Key Environmental Protection Laws
In China, unlike the Civil Code which will enter into force on 1 January 2021, the environmental laws are not codified. Instead they are principally written into Environmental Protection Law and spread in a decentralised manner, in statutes at all levels enacted by the central and local government.
On one hand, each environmental protection law has a clearly defined and narrowed-down ambit commensurate to the corresponding regulatory objective. For example, the regulation of air, water, soil, noise, solid waste, radioactive and marine pollution is set forth under: the Atmospheric Pollution Prevention and Control Law; the Water Pollution Prevention and Control Law; the Soil Pollution Prevention and Control Law; the Law on Prevention and Control of Pollution from Environmental Noise; the Law on the Prevention and Control of Environment Pollution Caused by Solid Wastes; the Law on Prevention and Control of Radioactive Pollution; and the Marine Environment Protection Law.
Moreover, for the regulation of planning and construction projects, there is an Environmental Impact Assessment Law; for the regulation of production, service activities and related management activities, there is a Cleaner Production Promotion Law; for the regulation of pollutant discharge, there is a Measures for Pollutant Discharge Permitting Administration (For Trial Implementation); to economically encourage environmental protection, there is an Environmental Protection Tax Law; for the regulation of environmental information disclosure, there is Measures for the Disclosure of Environmental Information by Enterprises and Public Institutions. Each separate statute complements the others comprising the overall landscape of the Chinese environmental legal system.
On the other hand, environmental protection laws and regulations are spread among the statutes enacted by the central and local legislators. In China, the narrow-based law only refers to the statutes enacted by the National People's Congress and its Standing Committee, while broad-based law refers to various regulations, including administrative regulations promulgated by the State Council, departmental rules promulgated by the ministries and commissions of the State Council, local regulations enacted by local people's congresses, rules of local governments promulgated by local governments and other normative documents. In this article, the laws of environmental protection in China refers to the latter.
In 2014, all levels of courts, including the Supreme People's Court (SPC) in China set up adjudication tribunals for the environment and resources to handle trials of cases involving environmental or resource disputes. In addition, judicial interpretations in the field of environmental protection issued by the SPC are applicable to the trial of environmental cases in every court and benchmark the behaviour of enterprises and individuals indirectly through the courts’ judgments.
Key Environmental Protection Principles
The Environmental Protection Law establishes five principles for environmental protection, which are:
Key Environmental Protection Policies
China's main environmental policies are reflected in the State Council's 13th Five-Year Plan for Ecological Environment Protection and the General Plan for the Reform of the Ecological Civilization System and other policy documents. Industrial policies related to environmental protection are important. The Guiding Catalogue of Industrial Restructuring (2019 version) divides industries into three categories: the encouraged, restricted and eliminated. The encouraged industries include environment-friendly materials, environmental protection equipment, etc, and the relevant operating entities can enjoy tax benefits.
In China, the Ministry of Ecology and Environment (MEE) is the environmental authority of the State Council. It is a newly established department in the institutional reform of the State Council in 2018, reshuffled from the former Ministry of Environmental Protection. It integrates different parts of the responsibilities of the National Development and Reform Commission (NDRC), the Ministry of Water Resources, the former Ministry of Land and Resources and the former Ministry of Agriculture. The MEE leads and orchestrates local environmental authorities across the country. The main responsibilities of the MEE include the following:
In addition to the MEE, the Ministry of Natural Resources, the Ministry of Transport, the Ministry of Water Resources, and the Ministry of Agriculture and Rural Affairs are also responsible for specific tasks of environmental protection.
The local environmental authorities are responsible for supervising environmental protection and law enforcement within their administrative area. In accordance with the requirements of the State Council, the reform of the vertical management system to streamline nationwide the environmental protection departments at sub-provincial level shall be completed in 2020.
