Part I: A Sleeping Dragon Awakens
If you have read the stories about the Songhua River spill, or have visited Beijing on a particularly smoggy day, you may assume that Chinese environmental law is a myth. Do not be misled. While the enforcement of environmental laws has taken a back seat to economic development in the past, all signs indicate that you should elevate the level of attention your company devotes to environmental compliance in China, whether you already operate there or are planning to do so.
What Are the Signs of Change Ahead?
First, Chinese citizens, fed up with governmental laxity toward (or more likely complicity with) egregious environmental polluters, are starting to take environmental enforcement into their own hands. Riots have occurred in several areas of China directed toward industrial facilities that have caused serious health problems and even deaths as a result of their unchecked discharges.
The Chinese news agency Xinhua reported on April 23, 2006 that Zhou Shengxian, head of the State Environmental Protection Administration (SEPA), said “pollution has posed a great threat to social stability . . . there were 51,000 disputes over environmental pollution last year.” Threats to “social stability,” especially when reported with such frankness, are taken very seriously by the central government.
Second, more than 15,000 journalists will descend on the country to cover the Olympics in 2008. The government wants to present them with a cleaner, if not exactly “greener,” China. It wants the story to be environmental progress, not environmental Armageddon.
Third, China is becoming increasingly aware that its domestic activities can have international consequences. Greenhouse gas emissions are the obvious example here, but other pollutants cross boundaries as well.
The Financial Times recently reported (April 12, 2006) that mercury discharged from traditional coal-fired power plants and other air pollutants from China are being found in mass quantities as far away as the United States. On top of increasing international trade pressures, China does not want to be seen as a bad international citizen on the environmental front.
Consequently, the highest levels of the Chinese government are starting to talk tough. Chinese Premier Wen Jiabao recently called for stronger environmental law enforcement. “We must spend money on pollution control sooner or later. The sooner the better,” Wen told a conference in Beijing on April 17, 2006. “Those who cause major pollution accidents through making wrong decisions or lax supervision must be severely punished.”
What Does This Mean for Your Company?
Like it or not, the most recent high-profile environmental disasters in China have originated in chemical plants.
- Last November, the widely reported chemical plant blast in northeastern Jilin province released 100 tons of benzene and nitrobenzene into the Songhua River, compelling officials to cut off water supplies to millions of people downstream.
- A spill of cadmium in the Beijiang River in south China’s Guangdong province has threatened local drinking and agricultural water supplies and chemical spills along Northeast China’s Hun River and central China’s Xiangjiang River.
- The South China Morning Post reported on April 10, 2006 that SEPA is expected to introduce a more stringent approval process for new industrial projects. As the result of a two-month nationwide audit of 127 chemical producers, SEPA rejected or suspended approval for 44 projects across a range of heavy industries and published a “name-and-shame” list of 20 projects that fell short of environmental standards. The newspaper reported, “Analysts said the crackdown has effectively frozen new petrochemical projects.”
Foreign Chemical Companies May Be the Next Target
While it is true that, thus far, the high-profile spills that have driven increased scrutiny of the chemical industry have occurred at state- or township-owned enterprises and not at foreign-invested ones, this fact should not induce complacency. Foreign-invested enterprises may have fewer community connections and thus may present easier targets for enforcement.
Part II: China’s Environmental Laws and Regulations
The environmental regime in China has three components: laws, regulations and enforcement. The first part of our primer reported on the changing attitudes at the highest levels of the Chinese government – change that signals an impending increase in enforcement. In Part II, we offer a basic introduction to China’s environmental laws and regulations.
China’s environmental laws are roughly comparable in scope to US environmental laws. As in the United States, Chinese environmental laws generally follow a focus-specific approach. China has, for example, a Law on the Prevention and Control of Atmospheric Pollution (2000); Law on Prevention and Control of Water Pollution (1996); and Law on the Prevention and Control of Environmental Pollution by Solid Waste (2004). These laws are not nearly as detailed as US laws. They set forth general policy and leave significant areas to be fleshed out by regulations.
Environmental Impact Assessment
One noteworthy difference between Chinese and American laws is that China requires all public and private entities that intend to undertake construction or development activities to prepare an Environmental Impact Assessment (EIA). The projected impact on the environment – major, minor or negligible – determines the scope of the EIA.
EIAs must be performed by certified institutions, of which there are now approximately 90 in all of China. The results of the EIA determine whether the construction or project (including the expansion or significant modification of an existing plant) can commence in the first instance, and, if so, what permits will be required.
In another significant contrast between American and Chinese law, the Chinese laws are not codified in any central location similar to the United States Code. Consequently, at times, simply finding the applicable Chinese law can be a challenge.
No CERCLA Counterpart
Most Chinese environmental laws address operational issues. China currently has no analog to the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) dealing with historical contamination. As a general proposition, however, those who caused environmental contamination and those who own contaminated property (whether they caused the contamination or not) are responsible for the harm caused by that contamination.
The systematic cleanup of contaminated sites in China that are not actively causing significant, current, off-site human or environmental harm is years away, but you should be aware of the current liability scheme.
A purchaser of assets or equity of companies operating in China should conduct due diligence to determine the extent of on-site contamination. A purchaser should also ensure that liability for any prepurchase environmental harm is allocated by contract to the seller, or that exposure for environment related liability is covered by indemnification.
SEPA is the primary environmental regulatory body in China. However, numerous other agencies are overseeing environmental responsibility for certain matters. SEPA has approximately 300 employees, with 200 based in Beijing and the balance in the provinces. SEPA promulgates most national environmental regulations.
