How new environment protection laws will affect doing business in China
Amended PRC Environmental Protection Law Implemented on January 1, 2015
The amended Environmental Protection Law (EPL) came into force on January 1, 2015, after being approved by the National People's Congress in 2014. This is the first amendment to the Environmental Protection Law, which originally came into force more than 25 years ago. The updated law makes significant progress to:
(a) promote transparency and availability of information from both private enterprises and governmental authorities;
(b) make it easier to bring public interest litigation; and
(c) strengthen penalties on both polluters and the relevant governmental agencies for failing to fully enforce the law.
This paper summarises some of these key developments and their potential impacts on doing business in China.
Main features of the new EPL
Increased public disclosure of information
The new EPL grants rights to citizens, legal persons and other organisations in China to obtain environmental information in order to participate in and supervise environmental protection. To facilitate this process local governmental authorities are now required to increase transparency and make environmental information publicly available. For instance, local governmental authorities are required to make publicly available information regarding environmental quality, monitoring data, environmental incidents and the collection and use of pollution discharge fees.
In addition, the new EPL requires the key polluting enterprises to disclose their pollution discharge information, including description of their key pollutants, discharge method, discharge concentration and total quantity, as well as pollution prevention plans, environmental impact assessments and environmental emergency plans.
The driver behind these increased disclosure requirements is to promote public awareness and therefore accountability of both governmental authorities and the polluters. As concern for environmental issues continues to grow in China, enterprises and government officials should increasingly expect to be subject to public opinion. The measures under the new EPL will make it more difficult for enterprises to skirt environmental laws, and for officials to fail to enforce the law, without being subject to public scrutiny. This new reality in China will require enterprises to not only comply with environmental laws, but importantly, to be seen to be complying. These environmental compliance measures will be an additional cost of doing business in China that new and existing enterprises will need to factor in.
New environmental impact assessment process
Although the requirement to conduct an Environmental Impact Assessment (EIA) for planning and implementing construction projects was established under the PRC Environmental Impact Assessment Law (EIA Law) in 2003, there was little public participation or transparency in the process. The new EPL expands the requirements with respect to the EIA process. If an EIA is required by law for a construction project, the developer of the project must include the public who may be affected by the project in the EIA process by explaining the relevant project and seeking their opinion.
The new EPL further requires the governmental authorities to ensure that public opinions on the proposed construction project have been sought and adequately considered during the EIA process and also to make the EIA reports publicly available (except for information involving State secrets and commercial secrets).
If the developer of a project fails to submit an EIA report that fully complies with the new requirements, including seeking public opinion, the competent governmental authorities may order the developer to stop construction, impose fines and order the developer to restore the site to its original condition.
Increased liabilities for violation of the new EPL
Under the original EPL non-compliance with the law was widely seen as cheaper than compliance. The new EPL seeks to address this by substantially increasing the penalties for enterprises that violate the law and also meaningfully penalising the responsible persons of the violating enterprises.
Under the original EPL, any violation was subject to a one-off fine, allowing a polluter to continue polluting without recourse after payment of the fine. However, the new EPL adopts a cumulative fines approach – instead of a capped one-off fine. Violating enterprises may be subject to fines that accumulate on a daily basis without a cap as long as their contravention of the law continues after they receive orders from the governmental authorities to rectify their contravention.
The cumulative fines are determined by reference to certain factors such as the operation costs of pollution prevention facilities and the direct losses caused by the illegal act or income derived from the illegal act.
These measures are all aimed at making compliance with the law more appealing than non-compliance. The removal of the cap on fines will likely increase costs for enterprises that fail to meet environmental standards. This could level the playing field for enterprises with high compliance standards and add pressure to those that may have gaps in their environmental compliance practices.
Imprisonment of responsible persons
In case of non-compliance by an enterprise of its obligations under the new EPL, the persons in charge or other persons directly responsible for such non-compliance may face imprisonment for a period of up to 15 days. This is a new penalty under the new EPL. A significant problem under the old EPL law was the lack of incentive for enterprises to comply with the law. Personal liability, including imprisonment, is a significant development to encourage compliance with the new EPL. While it is too early to determine how frequently this penalty will be used, the mere possibility of imprisonment is expected to be a highly effective measure to encourage compliance of the new EPL.