Under the Environmental Protection Law, the eco-environmental authority and the authorised institution are entitled to carry out on-site inspection of producers and operators who discharge pollutants. Such producers and operators shall not refuse inspection or cheat in any way. During the on-site inspection, the inspectors have the right to demand that all relevant information and documents be provided honestly. Trade secrets do not constitute a valid exception – however, the inspectors shall keep such secret information and documents confidential and failure to do so would subject such inspectors to administrative penalties or even criminal liabilities. In addition, the environmental authorities at or above the prefecture level may seal up and seize relevant facilities and equipment if the operators discharge pollutants illegally and have caused or may cause serious pollution.
According to the Law on the Prevention and Control of Environment Pollution Caused by Solid Wastes and the Soil Pollution Prevention and Control Law, the inspectors may carry out on-site sampling. Further, the method of inspection is not limited to on-site inspection – for example, according to the Atmospheric Pollution Prevention and Control Law, the inspector may inspect producers and operators which discharge air pollutants by automatic monitoring, remote sense monitoring, and far-infrared imaging.
In addition to the confidentiality obligation, the inspectors shall also comply with the following requirements:
Circumstances under Which a Pollutant Discharge Permit is Mandatory
Under the Chinese environmental laws, classified administration of pollutant discharge is implemented upon factors including the industry categories, pollutant production, discharge of pollutant and environmental impact, etc. There are three categorised forms of administration of pollutants discharge – namely, (i) priority administration, (ii) simplified administration and (iii) registration-based administration. Pollutant-discharging entities which are subject to registration-based administration only need to complete registration forms.
Pollutants discharge which shall be preconditioned upon a discharge permit include:
Application of Pollutant Discharge Permit
The environmental authorities of a prefecture-level city are responsible for granting pollutants discharge permits. As for any pollutant-discharging entity which is located at different production or operation premises, they shall apply for a separate pollutant discharge permit for production or operation premises located in a different place. As for the major pollutant discharging entities, they shall make public their applications for pollutant discharge permits before application. If the application is rejected, the responsible department shall notify the reason in writing. The applicant has the right to apply for administrative reconsideration or bring an administrative action against the authority issuing such a rejection.
Under Chinese law, environmental liabilities against the responsible persons such as project owners, polluters, and land usufructuaries can be divided into three categories: civil liability, administrative liability and criminal liability.
Environmental Civil Liability
Environmental civil liability consists of tort liability first and foremost for environmental pollution, which would give rise to compensation for the aggrieved party who suffers personal injuries or property damages due to environmental pollution.
The prerequisites of environmental tort include four elements as follows.
The tortfeasor shall assume liabilities by way of: cessation of infringement, removal of obstruction, elimination of danger, restoration to the original status, compensation for losses, apology, etc. It should be noted that apology is a characteristic form of liability assumption in China – this is different from many other countries.
Where two or more polluters commit separate pollutions, which result in the same damage, and neither of them is sufficiently proved to have caused the entire damage, the polluters shall assume corresponding liabilities respectively. However, in the above case where each polluter's misconduct is sufficient to cause the entire damage, the polluters shall assume joint and several liabilities. Even when the damage is caused by a third party, the polluter shall make compensations to the victim first if the victim requires it to do so, after which the polluter is entitled to be reimbursed by the third party.
In addition, local governments and relevant departments are entitled to file a lawsuit as the plaintiff on restoration and compensation against the polluter once they fail to reach a consensus of solution through consultation. Where the damaged ecology or environment can be restored, the polluter shall assume restoration liability. If it cannot be completely restored or partially restored, the court may render a judgment for the compensation of permanent ecological function loss once the plaintiff requests this. Social organisations specialising in public welfare activities for environmental protection are also entitled to file an environmental public welfare lawsuit against pollution which jeopardises the public interest or has a significant risk of jeopardising the public interest.
Environmental Administrative Liability
The prerequisites of administrative liability include the wrongdoer’s misconduct in violation of environmental administrative law and the fault, but does not necessarily involve damage.
For entities discharging pollutants illegally, the environmental authorities may impose penalties, including fines, restoration to the original state, orders of corrections, restriction on production, suspension of business for rectification, and even business termination or close-down.
