The Business of Cleaning Up China's Environment

The State Environmental Protection Administration (SEPA) was given ministry-level status in government reorganizations in April 1998 - a clear indication that the government is taking environmental issues seriously. The new status has made the SEPA a more powerful authority, better qualified to carry out its task of overall supervision and administration of environmental protection work nationwide. Contrary to trends in other government organizations, the number of SEPA employees increased following restructuring with staff numbers raised at both the provincial and central level, especially in departments of environmental inspection and enforcement as SEPA needs to strengthen its ability to enforce the environmental laws and standards in China.

New environmental laws for 2003

A number of major laws govern environmental protection in China, the cornerstone of which is the PRC Environmental Protection Law, effective from December 26 1989. New laws continue to be enacted, with the most important recent addition being the Environmental Impact Assessment Law (环境影响评价法) issued on October 28 2002 and effective from September 1 2003. In addition, the Promotion of Clean Production Law was approved by the Standing Committee of the National People's Congress in June 2002 and entered into effect on January 1 2003.

The Environmental Impact Assessment Law classifies projects into three categories according to their likely effect on the environment.¹ Category 1 projects are subject to full detailed environmental impact statements. Environmental impact analysis reports on specified areas may be sufficient for Category 2 projects, while only a registration form is required for Category 3 projects. In addition to placing more emphasis on the effective implementation of environmental impact assessments and the use of cleaner technologies, this law also introduces the concept of strategic environmental assessment whereby environmental protection is a more significant factor in the decision-making process.

The Cleaner Production Promotion Law states that cleaner production should include the application and use of environmentally sound designs in industry, use of clean energy sources, non- or low-pollution technologies and production methods, efficient and comprehensive use of resources (including waste), and improved environmental management.

The Law also clarifies the roles and responsibilities of different government departments. Under the Law they will be required to provide technical guidelines and criteria for implementing cleaner production methods. Assessments, reviews or audits may be required, with the emphasis on cleaner production auditing for polluting industries and those that fail to meet the relevant standards, or based on the total amount of pollution control requirements. A product labeling system linked to environmental performance may also be implemented. The Law also specifies that the State Council will periodically issue a directory of production processes, technology, equipment, and products that must be eliminated within a fixed time limit. Pollution information disclosure will also be required for those polluting companies. The Law contains scope for preferential fiscal and tax policies and other incentives as part of its implementation. However, if a company violates this law, it may be ordered to make rectifications or be fined. Such violation may even lead to criminal liability.

New emission standards

In addition to laws and regulations, environmental standards are an important component of China's environmental statutory framework. Most environmental quality standards, pollution discharge standards and emission standards are compulsory and provide a benchmark for monitoring violations. While national standards set the basic requirements, provincial governments may issue more strict local standards (usually for discharge or emission control) based on their economic and environmental conditions. Nearly all administrative districts at the provincial level have issued local environmental standards, which are effective within their respective administrative district. Since these local standards have to be more stringent than national standards and since they are usually directly aimed at solving particular local environmental problems, these standards have great significance in environmental protection and are important supplements to national environmental standards.

New national emission standards for thermal plants are expected in 2003 and will adopt the novel output-based formula, also known as generation performance standards, or GPS. Traditional standards throughout the world regulate emissions based on pounds or kilogrammes per unit of fuel burned (e.g. lb/mmBTU) while GPS is expressed in terms of pounds or kilogrammes per kilowatt-hour produced (e.g. lb/kWh). This new standard, only in place in a few jurisdictions around the world, encourages power producers to adopt more efficient technologies - i.e., those that require less fuel to generate electricity.