Sealing up and seizure of facilities and equipment
The new EPL empowers the environmental protection department in the local governments to seal up and seize facilities and equipment of enterprises that is causing or is likely to cause serious pollution. This is a new penalty, not present in the original EPL.
The interpretation of "causing or likely to cause serious pollution" by each environmental protection department of the local governments is now an important consideration for all polluting companies in China. The new EPL provides considerable scope for the application of this clause to be expanded at the local level and therefore this matter will have to be considered specifically in the context of the location of each facility an enterprise operates in China. In addition, this penalty should be considered in conjunction with the increased transparency and disclosure requirements and the potential for public pressure on government officials to take a hardline approach to companies that the public consider as causing pollution.
On the face of the relevant provision under the new EPL, it would appear to allow environmental protection authorities to seal up/seize facilities for any unauthorized discharge of pollutants (i.e., there is no built-in significance threshold or opportunity to cure following an initial violation). It is hoped that the Ministry of Environmental Protection and its local counterparts are encouraged to institute safeguards so that property sealing up/seizure only occurs in truly compelling circumstances and is not misused, or used inconsistently by government officials.
Delegation of powers to environmental protection departments to decide to suspend operations
Under the original EPL it was possible for local governments, rather than the specific environmental protection departments, to suspend or shut down operations of an enterprise that was not compliant with its environmental obligations under the law. However, the new EPL redirects this power to the relevant local environmental protection department within local government. This is important when considered in connection with the penalties on the officials within the environmental protection departments to fully implement the law, as highlighted further below.
This amendment is important as it aims to tackle non-compliance from both ends – encouraging compliance with the law and ensuring there are consequences for non-compliance. By empowering the environmental protection departments with the authority to enforce the law, and to punish officials for not doing so, the risk of the new law not being properly implemented is reduced.
Increased liabilities for governmental officials
The new EPL takes a carrot and stick approach to encourage officials to enforce the law. Local governments are now encouraged to include proper enforcement of the law as a factor in the performance appraisals of officials at the environmental protection department. However, in the event an official fails to properly enforce the new EPL, not only will this be reflected in their performance appraisal, the official will also be subject to increased penalties. For example, an official may be subject to demerits, demotions, dismissal and criminal prosecution if they unlawfully grant an administrative approval, cover up an environmental violation, fail to make a decision on suspension or closure of an operation, or fail to make publicly available environmental information, as required by the law.
Standing to initiate public interest litigation
Under the original EPL it was often considered that only the governmental authorities had standing to commence litigation against polluters for a breach of their environmental obligations. However, a significant development in the new EPL is to set-out a procedure and requirements for certain social organisations (NGOs) to have standing to initiate such "public interest litigation". This builds on the amended PRC Civil Procedures Law (effective on January 1, 2013), which established the public interest litigation system, but which failed to detail the rules on who had standing to initiate such litigation.
In order for an NGO to have standing to initiate public interest litigation against a polluting enterprise, the NGO must:
be registered with the civil affairs department of a government of a municipality divided into districts, or above;
have at least five years' experience in environmental protection activities for the pubic interest and not have committed any violations in that time; and
not seek economic gains through the litigation.
Importantly, an NGO may only bring actions against an enterprise for failing to comply with its environmental obligations. An NGO may not initiate litigation against a government official for failing to properly enforce the law.
Since the implementation of the new EPL, the first public interest environmental lawsuit has been initiated by an NGO. All-China Environment Federation filed a lawsuit against a glass manufacturer with the Intermediate Court of Dezhou City, Shandong Province for air pollution in March 2015. The claimed damages is approximately RMB30,000,000.