If an entity fails to correct its pollution activities as ordered, the fines imposed by the relevant department could be calculated on a daily basis until the polluting acts are ceased and the final amount can be substantial when taking account of factors such as the pollution duration, damages caused thereby, illegal income gained and other reasonable factors.
Environmental Criminal Liability
Environmental criminal liability in China arises out of serious environmental pollution. Both the entity and the individual can be held criminally liable. If an entity perpetrates environmental pollution, in addition to imposing a fine on such entity, the court will also impose a fine, criminal detention or fixed-term imprisonment on the directly responsible persons.
Based on the polluter-pays principle, the subject of environmental liability is generally limited to the polluters. However, the purview of this principle is expanded in the circumstance of soil or land pollution. In the case where the polluter cannot be ascertained, the obligations of pollution risk control and land restoration will be assigned to the later land usufructuary. Considering that the land usufructuary did not commit any pollution, it can apply for the financial support out of earmarked funds apportioned by central and provincial government. When the person responsible for soil pollution is unascertainable, the local environmental authorities may find the person responsible for soil pollution in collaboration with other relevant departments.
In addition, in the field of environmental pollution caused by solid waste, the storage and treatment costs of the untreated industrial solid waste of any entity which has terminated its business operation prior to 1 April 2005, shall be borne by the transferee if the land usufructuary has been transferred to the same.
For types of liability, please refer to 4.1 Key Types of Liability. The defences of liability would be unfolded from three perspectives: civil, administrative and criminal.
Environmental Civil Defences
Defence of statute of limitations
Given that the consequences of environmental torts could remain undiscovered and often gradually emerge after many years, in China, the statute of limitations for liability of environmental tort is a three-year period, starting from the time when the victim knows or should have known about the incurrence of damage.
Defence of causation
The defendant may deny the causal link by proving that it is not possible that the discharged pollutant could cause the damage, the discharged pollutant that could cause the damage was not in place where the damage occurred, or the damage already existed before the discharge of the pollutant, etc.
Defence of victim’s fault
When damage could be attributed to the intentional act or gross negligence of the victim, the polluter may claim exemption or mitigation of liability.
Defence of force majeure
The polluter can usually invoke force majeure for environmental tort damage caused by objective circumstances (such as earthquakes, floods, typhoons, etc) that are unforeseeable, inevitable and insurmountable. Notwithstanding the force majeure argument, when the polluter's tortious act per se violates the mandatory provisions of the law, such as the anti-seismic, flood-control and windproof performance of the pollution prevention facilities cannot meet the standards required by law, the polluter shall assume the liability for environmental tort as well.
Environmental Administrative Defences
Defence of age or mental illness
No administrative penalty shall be imposed on actors aged under 14 and the penalty should be mitigated if imposed on persons between the ages of 14 and 18. Mentally ill patients who are unable to recognise or cannot control their own conduct also have a solid defence ground against administrative acts.
Defence of statute of limitations
The statute of limitations for environmental administrative penalty is a two-year period. If an illegal act is not discovered within two years after its commencement or termination, environmental authorities cannot impose an administrative penalty upon the polluter.
Environmental Criminal Defences
With the stepped-up supervision of the ecological environment, there has been a growth in environmental pollution criminal cases in China in which guilt has been legally established. Apart from the common defences such as age, mental disease, self-defence or act of rescue, the procuratorate or court may make a decision not to prosecute or rule to acquit the defendant in an environmental criminal case when all of the following conditions are met:
The environmental liabilities above apply to both individuals and enterprises. With respect to the fact that production and operation activities become a major source of environmental problems, more and more normative rules have begun to focus on the environmental behaviour and environmental liability of enterprises.
Corporate Environmental Credit and Environmental Liability
Since 2014, China has introduced an enterprise environmental credit system nationwide, and is expected to fully establish enterprise environmental credit records by 2020. The eco-environmental authorities conduct environmental credit evaluation, determine the environmental credit ratings for enterprises and publish the results on their performance in complying with environmental laws and regulations. For those that are identified as unqualified enterprises in the evaluation, access to benefit from government environmental special fund subsidies, or to public construction bidding, government procurement, tax concessions, bank credit granting, stock issuance, bond issuance, insurance rates, etc, will be restricted.
