The Chinese government is determined to transform the country into a green, low-carbon, and circular economy. Foreign companies doing business in China will have to accept and adapt to increasingly robust laws, and the proper implementation and compliance of environmental regulations.
Depending on the industry, entities with a presence in the country will have to make the necessary changes to adhere to environmental compliance and avoid fines and penalties.
Environmental compliance, also known as green compliance, includes all environmental laws, regulations, and standards, which must be respected and executed by companies operating in China.
In the past year, Chinese authorities have published guidelines on how to comply and implement current regulations. Entities that are proactive and include green compliance in their business plans, will enjoy a more competitive advantage.
Last year, China inaugurated the world’s largest carbon trading market, including over 2,200 companies in the power generation sector, most of them state-owned enterprises (SOEs). This conglomerate represents about half of China’s energy-related emissions, and 10-14 percent of the world’s total.
Each company is allowed by the government to emit a certain amount of CO2 emissions each year. If they finish the year under the limit, they can sell the difference on the market as a credit. Conversely, if the company exceeds its limit, it is required to buy additional credits to compensate.
Failure to pay quotas on time is regarded as a violation and will lead to penalties between RMB 20,000-30,000 (US$2,960-4,450) and “name and shame”. As of May 2022, the Ministry of Ecology and Environment (MEE) has punished over 100 firms in the national carbon market for incompliance.
Experts estimate that the system will be expanded in the future to become more comprehensive, and the penalties made higher to speed up China’s decarbonization process. Eventually, China’s carbon market may include a much broader set of entities.
Companies can prepare for carbon trading requirements by establishing an internal price on carbon. This can either be an internal tax to encourage emissions reductions within the company to fund green initiatives or a shadow price that allows the company to track its emissions.
Compared to Europe and the United States, the development of ESG (environmental, social, and governance) sustainability standards is still in its initial state. Currently, there is no law in China covering ESG responsibilities, however major polluters and companies that finance them have been required to submit annual reports detailing a range of environmental information.
According to the Measures for the Administration of Legal Disclosure of Enterprise Environmental Information (the Measures), companies identified as being required to disclose environmental information must compile a yearly “Legal Disclosure Report of Environmental Information” and upload it onto the “Enterprise Environmental Information Legal Disclosure System”.
Major pollutants, companies required to undergo mandatory clean production audits, and publicly listed firms and bond-issuing companies penalized for ecological violations in the past are obliged to disclose environmental information. Failing to comply could mean a penalty of RMB 10,000 (US$1,580) to RMB 100,000 (US$15,805). This will also be included in the company’s credit record.
Though the fines are relatively small for large corporations, the potential negative impact on their corporate credit record could be much more damaging, affecting their reputation and missing out on bids for government contracts.
On the other hand, voluntary ESG reporting has increased significantly in China. This proactive stance will require important changes by companies, including hiring key staff and investing in systems to collect and manage specific information. Smaller companies may choose to outsource this process to a third-party firm.
Major pollutants and companies that use toxic materials or exceed prescribed energy consumption must undergo a clean production audit, conducted on the production processes and services according to certain procedures. This information is later used to recommend and implement changes to attain cleaner production.
Companies that fail to implement a mandatory clean production audit, falsify their clean production checks, or fail to properly report the result of the audit must rectify within a prescribed time. If they refuse to do so, they will be forced to pay a fine between RMB 50,000 (US$7,400) to RMB 500,000 (US$74,000).
Last year, the Regulation on the Administration of Pollutant Discharge Permits (the Regulation) came into effect and marked the establishment of a national pollutant discharge permit system in China. The regulation was designed to standardize permit application procedures, improve discharge management, tighten supervision, and clarify the responsibilities of relevant discharging companies.
Entities that discharge pollutants into the environment must obtain a pollutant discharging permit prior to the launch of their production facilities or the actual discharge of pollutants, save for discharging entities that generate/discharge only a limited number of pollutants and have only a minor environmental impact. The latter type of discharging entity is only required to complete a pollutant discharge registration, a much simpler process.
Discharging entities must carry out self-monitoring and keep the records for at least five years; establish a ledger record system for environmental governance and periodically report on pollutant discharge permit implementation, as well as disclose pollutant discharge information on the national permit management platform.
Violations of the discharge permit system, such as discharges without a permit, discharges that exceed applicable standards, or discharges made without a required permit re-application, will carry fines up to RMB 1 million (US$148,000) and administrative sanctions, which could mean production or business restrictions or suspension, or even business shutdown. The responsible person may also be held accountable for severe, continuous, and intentional violations.
Last April, 14 authorities, including the MEE and the Supreme People’s Court, jointly published the Rules on Compensation for Ecological and Environmental Damage, which clarified the responsibilities of the polluter for repairable and unrepairable damages.
Damages that can be repaired should be so done by the polluter or an entrusted third party. Polluters that cause irreparable damage should compensate for the related losses according to law and bear the related expenses within the scope of compensation for ecological and environmental damage or conduct alternative repair to realize the equal restoration of the ecology and its service functions.
Foreign companies are advised to include green compliance into their business plans and execute a few preventive actions, such as audit their facilities and supply chain to identify possible improvements, invest in managing tools, technology, and services to meet green compliance responsibilities, pay attention to future regulations changes and finally, fit sustainability into their risk management strategy.
In some industries, investors and other stakeholders already expect responsible sustainability practices from companies.
Due to China’s seriousness regarding their green economy objective, regulatory updates and new environment protection rules can be expected to be announced in the coming years. Firms should create a detailed plan for investments, changes to operational workflows, and exposure to incompliant links in the supply chain to effectively adapt to strengthening green compliance requirements.
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