However, except for the highest profile matters, SEPA is not directly involved in administering these regulations or in issuing permits to regulate air and water emissions and hazardous and solid transportation. These tasks are handled by local Environmental Protection Bureaus, which exist at the provincial, county and township levels. These bureaus, while theoretically taking direction from SEPA, are funded (and thereby controlled) by local governmental authorities. These local environmental bureaus have the ability to impose stricter requirements than those promulgated nationally (as do the US states), but they cannot impose less stringent requirements. The broad language used in the environmental laws and the dearth of environmental regulation, however, grants considerable discretionary power to these local authorities. The environmental manager used to a high degree of regulatory precision in the United States must be prepared to accept operating in an ambiguous environment in China.
As noted in the first article in this series, enforcement has traditionally been the weakest link in China’s environmental regulatory chain. Lately, however, there are a number of reasons to believe that the national government wants to change this situation.
The Supreme People’s Court, for example, in a decision issued on July 28, 2006, made it clear that the Criminal Law can be used in these efforts. Indeed, Article 338 of the Criminal Law mandates a “fixed-term imprisonment of not more than three years or criminal detention” for environmental violators and that they “shall also, or shall only, be fined” for “a serious environmental pollution accident” to property or people.
The Court interpreted “heavy losses of private or public property” quite stringently:
- “…private or public property losses not less than RMB 300,000 (US$37,500); (b) the permanent destruction or loss of use of not less than 5 Mu (slightly less than one acre) of farm or forest land; or (c) the death of not less than 40 cubic meters of ‘forestry’ or other woods, or the death of not fewer than 250 young trees.”
- The Court interpreted “serious consequence of personal injuries” to include the death of one or more people, serious injury of not fewer than three people, or “light wounds” to not fewer than 10 people. If three or more people are killed in an environmental accident, the Court held that those responsible can be imprisoned for three to seven years.
PART III: Environmental Compliance Strategies for China: Nine Suggestions to Ease Your Way
Previously, we explored why you should take environmental compliance in China seriously. This article looks at how you should undertake your environmental compliance activities. While by no means comprehensive, these nine suggestions might ease your entry into China or aid your existing operations.
Use the EIA Process as a Blueprint and Calling Card
The EIA process, to which every company must submit, provides a valuable framework for your environmental goals and can form the basis for your future relationship with the regulators. In fact, even if your plan sets out some newer, less tested approach, China may be more tolerant than other jurisdictions of experimentation. If a new technology appears to hold great promise for pollution prevention or treatment but has no operational track record, it will probably be permitted as long as its risks are clearly set forth.
The EIA rules require some public participation in the development and approval process. However, scheduling additional public information sessions advertises your desire to be a conscientious neighbor. If you are undertaking a project in China with a local joint venture partner, you should assume the responsibility for the EIA, as the local partner may not have all environmental impact adequately assessed or may delay matters by obtaining approvals in ways that Western entities would find unpalatable.
Hire a Local Environmental Manager
Employ a China environmental manager who reports directly to your global headquarters’ environmental or environmental health and safety department and is responsible for all China operations. Finding a qualified employee for this and other environmental functions will be one of your hardest challenges. Start searching for the right candidates early and hire those who meet your needs, even if the facility is months away from completion. They can begin absorbing your corporate environmental values and culture by working in one of your other facilities first.
Articulate Corporate Environmental Values
Best practices include the implementation of an “environmental values deployment program,” especially when you are attempting to inculcate these values into a management team that may be the product of a culture with little or no experience with corporate environmental responsibility. If your company subscribes to the Responsible Care® program, this should be somewhat easier; the China Petroleum and Chemical Industry Association recently signed on to the program and has committed to rolling it out to the domestic Chinese chemical industry. Training programs must be developed to ensure action and must take place across all levels; if yours is a US- or Europe-based corporation, the program should include applicable provisions of any antibribery laws or treaties your country has enacted or ratified.
Set Up a Reporting System
Implement a mechanism to ensure that plant-level environmental personnel fulfill their environmental responsibilities and report the results to the China environmental manager. Define a number of performance outputs derived from the responsibilities of each individual in the chain. A number of contractors provide China-tailored environmental reporting software.
Perform Regular Audits
Do systematic checks regularly, performed either by independent internal teams or outside auditors, to establish whether all activities are being carried out in accordance with the environmental management system, covering both local and corporate-wide standards.
Review Supplier and Contractor Performance
Environmental performance guidelines should be integrated into purchasing and contracting policies, and reviews of the environmental performance of suppliers and contractors should be conducted before and after their selection.
The right to conduct periodic audits of their environmental compliance should be part of the contracts with these entities. These contractual provisions promote environmental stewardship and reduce the risk that your suppliers will be shut down (and your supplies and services interrupted) by regulators.
Get Employees Involved
Encourage all employees to become involved in environmental management, compliance and innovation.
Keep the Neighbors Happy
Many of China’s environmental laws contain provisions that permit private lawsuits (similar to nuisance actions) by neighbors who contend they have been injured or the enjoyment of their property damaged by emissions from nearby factories, so work with neighborhood groups to address concerns before they escalate.
Look for Other Benefits
If you have cogeneration facilities, any excess power generated by these units can be sold to the electrical grid in China at competitive prices. Clean Development Mechanism projects, providing Certified Emission Reduction credits under the Kyoto Protocols, can also be undertaken in China with the cooperation of a Chinese partner.
Whether your company has already established operations in China or plans to do so, taking any or all of these steps will demonstrate your commitment to the country’s increased concerns about environmental compliance.