Corporate Listing and Environmental Liability
According to the requirements of China’s Securities Regulatory Commission, issuers shall fully disclose in their prospectus the investment project’s environmental information, such as pollutants, investment made and measures adopted for environmental protection, and environmental punishment inflicted during their production and operation activities.
Once being found to have committed fraudulent issuance or false statements in violation of environmental rules, the issuer shall assume corresponding legal liabilities, including hefty compensation brought by securities group action, substantial fines, involuntary delisting, and the criminal charge of illegal disclosure or non-disclosure of important information.
Thanks to its independent legal standing, a parent company usually does not need to be implicated by the environmental liability caused by its subsidiaries. However, in the specific setting of piercing the corporate veil, say for the reason of excessive control, the environmental violation conducted by subsidiaries under the control of their parent company could also be attributed to the parent company. Consequently, in specific circumstances, shareholders of a company may also bear civil, administrative or even criminal liability.
Administrative and Criminal Liability
Under China's Environmental Protection Law and Criminal Law, the directly responsible persons for the environmental violation may receive administrative and criminal penalties. In practice, company leaders in charge of environmental protection are often identified as the persons in charge who are directly responsible. Administrative penalties include fines, administrative disciplinary measures and administrative detention; criminal penalties include fines, criminal detention, and imprisonment.
Civil and Other Liabilities
According to the Company Law, directors, supervisors and senior managers of a company are subject to the fiduciary duty. They shall be liable for any losses of the company caused by their violation of the laws during their office term. If the person in charge of the company fails to perform, resulting in any unlawful environmental misconduct of the company and imposition of administrative or criminal penalties upon the company, the company or its shareholders may lodge a compensation claim against the person in charge for such losses.
In addition, the managers may be punished for illegal and unfaithful acts which may adversely affect their performance evaluation result and annual performance salary.
Currently, there is no nationwide law or regulation promulgated to govern environmental liability insurance or director's and manager’s liability insurance. In practice, criminal liability is excluded from the coverage of relevant environmental liability insurance. With regard to civil liability, insurance companies often exclude from their coverage the civil liability for damages caused by any wilful wrongdoing.
At present, there are no laws and regulations that stipulate environmental responsibilities of financial institutions nationwide. But some local authorities have begun to legislate on mandatory green obligations for financial institutions. Financial institutions must bear legal liabilities for violations therefrom.
Shenzhen, a well-known special economic zone in China, is currently seeking public comments on the Green Finance Regulation drafted by the local legislative institution. This local regulation will require financial institutions such as banks, security companies and insurance companies to establish a green investment evaluation system to evaluate the environment impact of projects, the risk management capabilities, and the environmental benefit. This evaluation system must be incorporated into the post-investment management.
If financial institutions fail to comply with the above requirements, they shall be fined. If a financial institution fails to comply with the aforesaid obligations and its equity or debt investment finally causes damage to the environment, the eco-environmental authorities will impose an administrative fine calculated on a specific proportion (1–10%) of the investment amount.
In addition to administrative liabilities, financial institutions may bear civil liabilities for environmental damage caused by the investee’s pollution under certain conditions. Related cases have emerged in China's judicial practice where banks are also listed as defendants when they lend to enterprises with serious pollution problems. According to the general rules of the tort law, if a financial institution knows that the investee commits the pollution and still invests, or controls or participates in the investee’s pollution through investment, the financial institution could be deemed as a joint infringer.
It is noteworthy that, according to the green finance development roadmap jointly issued by the People’s Bank of China, the NDRC, the MEE and other departments, China will legislate on the lender’s environmental responsibilities and the exemption conditions.
As mentioned above, so far there is no law that stipulates exemptions of financial institutions. However, in practice, financial institutions can usually mitigate their risk of being liable by strengthening investment reviews and conducting environmental due diligence on the investee.
