The Sting of a Thousand Cuts

A new era of environmental enforcement in China

China’s rapid development has caused a number of environmental issues the central government is attempting to address. Since the 19th Party Congress, the country has begun to publicly recognise the threat a lack of environmental enforcement has on humanity’s future. In this article, Peter Corne, vice chair of the European Chamber’s Energy Working Group and office head at Dorsey & Whitney LLP Shanghai, and Johnny Browaeys, director of corporate services at GREENMENT ENVIRONMENT, outline the steps China is taking to save its environment.

The thousand cuts ….
On 19th October 2017, President Xi Jinping, in a three and a half hour speech to the National Party Congress, emphasised that constructing an ecological civilisation is necessary for the continued development of China. President Xi chose his words carefully, saying:

“The damage that humanity does to nature will ultimately harm humanity itself – this is an unavoidable rule.”

This pronouncement—together with the latest in a series of central environmental inspections covering 30 provincial regions—has ushered in an era, in which the environment is at the forefront of enforcement actions. In a centrally-led, far-reaching enforcement campaign, over 5,700 officials have been arrested and over 30,000 companies have been sanctioned. The campaign was a large-scale, coordinated effort between central inspection teams and local government authorities. The central government has stated its commitment to conducting inspections on a biennial basis and to target air pollution in the Jingjinji Metropolitan Region.

The campaign would not have the impact it does, on local government officials and corporations, if not for the new tools given to inspectors from recent amendments to existing environmental laws, rules and regulations.

Deliberate steps….
Few people at the time fully appreciated Premier Li Keqiang’s declaration of war against pollution following the ‘airpocalypse’ experience in Beijing several years ago. However, it set in motion a series of measures that reversed the sense of helplessness and apathy associated with environmental protection in China. The central government’s increased environmental targeting these past few years has resulted in several highly-specific environmental policy action statements—the Air Ten, the Water Ten, and most recently the Soil Ten—along with the the issuance of long-awaited laws and regulations.

However, the amended Environmental Protection Law of the People’s Republic of China (Environmental Law), which came into effect in 2015, promised to change the status quo that favoured “growth at any cost”. It did so by providing enforcement authorities with an enhanced set of tools they could use not only against environmental infringers, but corporate senior managers and regulators as well. The most potent of these measures changed the process of fining infringers from a ‘per event’ basis to a daily basis, drastically altering the ‘pollute vs comply’ cost equation. Responsible senior managers could be thrown into administrative detention up to 15 days at a time from repeated infringements made by their company. Government officials’ career advancement was made contingent on environmental performance. To round out these changes, freed from the need to demonstrate some sort of loss or damage, a number of non-governmental organisations (NGOs) became qualified to bring environmental lawsuits.

These NGOs pushed for compliance with other methods. On 13th October, the Corporate Information Transparency Index (CITI) was released at the 2017 China Green Supply Chain Forum by the Institute of Public and Environmental Affairs (IPE) – China’s most reputable environmental NGO. The IPE gave CITI performance/ scores to approximately 260 brand-name companies. These new regulations meant more challenges for supply chain management. Some companies shared the countermeasures they devised with others, however these businesses admitted that they lacked both experience and resources to make their supply chains compliant.

Prior to the amended Environmental Law, environmental authorities focused on up-front approvals, with environmental impact assessments and construction approvals taking most of their attention. Now the emphasis is on corporate operational compliance and operations-based emissions under government oversight.

The law now provides enforcement tools, but without underlying and unequivocal policy support, it struggles to be an instrument of social change. It has now become clear, in a succession of policy initiatives, that environmental enforcement is here to stay, having been put on par with anti-corruption as a government priority. What we are therefore seeing is an elusive convergence of two critical factors—enforcement tools and underlying policy—underpinning implementation. Other issues that have factored into the implementation of the Environmental Law include the number of employees comprising China’s environmental authorities and the proliferation of specialist environmental tribunals within the court system.