This is a significant development in the evolution of China's environmental protection regime. We understand that there are more than 700 NGOs that potentially have standing to litigate enterprises that are in breach of their environmental obligations. This, in conjunction with the increased transparency and availability of information of the polluting activities of enterprises, will make it harder to enterprises to hide any non-compliance or avoid consequences of such non-compliance.
Any citizen, legal person or other organization is now able to report the following non-compliance:
environmental pollution and ecological destruction by any organisation or individual - to environmental protection departments; and
non-performance of duties by the environmental protection departments - to the governmental authorities at a higher level.
The governmental authorities receiving the above reports are obliged to keep information of the informants confidential. This is yet another layer in the new EPL to encourage public involvement in environmental protection and make it increasingly difficult for enterprises and government officials to avoid their obligations.
Legislation by Central Government
To strenghen the enforceability of penalties stipulated under the new EPL, the Minsitry of Enviromental Protection has promulgated several rules on implementing the penalties under the new EPL:
Measures on Implementing Fines Accumulated on a Daily Basis by Environmental Protection Departments (Fines Measures);
Measures on Implementing Restrictions to Manufacturing and Suspension of Production for Rectification Environmental Protection Departments; and
Measures on Implementing Seal-up and Seizure of Assets by Environmental Protection Departments (Seal-up Measures).
The above measures all came into force on January 1, 2015 together with the new EPL. The measures detail the criteria for applying the relevant penalties under the new EPL, and expand the application of such penalties to some extent. For example, the Fines Measures and the Seal-up Measures both stipulate the typical misconduct that is subject to fines or which would result in seal-up/seizure of assets - in addition, these measures further provide a catch-all clause to cover other unlisted actions; effectively allowing the relevant environmental protection departments to expand the range of actions of an enterprise that may be subject to punishment.
The new EPL specifically grants the local congresses powers to legislate on an expanded scope of environmental non-compliance that is subject to cumulative fines.
For example, The People's Congress of Guangdong Province passed the new Regulations of Guangdong Province on Environmental Protection on January 13, 2015. Under the regulations, the cumulative fines are expanded to the following actions:
dismantling or leaving idle installation for pollution control without prior approval;
violating compulsory disclosure requirements by key polluting enterprises; and
starting construction before submitting EIA documents.
Future amendment to EIA Law
The EIA Law was implemented in 2003. With the new EPL in place, certain discripencies have been identified between these two laws, including the following examples:
Disclosure of EIA report
The new EPL imposes a new obligation on each environmental protection department to disclose the EIA reports they receive to the public, except for information involving State and commercial secrets. As the primary law that sets forth the EIA procedures, it is necessary to amend the EIA Law to include the corresponding information disclosure reqirements required under the new EPL.
New penalties under the new EPL
As discussed above, the new EPL imposes new penalties to enterprises failing to comply with environmental protection requirements (e.g. cumulative fines, seal-up/seizure of assets, imprisonment of responsible perons, etc.). However, the main penalty available under EIA Law is still a one-off penalty. It is possible that the local enviromental protection department may choose to apply the one-off fine under the EIA law instead of the more serious cumulative fines under the EPL. It is also possible to apply both the one-off fine under the EIA Law and the cumulative fines under the EPL as the new EPL does not prohibit the simultaneous application of EIA Law. Therefore, the EIA Law shall be amended accordingly to be adapted to new penalties regime under the new EPL.
In light of these discrepencies, it is necessary to amend the EIA Law for consistency with the new EPL. In fact, proposals to amend the EIA Law were raised during the session of National People's Congress in March this year.
Impact of the New EPL
The impact on the China market participants impact may be both positive and negative.
Cost of non-compliance
Under the original EPL regime, enterprises that fail to comply with environmental protection regulations are subject to capped one-off fines. Such punishment for non-compliance has been viewed as not serious enough and many of such enterprises kept violating environmental protection regulations by simply paying the fines as cost of doing business, which are normally much less than the cost of compliance. With the new EPL in place, the increased liabilities (e.g. the cumulative fines and imprisonment of responssible persons) for non-compliance, if properly implemented, will change this situation.
