Environmental laws have been on the statute books in China since at least the 1980s. Until recently, however, enforcement of these laws has not been as active or rigorous as in other parts of the world. This is set to change in the light of new developments, and consequently investors into China - current and future investors - should from now on give serious attention to environmental factors when doing business in China.
Due to increasing public awareness of environmental issues and the strengthened commitment of the government to China’s international environmental obligations, environmental protection has now become a major theme of Chinese government policy. China has publicly pledged to reduce energy consumption per unit of gross domestic product by 20 per cent and pollution emissions by 10 per cent between 2006 and 2010.
To meet these targets, China has implemented a raft of new legislation, including the Circular Economy Promotion Law issued in November 2008 which intends to promote sustainable development in China by increasing recycling efficiency and reducing pollution emissions. In addition, the Chinese government has recently introduced stringent environmental rules regulating the emission of pollution across China. Since the first half of 2008, the government has begun taking strict action against polluters, and some of these actions have already had an impact on foreign investments in China.
This article briefly summarises the principles behind the PRC environmental laws and their enforcement, discusses environmental risks and factors for foreign investors to consider, and considers the direction that China may be taking as regards the protection of its environment.
Chinese environmental rules are embodied in a number of different areas: constitutional principles, national laws and regulations, ministry circulars, local governmental rulings, and a substantial number of environmental standards on environmental protection, natural resources and renewable energy development.
Chinese environmental rules are chiefly intended to prevent pollution damage resulting from liquid and solid waste, air pollution and hazardous noise. The most important laws regulating pollution prevention are the PRC Environmental Protection Law, the Air Pollution Prevention and Control Law, the Water Pollution Prevention and Control Law, the Solid Waste Law Prevention and Control Law, Regulations on the Safety Administration of Dangerous Chemicals and the PRC Environmental Impact Assessment Law.
In China, environmental rules and regulations are designed to follow three guiding principles:
- The first guiding principle is emissions control. Under this principle, the total volume of pollutants that are permitted to be emitted by enterprises within a prescribed geographical area (usually, a province) is determined by the PRC central government. The total emissions volume may vary from year to year, and depends on a number of factors including local economic development plans, types of pollutant, and local environmental conditions.
Local government is required to regulate pollution emissions according to the total volume set for its area by the PRC central government or the level of government superior to such local government. This centralised system of emissions control was set in place with the intention of preventing local government from approving new investment projects regardless of their impact on the environment. The effectiveness of this policy has to date been fairly patchy.
- The second guiding principle is environmental impact assessment. Under this principle, any proposed investment into new production plants or their expansion must first pass an environmental impact assessment. The assessment is administered by the PRC environmental protection authorities - namely, the Ministry of Environmental Protection and the relevant local environmental protections bureau (collectively, the EPA). The purpose of such assessment is to demonstrate that the proposed project will not have a material negative impact on the local environment.
A proposed investment project into China will not be approved by any government authority until an environmental impact assessment has been successfully completed. The assessment may well lead to construction or operational plans being amended to bring them into compliance with environmental standards. Any environmental protection facilities that are required by the authorities to be incorporated into a project must be designed and constructed at the same time as the principal investment project itself.
Following completion of construction, and within three months after operations commence, a project will be subject to inspection and final approval by the EPA .
- The third guiding principle is that the polluter pays. Under Chinese law, a polluter must pay for the waste that it generates. This principle is generally enforced under a licensed discharge system. In most developed provinces of east China, enterprises must apply for a pollutant discharge licence before discharging certain types of waste (especially waste water or solid chemical waste) into the environment. An enterprise may only discharge waste in accordance with the conditions set out in its discharge licence. These conditions normally stipulate the type of permitted waste, the maximum volume of permitted discharge, the density of the waste and discharge method, and any permitted hazardous components. A fee which is calculated on the basis of the discharge amount and density of the pollutants will be payable to the EPA.