Draft standards, released in December 2001, limit new, expanded and retrofitted power plants in China's "Two Control Zones" (i.e. the sulphur dioxide and acid rain control zones) to 1.5 grams of sulphur dioxide emissions per kilowatt-hour. Pollution levels in the two zones varies from place to place and from time to time, but generally since the State has devoted resources to controlling emissions in these areas, the pollution levels now are lower than before.² The draft standards also limit nitrogen oxide emissions to 2.5 and 4.0 grams per kilowatt-hour, depending on whether the plant is new or has already been in operation. New plants face more stringent standards. Eventually, older plants may also be required to comply with the higher standards, but implementation would likely be gradual, given the technical complexity and the cost of the upgrading.

China has also introduced European standards to control vehicle emissions. Beijing started applying Euro II standards in 2002 and Shanghai is expected to introduce the same standards sometime in 2003. These air quality standards require control to PM10 (particulate matter, 10 microns or less) rather than TSP (total suspended particulate), implying follow up control requirements on fine particulates.

Effects of WTO entry

European vehicle emission standards are one example of how external factors are playing a role in PRC environmental law. China's environmental investment market generally became more open to the world after its entry into the World Trade Organization in December 2001. The tariff level for importing products related to environmental protection will decrease according to the agreed schedule. Also, for the first time, China will officially open virtually all of its environmental service sectors to foreign investment (excluding environmental quality monitoring and pollution source inspection) subject to the restriction that investment is by means of joint venture. Environmental quality monitoring and pollution source inspection are still excluded as SEPA and its local branches have responsibility to carry out environmental quality monitoring and pollution source inspection. In this sense, these two areas are not considered "services", but rather they are considered as governmental functions.

WTO entry will clearly lead to greater opportunities for foreign investment. The extent of these opportunities is indicated in the Foreign Investment Industrial Guidance Catalogue ((外商投资产业指导目录)), which was revised in March 2002. Under the Catalogue's scheme, foreign investment is classified as "encouraged", "restricted" or "prohibited". Almost all environmental-related technologies fall within the encouraged category. These include recycling technologies and comprehensive use of resources, development of energy-saving technologies, wastewater treatment technologies and environmental monitoring equipment.

During the one year since China's accession to WTO, foreign investors have shown considerable interest in the market and have expanded their presence in China. It has been reported that American environmental consulting company Ecology and Environment established its Shanghai presence shortly after China's accession to WTO. French company Onyx under Vivendi Environnement Group recently won a contract for the operation of a refuse incinerator in Shanghai. Some Japanese environmental companies are also considering establishing joint ventures in China.

Additional WTO-mandated standards are contained in The Agreement on the Technical Barriers to Trade (TBT Agreement) and the Agreement on Sanitary and Phytosanitary Measures (SPS Agreement). Both of these oblige WTO members to provide clear notice of environmental standards, greater public participation in standard setting, the adoption of international standards and consistent and transparent enforcement. These requirements will all contribute to accelerating China's pace of environmental protection and related legal reform.

WTO rules should also promote greater consistency and transparency in enforcement of environmental regulations. China's Protocol of Accession to the WTO requires that China bring all technical regulations, standards and procedures into conformity with the TBT Agreement and apply its conformity assessment procedures equally to imported and domestic products.

Kyoto Protocol

Foreign investors may also at some stage be able to benefit from China's recent ratification of the Kyoto Protocol. This global treaty aims to limit greenhouse gas emissions, which are widely believed to cause global warming. Similar recent announcements by Russia and Canada mean that the Protocol is likely to enter into force within the next year, even without the participation of the United States. Non-participation by the US means that US companies will not face legally binding restrictions on their emissions of greenhouse gases. However, US companies may also find themselves excluded from participating in the Kyoto Protocol's Clean Development Mechanism (CDM). The CDM permits entities from developed country parties to the treaty to earn marketable credits (that can be sold on an already developed world market) for participating in projects in developing countries that reduce greenhouse gas emissions below the "business-as-usual" amounts.

China's size, heavy dependence on coal as a source of fuel and low-cost abatement options mean that the country could play host to a large number of CDM projects worldwide. Potential CDM projects in China include: retrofitting inefficient coal-fired power plants with cleaner and more efficient technologies and equipment; substituting wind for coal as a source of fuel and sponsoring cleaner public transportation systems.

