Foreign investors in China cannot afford to take a lax approach towards compliance with environmental legislation. The law is becoming much more comprehensive and is applied stringently to international firms.
Over the last 10 years, the Chinese government has devoted substantial resources to environmental protection and has greatly enhanced the regulatory framework. However, the beneficial effects have been overwhelmed by the consequences of economic growth. Rapid industrialisation has resulted in substantial environmental deterioration, and massive urbanisation has moved Chinese people closer than ever to pollution sources.
On the positive side, studies by Chinese and foreign experts have been effective in linking environmental quality with future economic development. The sustainability concepts worked into the 10th five-year plan (2001-05) show that China’s leaders are serious in wanting to balance economic progress with environmental management principles.
Environmental controls are now integral in the design of most new legislation and national infrastructure projects. The current five-year plan was the first to contain a special chapter on strategies for incorporating environmental sustainability practices in the development of the national economy. Key areas for legislative development include: wastewater treatment and recycling, groundwater exploration controls, protection of important mining resources, desertification controls and afforestation, air pollution prevention, and the improvements of waste management and treatment capabilities.
As the economy continues to grow, man aging China’s environmental challenges will become even more complex. The strengthening of legislation will be among the key instruments used to meet this challenge. For foreign investors, this means having to work within an increasingly comprehensive environmental legislative framework, which will continue to move closer to international standards. Furthermore, although local environmental protection bureaus (EPB) lack financial and technical resources to administer and enforce the law uniformly throughout the country, foreign companies will continue to be monitored closely, as they are seen as having the means and experience to minimise pollution.
In the past eight years, there have been major amendments to China’s environmental legislation and promulgation of many new standards and regulations. Foreign investors must fully understand and respond to this evolving regulatory environment. Otherwise they risk non-compliance and developing an environmental strategy that fails to anticipate future impacts upon business.
Essentially the regulatory framework is sound, and has been approaching international standards for some time. Legislation dealing with industrial pollution has become increasingly comprehensive and responsive to industrial developments. The Environmental Protection Law (1989) established a good ‘command and control’ legislative framework, which is supported by economic disclosure instruments, such as those associated with pollution levies and fines for noncompliance. Other environmental laws outline goals, policies and requirements for the protection of various environmental areas, such as the atmosphere and surface and ground water, and specify control requirements for specific materials such as solid wastes.
China’s overall industrial pollution control strategy is to encourage cleaner production, expand mass pollution controls, centralise waste treatment and encourage public participation. Investors in China can expect regulatory developments to continue along these lines.
The adoption of the ISO 14001 environmental management system certificate will continue to be encouraged, as it is believed to be an ideal way to support cleaner production and ensure regulatory compliance with the minimum allocation of government resources. The initiative will be supported by the promulgation of a cleaner production law expected later this year.
New pollution discharge fee
The trend away from concentration-based to mass-based controls will be reinforced by the development of a new pollution discharge fee. The fee will no longer be based on the concentration of individual pollutants, but instead on the degree of environmental impact of all pollutants discharged. In addition, the original practice of channelling 20 per cent of the fee into environmental protection administration has been discontinued. The levy will now be collected and distributed centrally and used to compensate for any environmental damage caused.
A revised Environmental Impact Assessment (EIA) Law is expected to include strategic aspects, allowing its application to be extended to industrial parks and the creation of conservation areas. In effect, the new law will attempt to deal with the cumulative environmental impacts of a development, not just the impacts of an industrial facility. It will also strengthen public participation. Although participation is required in current environmental impact assessment, putting this into practice has proved difficult. After the revision’s approval, public participation will be essential to EIAs, which means effective communication between enterprises and the public will become more significant during project development. However, it is important to note that a completed EIA will still be a technical document falling short of international standards in that it does not include a social impact assessment. Those companies that require an international standard EIA should compare the locally prepared EIA with international standards to identify gaps.
In the long-term, regulations in the pipeline include the preparation of ‘superfund’- type legislation similar to that in the US, which holds generators liable for past polluting practices. It is unclear when this law will be promulgated, although experts estimate within five to 10 years. It is imperative for investors to record the status of soil and groundwater quality with the local EPB – this way they can avoid being held accountable for contamination caused before they acquired the site. It is also important to use a locally qualified laboratory to authorise any analytical results when acquiring sites in China with their local EPB.
China should be congratulated on the progress it has made in the development of environmental legislation during the 1990s, especially in relation to industrial pollution control. While industrial output has increased dramatically over the last decade, the total discharge of major pollutants has risen only slightly. However, there is still some way to go before legislation meets international standards. The table below highlights areas where continued efforts need to be directed.
Various actions need to be considered by prospective investors. An environmental impact assessment is the basis of China’s industrial pollution control legislation and is required by law for all industrial or development- related investments in China, including joint ventures and wholly foreign-owned enterprises. However, since the preparation of an EIA does not begin until after the proposed project site has already been selected, there are several other important factors that must be considered.
Planning and permitting
1. A local EPB’s power originates from its relationship with other government departments. Therefore the most important step in establishing a facility in China is to undertake project proposal discussions with local departments of all ministries and agencies that may have jurisdiction over a proposed project. This helps to minimise future complications regarding project design and compliance, as well as jurisdictional battles between government authorities.
2. Another crucial step is to ensure that the local EPB and/or the State Environmenmental Protection Administration (SEPA) recommends
an appropriate institute to conduct an EIA. Despite nationwide efforts to separate regulation from implementation, some EPBs generate additional revenues by directing clients to a preferred EIA subsidiary. Failure to adhere to their advice in this regard would almost certainly result in EIA approval difficulties. The assignment of an EIA is usually taken as evidence of an EPB’s tacit approval of the site and project.