The PRC environmental regulator - EPA
The PRC environmental rules are chiefly enforced by the EPA, whose powers include investigating environmental accidents, inspecting and monitoring environmental compliance by businesses, issuing discharge licences and imposing administrative penalties for breach of environmental rules. Penalties may include suspension of construction or production pending rectification, and monetary fines.
The EPA regularly conducts investigations of projects that are under construction, and may then henceforth conduct annual site inspections. These activities will most likely lead to a course of correspondence between the EPA and the relevant business operation. It is important that a record is kept of any such correspondence.
From the first half of 2008, the EPA has begun taking a tougher stance against polluters. The number of investigations undertaken by the EPA has increased dramatically, and it has imposed a greater number of larger fines, particularly in the more industrialised regions of China. The ceiling for administrative fines for certain types of water pollution has more than doubled, and since January 2008 the penalty limit ( RMB 1 million) as set out in previous regulations has been removed. In addition, several of the largest state-owned enterprises that are in high pollution industries, including Sinopec and PetroChina, have been included on the EPA ‘watch list’, and are being closely monitored by the EPA to ensure their compliance with the environmental rules.
Environmental liability - administrative, civil and criminal
Chinese environmental laws impose three types of liability on polluters: (i) administrative liability, (ii) civil liability and (iii) criminal liability. Foreign invested enterprises (FIEs) are legal persons in China and accordingly FIEs and their management may be sued under Chinese law. Foreign investors, their FIEs and management should therefore be aware of their liability under PRC law.
Administrative liability is the most common type of liability incurred by polluters in China. The EPA is the authority that conducts investigations into alleged breaches of administrative rules. Administrative penalties may include a warning, fine, suspension or closing down of operations. There is no predetermined way of calculating administrative fines. The level of a fine will depend on the type and severity of the pollution, and the manner of non-compliance. A monetary fine may be set at between one and five times the waste discharge fee payable by the polluting entity - which may in theory amount to several million RMB. The EPA may also calculate administrative fines as a percentage of the total economic loss caused by the polluter.
If a polluter is an enterprise, its management may also be personally liable and administrative penalties may be imposed on them directly. For example, the EPA may impose fines on the management of companies that breach water pollution regulations of up to half their annual salary.
Civil law liability
Under civil law, a victim of environmental pollution (the Plaintiff) may sue the polluter and claim for compensation equal to the direct and indirect economic loss suffered by it. There is no punitive damages concept under PRC civil law in respect of environmental liability. Environmental pollution is treated as an action in tort under Chinese civil law. Disputes may be handled by the local EPA or the People's Court, as may be chosen by the parties involved.
The limitation period for bringing a claim under civil law against a polluter is three years from the time when the victim first knew or ought to have known about the matter giving rise to the claim. This period is longer than the two years limitation period set for normal civil cases.
Under Chinese law, (the Plaintiff does not need to prove the existence and breach of a duty. To be entitled to compensation under Chinese law, the Plaintiff must prove that the polluter caused the pollution and that the harm suffered by the Plaintiff is related to that type of pollution. If the Plaintiff succeeds in proving this, the burden of proof shifts to the polluter. It is therefore clearly most advisable for foreign investors to keep good up to date records on their environmental compliance in China.
Where pollution causes serious economic loss or personal injury, the person (intentionally or negligently) responsible for the accident may be held liable under Chinese criminal law.
Similar to administrative liability, a legal representative or any employee who ‘directly’ causes pollution may be held liable alongside the polluting enterprise. Note that there are no guidelines as to the definition of ‘directly’. Criminal liability for environmental accidents includes imprisonment of up to seven years and monetary fines.
Future types of liability
In addition to administrative, civil and criminal sanctions that may be imposed on polluters in China, the PRC government is in the process of introducing new powers to prevent and discourage enterprises from polluting the environment.
