Environmental Regulation: Threat or Opportunity?

How environmental regulations affect foreign companies in China

China’s and the European Union’s (EU) commitment to the 2015 Paris Agreement on Climate Change, could lead to further environmental regulations and more environmental restrictions on companies than the ones currently faced. Carlos Mínguez, Francisco Martínez Boluda and José Clerigues, lawyers at Uría Menéndez, analyse how environmental regulations affect companies and the challenges companies operating in the EU and China may face in the near future.

In the past three decades, public awareness of climate change and environmental protection has grown rapidly and will presumably continue to grow. The European Union (EU) is committed to making Europe the most climate-friendly region in the world (as expressed by Jos Delbeke, European Commission, Director General for Climate Action). To do so, a significant amount of environmental legislation has been passed in recent years by the European Parliament and European Council.

Even if the EU takes the lead in environmental protection, China has shown in recent years that it is more than capable of holding an environmental leadership position. Showcasing this, in 2014, an important amendment to the Environmental Protection Law was passed and in 2015 China (and the EU) became party to the Paris Agreement under the United Nations Framework Convention on Climate Change (Paris Agreement on Climate Change) which set an admirable goal of “holding the increase in the global average temperature to well below 2°C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels ” (Article 2.1.a). Both China and the EU have confirmed their commitment to the agreement, despite President Trump’s announcement that the United States would withdraw from the Paris Agreement on Climate Change (in accordance with Article 28, the withdrawal cannot happen before 4th November, 2020).

Some say environmental regulations inhibit company performance, specifically those in the industrial sector. In the EU, industrial facilities sometimes need to obtain more than one permit (from various public authorities) to legally operate, they must limit specific types of emissions, and operators have to introduce into their production process so-called “best available techniques” (in essence, the most effective and advanced stage in the process of trying to limit pollutant discharge). On the contrary, environmental regulations benefit scientific progress, human health and the environment as a whole.

The 21st century has seen the rise and consolidation of renewable energy sources. Market entry for this industry has been at the expense of thousands of primary sector jobs, however this renewable expansion has also created a lot of new positions. The EU has stated that by 2050, greenhouse gas emissions will be reduced by 80 per cent below 1990 levels. This goal will be achieved, by progressively reducing electricity dependency in industrial sectors dedicated to burning fossil fuels such as coal and by instead promoting the use of renewable sources of energy. This change in the energy mix is something that some countries of the EU are currently experiencing. For example, the coal mining sector in Spain employed around 30,000 workers in 1995. Today, there are fewer than 2,000. State aid for this sector is coming to an end.

On the other side of the globe, China is the world’s largest coal producer and consumer. Much of the electricity produced in China comes from burning coal. The downside of this industrial sector is the generation of carbon dioxide and nitrous oxide; gases that are responsible for global warming and climate change. At this time, both China and the EU are responsible for almost 40 per cent of the world’s greenhouse gas emissions.

Environmental protection is on the Chinese government’s agenda and companies should be prepared to include it in theirs, especially if they have not already done so. Environmental protection can also play an important role in companies’ competitiveness. The rise of healthy lifestyles and the increased public awareness of environmental matters have led to new business opportunities that have strengthened product development. Michael Porter, a Professor at Harvard University, outlined two basic strategies in order to achieve success in the market: cost leadership and differentiation. Companies can invest in green technology to accomplish both: they may create a cost leadership strategy (for instance, energy savings as a result of LED implementation) or a differentiation strategy by, for example, using environmentally-friendly products throughout the production chain and as a by-product obtaining a green label (all of which can have a positive impact on the clients’ perception of the company and can confer tax relief or exemptions).

Ultimately, environmental regulation can be seen, using SWOT analysis, not as a threat but as an opportunity. Respecting the environment and aiming to increase profits may not be at cross purposes, but rather complementary. It cannot be ruled out that if climate change worsens, governments may gradually prioritise the reduced consumption of natural resources by, restricting company activities, e.g. reducing or prohibiting a company from using underground water in its industrial processes. In this scenario, not only citizens are impacted but companies as well. It is, therefore, necessary to overcome the mistaken belief that companies are only self-interested and not interested in the state of the planet. We should all be on the same side in this battle against environmental deterioration.

The challenges that companies face are remarkable, specifically in the industrial sector. We live in an era of change and development. Irreparable losses or considerable benefits may arise depending on how each company decides to deal with environmental matters.

Carlos Mínguez is Counsel and Head of the Environmental Department in the Valencia office of Uría Menéndez, Francisco Martínez Boluda is Partner and Head of Uría Menéndez in the Beijing office and José Clérigues is Senior Associate of the Environmental Department in the Valencia office. Uría Menéndez is the leading law firm in the Ibero- American market. With 576 lawyers, including 132 partners, the firm advises on Spanish, Portuguese and EU law in relation to all aspects of corporate, public, environmental, litigation, tax and labour law. They have 17 offices in 13 countries and over 2,000 clients. The Beijing office opened in 2009 and was the first Iberian law firm to land in this city.