Skeptics charge that environmental compliance often lapses as soon as central inspectors return to Beijing, and localities go back to a ‘growth at all costs’ approach. Recognising that risk, another law has just come into effect that enforces environmental compliance. The Environmental Protection Tax Law of the People’s Republic of China turns discharge fees into a form of taxation, and takes monitoring and collection out of the hands of local authorities and puts it into the hands of joint platforms established by tax and environmental bureaus. This means that local governments face consequences if they continue skirting around environmental law by waiving or subsidising discharge fees issued by favoured local companies.

Supply chain compliance – a hard nut to crack
On 19th September, Dr Zhang Yilin, the chief executive officer of Schaeffer Group Greater China, sent a note to the governments of Pudong and Jiading asking for them to allow their steel wire supplier to continue operating another three months. They estimated that without any alternative suppliers, the financial damage arising from the shutdown of this supplier and subsequent companies in the value chain could amount to a loss of renminbi-yuan (CNY) 300 billion.

Corporations that proactively engage their supply chain to enhance awareness and compliance have been able to weather the environmental storm more effectively.

Soil remediation – the next frontier
Most efforts to date have been to reduce air and water pollution, with soil and groundwater contamination generally considered too tough to tackle. Several years ago, a leaked survey detailing the extent of soil contamination in China brought the issue to the public’s attention. The central government eventually issued the Soil Ten policy action plan, which culminated in the enactment of the Soil Pollution Prevention and Control Law of the People’s Republic of China (Soil Law), an attempt to eliminate the issues that resulted from fragmented regulation.

The Soil Law is on track to be promulgated next year, and in advance of that, temporary rules that allow authorities to test parts of the law have been issued. These rules titled, the Measures on Soil Environmental Management for Contaminated Sites, were announced by the Ministry of Environmental Protection of the People’s Republic of China on 31st December 2016 and went into effect starting 1st July 2017. They mandated the sealing off or remediation of government targeted sites that were at the highest risk of environmental contamination.

A more systematic approach to surveys and enforcement promises to help address some of these concerns regarding the quality of locally-sourced food and water.

What you should do to manage risk?
Companies, with their environmental assessors and legal counsel, should audit themselves to guard against the following issues that could be flagged in an investigatory visit by environmental officials:

• missing or incomplete environmental health and safety permits
• non-compliance with land use or industrial policy
• inadequate environmental protection facilities
• hazardous waste disposal with unlicensed parties
• soil or ground water contamination
• noxious odours including volatile organic compounds
• outstanding fees or fines
• disputes with neighboring residents or facilities
• occupational health or safety compensation issues
• media or NGO exposure from non-compliance

Proactive self-assessment with periodic follow ups, combined with a strong compliance policy, is the best way to both guard against nasty surprises and to have a ready defence when one is accused of environmental non-compliance.

China may not be able to save the world, but there is still time for China to save its own environment. By initiating an era in which environmental enforcement is the new normal, China will be making a massive contribution to improving ecosystems far beyond its own borders in the years to come. Western companies will weather the inconvenience and emerge from the initial investigatory shock in a stronger market position. As the costs to pollute increase and issues with intellectual property protection are addressed, compliant Western companies will be better placed to compete and prosper.

Dorsey & Whitney LLP has locations across the United States, Canada, Europe and the Asia-Pacific region. Dorsey & Whitney LLP represent a number of the world’s most successful companies that hail from a wide range of industries, including leaders in the banking, energy, food and agribusiness, health care, mining and natural resources, and public-private project development sectors, along with major non-profit and government entities.

GREENMENT ENVIRONMENT is the largest and fastest growing independent Chinese environmental consultancy operating in accordance with international standards. GREENMENT ENVIRONMENT helps companies and their supply chains keep up with fast changing environmental regulations and engage with site operators to create self-motivated compliance through enhanced environmental awareness.