3. Unregulated industrial development has resulted in considerable unrecorded site contamination in China, and it is therefore imperative to conduct a due diligence environmental site assessment at any proposed site prior to establishing a facility. The results identify conditions associated with past site activities, particularly soil and groundwater contamination, in order to minimise future liability.
4. In general, prior to initiating an EIA, land-use rights should be approved by the Ministry of Land and Resources. However, the land lease contract made between an international company and a local Chinese venture partner often incorporates land-use rights, in which case additional approval by the ministry is not required. However, certain areas are off-limits to industrial locations based on drinking water locations, acid rain zones and prevailing winds. It is therefore important to involve the ministry from the beginning, and incorporate their suggestions and comments into a feasibility study.
5. To obtain a construction permit, an investor must apply either to the construction ministry, or the government body at the municipal or provincial level with direct jurisdiction over the project. An application must be accompanied by documentation of several key tasks, including a demonstrated involvement of the appropriate EPB and a basic understanding of the environmental issues involved.
6. Once project proposal approval is granted and the application for the construction permit is submitted, the project must be registered with the appropriate EPB as the first task in initiating the feasibility study and EIA.
7. A feasibility study must be prepared by an accredited design, engineering, environmental protection or research institute. The study will document site selection decisions and approval, as well as financial and technical feasibility issues. A review of this document is the only opportunity that the EPB has to influence and approve decisions at this stage of the project.
8. An EIA follows a format specified by national guidelines and the cost is set at 0.05- 0.5 per cent of the total investment. There are four distinct stages of an EIA:
The scoping phase involves a review of the proposed project and its impact on the environment and formulation of a scope of work. It is presented to an EPB review panel as a terms of reference report. In general, EIAs primarily assess impacts associated with the operational phase of a project and are less concerned with construction impacts.
The baseline phase involves investigating and evaluating the environmental and social baseline conditions to include a description of the project, raw materials and energy consumption, production processes flow diagram, pollution sources, treatment measures to control pollution sources, and landscaping and safety issues.
Prediction involves evaluation and forecasting of environmental impacts.
Impact assessment phase focuses on the impacts on waste, water, air, noise and human health.
9. Following the trial operation period of about three months, an inspection of technical, financial, health, safety and environmental aspects of the completed project must be conducted. Known as the Yanshou inspection, this is a certification procedure that aims to ensure compliance with all relevant regulations in addition to environmental issues.
10. Applications for contaminated wastewater discharge, air emissions and waste generation and disposal for new, expanded or upgraded projects should be submitted within one month after approval of the Yanshou inspection. EPBs above county level are responsible for supervision and management of pollutant discharge permit applications.
Normally, it takes three to six months to fulfil the above EIA management procedures and obtain final approval. Compliance with standards stipulated within the EIA report and existing environmental legislation will be monitored by the EPB roughly twice a year, but facilities are also strongly encouraged to undertake a self monitoring programme to maintain an accurate record of compliance statistics.
With the incorporation of crimes against the environment contained in China’s 1997 Criminal Law, polluters face severe punishment for actions that were not previously considered criminal. Local officials are also now held accountable for proper enforcement of environmental laws, in what is seen as a landmark achievement by central authorities to gain control over often-reckless regional economic development at the expense of the environment.
Enforcement of legislation
The environmental agenda was promoted in 1998 when the National Environmental Protection Agency (now known as SEPA) was elevated in status to an administration. Since then, the role of environmental protection in the national government has become clearer and more prominent.
However, there have been some impediments that affect SEPA’s ability to enforce legislation. Despite its promotion, SEPA was not given full ministerial status. This means China’s local EBPs are funded by, and responsible to local government rather than a centralised authority. This creates a structure that does not provide them with the power to properly enforce legislation without interference from local leaders. Also, EPBs at county and township level rely on the fees they collect from pollution levies to fund their monitoring and supervision activities; paradoxically, they have no vested interest in reducing pollution discharges.
Regional variations in enforcement experienced by some multinational companies are usually due to pressure for economic development and the desire to lure investment and jobs. Local leaders may be more concerned about development than environment protection. In contrast, several EPBs in wealthy areas with significant foreign investment such as Guangzhou, Shanghai and Dalian have reputations for implementing local regulations that are significantly stricter than the national standards. The key to understanding regional variation in pollution control policy lies in understanding the resources and objectives of the regional EPBs and governments.
Based on experience, it is possible to obtain local approval of sub-standard procedures or facilities. This, however, is not a reliable strategy as local leaders and policy can change, and fines, unexpected outlays for new waste treatment systems or criminal liability could result. Choosing a location with looser standards may just be delaying what will need to be done later as that area is forced to clean up its act.
In an effort to combat these regional variations, a significant campaign by SEPA, currently being reviewed by the State Council, is underway to strengthen the authority of local EPBs and bring them to a level equal to other local government departments. This restructuring should include emphasis on the integration of all local environmental departments, especially ecological protection, environmental education and publicity departments. Greater ‘vertical’ control over local EPBs will be given to higher-level provincial and municipal EPBs. However, EPBs will still be ‘horizontally’ responsible to local governments that will continue to fund them and take leadership roles in overall local environmental quality and administration.
The lack of ‘vertical’ control will have to be overcome before the enforcement of environmental law can be similar to the application of other areas of Chinese law. Even if this is
achieved, the rule of law in China will continue to be a significant cultural obstacle to bringing enforcement up to the level of international standards.
This article was written by Robert Hansor, account manager of Environmental Resources Management in Shanghai. For more information about ERM’s environmental, health, safety and social consulting services in China, contact Robert at firstname.lastname@example.org.