Future, June 21, 2017.
[38] www.gov.cn, Draft List of Encouraged Industries for Foreign Investment, June 30, 2019, p. 21.
[39] Investing News Network, China’s Mining Industry: An Open Opportunity for Investors, March 1, 2018.
[40] Investing News Network, China’s Mining Industry: An Open Opportunity for Investors, March 1, 2018,
[41] The European Union Chamber of Commerce in China, European Business in China: Business Confidence Survey 2019, p. 18.
[42] USCBC, The Revised Environmental Protection Law has Teeth, but will it Bite?, April 30, 2015.