The EPA is exploring with other government departments including the Ministry of Commerce, the China Banking Regulatory Commission and the China Securities Regulatory Commission, whether to require environmental compliance as a condition to obtaining further or ongoing approval or assistance from those other regulatory branches of the PRC government. As a result, Chinese companies (including FIEs) which are sanctioned for breaching environmental laws may in future find that they cannot for instance obtain bank finance, raise funds on the stock market or further expand their business within China or overseas. Through this method of inter-departmental cooperation, it is intended that enterprises operating in China will be additionally incentivised to comply fully with PRC environmental laws.
Considerations for foreign investors
In addition to the environmental laws and framework discussed above, foreign investors need to consider the following factors when reviewing their current operations or considering acquiring new businesses in China.
Following the revision to the Guidance Catalogue for Foreign Investment (in November 2007) and recent changes in government policy, new foreign investment into any high pollution, high energy consumption or natural resources project is now prohibited or restricted. To date, such projects have generally related to heavy polluting industries such as steel, mining, cement and chemical and paper manufacturing, and have utilised outdated technology. The government is now keen to promote the adoption of new clean technologies into sectors of the economy that have historically been heavy emitters of pollution into the environment. Even existing foreign investment into these heavy polluting sectors may be curtailed in future. Expansion of operations may be prevented and existing preferential treatments may be suspended unless new environmental protection facilities or new production technologies are introduced to reduce pollution emissions.
Choice of project location
Since the total volume of pollution emissions is set and enforced by the government, a foreign investor must consider carefully the location of a proposed project. If some areas are close to reaching their aggregate total discharge volume, there may clearly be regulatory difficulties in constructing new operations which would result in further pollution emissions.
Compliance with environmental rules
Enforcement of environmental rules varies across China. Historically, local government departments in less developed areas of China have generally been willing to overlook or ignore mandatory environmental standards in order to attract investment. However, central government has started to take action against local governments and officials who fail to implement national rules and standards for environmental protection. As a direct result, many FIEs have been advised by their local government contacts that compliance with environmental rules which may have previously been lax, will in future be actively enforced.
Historical environmental liability
In any M&A deal, there is always a risk that a target company is later discovered to own polluted property. According to the polluter pays principle, the target company will be primarily liable to clean up any pollution and pay compensation to any third parties that have suffered loss as a result of such pollution. The cost to the company of paying the compensation and the clean-up costs may ultimately result in loss to the new shareholder of the target company.
Where polluted property has been acquired, the new owner may in principle seek redress against the previous owners in respect of any environmental liability borne by the new owner. Where however the relevant previous owner cannot be found or has ceased operations, PRC authorities may tend to rule against the existing owner of polluted property even where they were not responsible for the pollution or contamination. It is therefore advisable that any foreign investor planning to acquire assets in China should first conduct thorough environmental due diligence on any property in order to identify any outstanding or potential environmental liability.
The PRC government is increasingly using the media to ‘name and shame’ polluters in public. Official pronouncements are made in the press, notifying the public of administrative penalties imposed against polluters. Although administrative fines are not generally substantial, the reputational damage caused by this type of negative publicity is widely perceived to outweigh the economic incentive to disregard environmental rules.
The PRC government has begun to focus its energies on safeguarding the environment. Penalties are now being imposed, sanctions levied and offending parties named in public. Although current PRC environmental laws may not be as sophisticated or severe as elsewhere amongst developed countries, there is every expectation that within a reasonably short time frame - the next five years or so - a new enforcement regime will emerge across the country which will require the attention and compliance of all business operators in China.
Foreign investors should therefore give serious thought to environmental factors when planning future business strategies in China. They should also review their existing business operations. In many instances, current levels of profitability may in part be due to non-compliance with environmental rules. Whilst a relaxed state of affairs may continue in the immediate short-term, recent renewed and spirited interest in the environment at the grass roots of society and at the centre of government indicates that in future polluters will ignore PRC environmental rules at their peril.
The emergence of a robust environmental regime in China is taking place at the same time as fiscal and regulatory incentives are being introduced to encourage businesses to adopt greener working practices. The combined result is expected to present new opportunities to foreign investors who are keen to buy into the high-tech production methods of the next generation.
Thomas Fairley, Associate
Zhang Yue, Associate