While it is reported that a few CDM-type pilot projects have already been undertaken in China the government is still working on the details of how to govern and oversee the CDM's operation in China. Many of the CDM's rules are stipulated by the Kyoto regime, but as a host country, China is permitted to adopt certain additional restrictions on investment. With the help of the Asian Development Bank China started an environmental project to explore opportunities for the institution of the CDM in the energy sector in October 2002.

If the Kyoto Protocol does enter into force and China adopts national CDM guidelines that encourage rather than deter foreign investment in this area, foreign companies could derive an added source of revenue from clean investment projects in China through the sale of certified emission reduction credits.

Trans-Century Green Project Plan

China's commitment to environmental protection is also apparent from domestic developments such as the Trans-Century Green Project Plan. The aim of the Plan is to coordinate departments, localities and the private sector in undertaking selected environmental protection projects. The Plan addresses key environmental problems in priority areas to bring environmental deterioration under control and to improve environmental quality in key cities and regions.

The Plan covers the period from 1996 to 2010 and is divided into three phases in line with the five-year plan period. According to reports, over 1,500 projects were completed or initiated during Phase I (the Ninth Five-Year period). Most investment focused on pollution prevention and control projects in seriously polluted river basins, including the Huai, Liao, Hai, Songhua, Huang, Zhu and Yangzi basins, and acid rain pollution control zones.

To further improve environmental quality and as a means of taking preventive measures in key regions, Phase II of the Green Project Plan gives priority to pollution prevention and control in the Huai, Hai and Liao Rivers, three major lakes (Tai Hu, Chao Hu and Dian Hu Lakes, where eutrophication is serious), Two Zones (i.e. the acid rain and sulphur control zones), Beijing, and the Bohai Sea, where eutrophication is also serious.

Efforts will also be devoted to water pollution control in the Three Gorges Reservoir area and along the Water Diversion Engineering route. Over 1,100 projects are listed within Phase II of the Green Project Plan with a total investment of Rmb262 billion. This amount reportedly accounts for about 38% of the total environmental investment across the country (Rmb700 billion) during the Tenth Five-Year Plan period.

Conclusion

China's environmental legal regime has been significantly revised and reformed over the last decade. Not only have a plethora of new laws, amendments, regulations and standards been issued, but policies and general attitudes reflect a more serious commitment to improving environmental conditions in the country. Some of this new thinking appears to owe to the joint motivations and requirements of WTO accession and Beijing's hosting of the 2008 Summer Olympics. Chinese decision-makers also are acknowledging that full-scale developed country status cannot be the starting point for environmental cleanup. New policies and regulations are incorporating environmental thinking and control into economic development schemes and attempt to regulate pollution with a forward-looking eye towards cost-effective and efficient implementation. In particular, China's interest in adopting market-based mechanisms like emissions trading, indicate a genuine interest in working toward sustainable development.

Endnotes

1 For a translation of the law, see page 69 of this issue. For more details the law, see Neal Stender & Zhou Jing, "The New EIA Law and Environmental Protection in China," China Law & Practice, December 2002/January 2003, 16(10), pp. 32-35.

2 These zones are scattered across China, and are designated by the amount of sulphur dioxide emissions or acid rain, respectively. Currently, sulphur dioxide control zones include Beijing, Tianjin, Shanghai and some urban districts located in Hebei, Shanxi, Inner Mongolia, Liaoning, Jilin, Jiangsu, Henan, Shanxi, Gansu, Ningxia and Xinjiang provinces. Current acid rain control zones include Chongqing and some urban districts located in Zhejiang, Anhui, Fujian, Jiangxi, Hubei, Hunan, Guangdong, Guangxi, Sichuan, Guizhou and Yunnan provinces.

By Danian Zhang, Baker & McKenzie, Shanghai & Bai Guoqiang, Shanghai Muncipal Bureau of Environmental Protection