New environment law signals warning

With the increase in haze in many of China's districts, the environmental issues of air, water and land pollution have raised broad and lasting concerns for Chinese society as a whole. Calls for pollution control are getting louder. With domestic environmental issues rising in prominence and the situation of environmental protection becoming increasingly grim，the old PRC Environmental Protection Law was no longer able to meet the requirements of social development. The legislative body therefore adopted the first amendment of the PRC Environmental Protection Law in April after 25 years since its promulgation. It was the first amendment passed by the Standing Committee of the National People's Congress this year and will come into force on January 1 2015. The new Environmental Protection Law includes new provisions on many aspects, including emphasising the responsibility of government regulators, improving the environmental monitoring systems, complimenting the system for controlling total discharge and intensifying penalties for violations of environmental laws. The new law has a significant influence on foreign investment, providing investors with both opportunities and challenges.

Time for change

As the fundamental and omnibus law for the environment, the Environmental Protection Law establishes the basic principles and theories for the environmental law system. After a comprehensive revision, the new law stipulates, in the very first chapter, that, “Environmental protection is a fundamental national policy of the state,” and that “the state adopts economic and technical policies and measures conducive to the economical use and recycling of resources, the protection and improvement of the environment and the promotion of harmony between humanity and nature, so as to achieve a balance between social and economic development and environmental protection.” It emphasises the relationship between economic development and environmental protection and further requires the governmental authorities to put these provisions into practice, as Article 14 provides, “When arranging for the formulation of economic and technical policies, relevant departments of the State Council and people's governments of the provinces, autonomous regions and municipalities directly under the central government shall fully take into consideration their impact on the environment and listen to the opinions of stakeholders and experts.” The new law further sends policy signals, which have been continually released by the party and government since the 18th National Congress of the Communist Party of China, that the model of development for economic growth at the expense of the environment has finally reached a historical turning point.

The Chinese government has made a strategic decision to make “great efforts to promote the achievement of ecological civilisation,” to “strive for green, recycling and low-carbon development, and establish resources-conserving and environment-protecting spatial patterns, industrial structures, modes of production and lifestyle.” The Ministry of Commerce's Guiding Opinions on the Attraction of Foreign Investment throughout China (2013) stipulate to “actively and steadily guide foreign investment direction and optimise the industrial structure.” Moreover, “Combined with the global industrial development trends and China's goal of optimising its industrial structure, further encourage foreign investors to invest in modern agriculture, high-tech fields, advanced manufacturing, energy conservation and environmental protection, new energy, modern service industries, etc.”

Opportunities in specific industries

Investment in the ecological and environmental protection industry will become a new hot spot. Manufacturing of environmental monitoring instruments, air pollution prevention and control equipment, pollution treatment and monitoring technologies, construction and operation of environmental pollution treatment and control facilities and other similar projects listed in the catalogue of encouraged industries under the Foreign Investment Industrial Guidance Catalogue (Amended in 2011) (外商投资产业指导目录 (2011年修订)), ecological and environmental protection projects encouraged under the Catalogue for Foreign Investment in the Dominant Industries of the Central and Western Regions (2013 Revision) (中西部地区外商投资优势产业目录 (2013年修订)), as well as the production and use of clean energy and other fields which the State Council and local governments promote, all have tremendous potential demand in the domestic market. These opportunities will most likely lead to more industries, land, credit, taxation, foreign exchange, trade and other preferential policies. With the technology, experience, capital and operations management that foreign investors bring, the ecological and environmental protection industries contain unlimited opportunities.

In contrast, high polluting, high energy consuming and high emission industries will face a reshuffle, with some facing the risk of elimination. These “Three High” industries are the wary choices for investment. The new Environmental Protection Law stipulates that the state implements a responsibility, evaluation and assessment system for environmental protection objectives. The government will include the fulfillment of these objectives as one of the criteria for evaluating the performance of local government departments and those in charge, as well as the “assume responsibility and resign” system for the person in charge of the local government and environmental protection departments. These regulations strengthen the governments' responsibility of environmental protection, improve the accountability system, add pressure and motivation to the governments and departments at every level to achieve the objective of environmental protection. They are also promoted to impose restrictions on access to the Three High industries and intensify the reform and rectification of the Three High enterprises.

Foreign investors must be cautious and consider the relevant national and local regulations, as well as their fulfillment of environmental protection objectives when choosing investment regions. The new law states that, “with respect to regions that exceed the national total key pollutant discharge/emission control targets or fail to fulfill the environmental quality targets determined by the state, the competent environmental protection department of the people's government at the provincial level or above shall temporarily halt examination and approval of the environmental impact assessment documents of construction projects that would increase the total discharge/emission of key pollutants”, and “construction of a project for which no environmental impact assessment has been conducted in accordance with the law may not commence”. The State Council released the Action Plan for Air Pollution Prevention and Control, which also provides special environmental protection requirements and objectives for certain regions. For regions that fail to pass the annual assessment, examination and approval for the environmental impact assessment of construction projects that would increase emission of air pollutants (except for the people's livelihood projects, energy conservation and emissions reduction projects) will be temporarily halted for the cities of those regions. This can adversely affect construction projects located in these regions.

Environmental due diligence

Environmental protection standards have been raised, enforcement has been carried out more strictly and responsibilities have been pursued more severely. Foreign investors must conduct environmental due diligence with respect to their target enterprises in China. The assessment should be focused on the pollution history of their operating activities as well as the associated liabilities, the situation of environmental protection and risks.

In order to avoid the situation of low cost for breaking the law and high cost for observing the law, the new Environmental Protection Law has intensified the punishment for discharging/emitting pollutants illegally, such as imposing a per-day continuous penalty with no cap. If an enterprise harbours potential environmental risks, it may not only be imposed a fine penalty, but also faces the risks of being ordered to limit or suspend production, undergo rectification, cease operations or shut down for more serious circumstances. In worst cases, the person directly in charge and other responsible persons will be imposed detention or criminal punishment.

Establishing integrity

The new law requires the relevant environmental protection departments to record information on the violation of environmental laws by producers and business operators in public integrity files and publish the list of offenders in a timely manner. The Ministry of Environmental Protection, along with other authorities, issued the Measures for Assessment of the Environmental Credit of Enterprises (Trial Implementation) (企业环境信用评价办法 (试行)), providing incentive, restrictive and disciplinary measures for different categories of enterprises based on their behaviour (i.e. integrity/good/warning/bad category). Government departments may use the results of the enterprises' environmental credit evaluation in administrative approval, public procurement, advanced appraisal, financial support, qualification grade rating and the allocation of financial subsidies. It is therefore important for enterprises to adopt good practices in the course of operation and management to reduce potential environmental debt risks and prevent accident risks, as well as to strengthen pre, in-process and post control and formulate and implement environmental incident contingency plans. In the case of pollution accidents, active control and remedial measures should be taken. With respect to the ecological impact from investment activities, enterprises must conduct ecological recovery provided by the legal requirements. In order to preserve the image of environmental integrity, communication and dialogue mechanisms upholding social responsibility for environmental protection should be established, allowing enterprises to listen to the opinions and suggestions of interested parties regarding the environmental impact of their construction projects and business activities.


Yacheng Zhou, Zhong Lun Law Firm, Beijing


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