Cost of compliance
The new EPL may also significantly increase the operational costs of enterprises in some manufacturing industries, which are traditionally heavy polluters and have been failing to comply with the enviromental protection regulations, e.g. steel, petrochemical and pharmaceutical enterprises. Many manufacturers in such industries will have to suspend their production to make way for improvement projects for compliance purpose. If they cannot endure the costs involved, some of them may be forced out of business. For example, it is estimated that the entire steel industry would have to spend RMB90-110 billion (US$14-$18 billion) on improving their facilities in order to meet the requirements under the new EPL, and the improvement projects are also expected to raise operational costs by RMB80 billion (US$13 billion) per year due to maintenance fees and other expenses.
Who will benefit from compliance?
Enterprises that are not so severly impacted in terms of costs in complying with the new EPL are likely to reap the most rewards from the new EPL because the new EPL requires that the Chinese government introduce fiscal, tax, price and government procurement policies and measures to encourage and support enterprises to further reduce emission of pollutants.
Further, it is expected that this policy will also translate into more work for the environmental protection industry and specialist environmental consultants as a result of the increased market need for environmental protection equipment, technologies and consultancy services. The increased penalties for non-compliance and preferential treatments for compliance will provide greater incentives for enterprises to purchase and use emissions-reduction technologies. This should provide opportunities for enterprises selling high-tech emissions scrubbers, purification filters, environmental protection monitoring devices, wast/sewage treatment and other environmental technologies in the China market.
Deficiencies in the New EPL
Although the new EPL has made many progress, there are still major gaps in the law.
Public information disclosure
The law fails to say in what specific forms information will be disclosed, whether the information will be viewable on websites, downloadable, or printed so as to be assessed by the public. Moreover, the law contains no requirements with respect to the specifics of the kind of environmental data that will be released. So far, disclosure of environmental information has been mainly focused on air pollution due to the long acknowledged air quality problems in nothern China, while information about water and soil quality does not receive much publicity. The Ministry of Environmental Protection classified soil pollution data as a State secret and therefore withheld such data from the public. In the absence of detailed rules under the EPL on data subject to public disclosure, more sensitive environmental data may continue to be withheld without justification.
Standing to file public interest lawsuit
Inividual citizens are stil unable to the file environmental lawsuits on behalf of the public. Although NGOs are granted standing to file such lawsuits, the new EPL imposes strigent critera for the eligibility of NGOs. An NGO must have a record of non-violation for five or more years so as to be eligible to file public interest lawsuit. The "non-violation" record is quite ambiguous as it is not defined under the new EPL, and the law contains no procedures to verify the "non-violation" record of NGOs, which might be difficult to prove in practice. This dificiency in the law may be used by the defandants or even the courts to disqualify NGOs for filing a public interest lawsuit.
Enforcement of the new EPL
Another concern regarding the new EPL is that implementation and enforcement of the law may prove to be difficult, notwithstanding that the new law introduces harsh punishments and incentives for both enterprises and government officials to comply with the law.
Since the restructuring of government departments and elevation of the then State Environmental Protection Administration to the current Ministry of Environmental Protection in 2008, financial and staff resources, as well as powers provided to the Ministry, have increased only incrementally. The transformation of the environmental governance system that was expected has yet to materialise. Insufficient resources and structural challenges will continue to be an obstacle to China’s progress toward a more effective environmental governance system and may therefore become a drag on the Ministry and its local counterparts to enforce the new EPL.
Local governments also need to change their mentality to consider not only the regional economic development, but also the need to protect and maintain ecological systems over the long-term. Since local governments still rigidly control personnel and finances at local environmental protection bureaus, it is uncertain to what extent local bureaus will be able to avail themselves of their powers under the new EPL, particularly if the local governments still favor short-term development of the regional economy over environmental protection.
Authors: Sam Farrands, Rebecca Silli, Yaohai Liang, Ashley Phelp
 Source: Liu Tao, senior engineer at the China Metallurgical Industry Planning and Research Institute.