When an individual or organisation suffers losses due to environmental pollution or ecological damage caused by others, it may file a lawsuit for damages under the tort law. If the act of polluting the environment or destroying the ecology has been suspected of constituting any criminal offense, the civil action for compensation is usually collateral to the criminal proceedings. Under certain conditions, NGOs, specialising in environmental protection activities, can institute environmental public-interest litigation against polluters, and local governments can institute litigation seeking ecological and environmental damages against polluters. For more details on civil litigation, please refer to 4.1 Key Types of Liability ("Environmental Civil Liability").
During civil actions hosted in China, the basic principle is that the compensation shall not exceed the amount of actual damage, so the application of punitive damages is restricted to a small scope subject to express statutory prescriptions, which currently includes fields of products (food) security, consumer rights and intellectual property. However, Article 1232 of the Civil Code, which will come into effect in January 2021, stipulates that civil tort cases where the tortfeasor violates the laws and regulations, pollutes the environment or damages the ecology, to the extent that serious consequences are entailed, will be subject to punitive damages. China's environmental legal practice is about to introduce punitive damages.
Similar to class action, the way of hosting numerous parties in one proceeding in China is representative litigation, which is a special kind of joinder, where two to five representatives are selected to represent one party. According to the Civil Procedure Law, the victims can initiate a representative litigation when there are a large number of persons on their side (usually more than ten) and the subject matter of the litigation is the same or is of the same kind. Generally, there are a wide range of impacts and a large number of victims from environmental pollution and ecological destruction. The aggrieved party can obtain compensation for damage through representative litigation. However, such a case is rare in judicial practice.
Although China does not have the case law legacy as under common law countries, in judicial practice, the cases adjudicated by higher courts do have some binding force on the trials of the same type of cases heard by lower courts. According to the Trial Guidelines on Unifying Application of Law and Strengthening Research on Similar Cases issued by the SPC in July 2020, local courts should refer to the guiding cases issued by the SPC.
Guiding Case No 130
This case involves multiple issues such as public-interest litigation, joint tortfeasor, entrusted pollutant discharge and assessment of the restoration expenses on the ecology and environment. The key points are as follows.
An enterprise that has obtained a pollutants discharge permit has a legal obligation to ensure that its pollution treatment facilities are operating normally and that the pollutants discharge meets the national and local standards. If it entrusts a third party to deal with the discharge, it shall perform the obligation to supervise the entrusted party. If it knowingly fails to stop or even facilitate the illegal discharge by the entrusted party, it shall be held jointly and severally liable for ecological or environmental damage.
If the polluter discharges pollution into the water and causes environmental damage, and the cost of environmental restoration is difficult to evaluate, the court can adopt the virtual cost approach to quantify the damage according to the relevant environmental protection regulations, as well as factors such as the type and amount of pollutant, and the exclusivity of pollution sources.
Under the Contract Law, civil parties are entitled to enter contracts out of their free will. If the contract for transferring or apportioning civil liability for environmental damage between private parties does not violate any mandatory law or administrative regulation, is not against any public order and good morals, nor involves malicious collusion that impairs the legitimate rights and interests of third parties, the validity of such contract will be protected by law. Environmental authorities and courts usually respect the contract concluded by private parties to dispose of their civil rights.
In recent years, the rapid development of the Third-Party Treatment of Environmental Pollution can also be regarded as a way of transferring liability through contracts. Without prejudice to the polluter-pays principle, polluters can allocate their liabilities of pollution treatment to a third party through contracts because sometimes polluters are not technically competent enough to treat pollution in a proper way.
However, in terms of administrative and criminal liabilities, it is administrative and judicial authorities that will decide what administrative and criminal penalties should be imposed. Hence, the parties cannot contract away their potential administrative or criminal liabilities.
Environmental liability insurance can be divided into compulsory insurance and non-compulsory insurance. At present, all provinces, autonomous regions and municipalities in China have selected certain pilot zones of compulsory liability insurance for environmental pollution, though this compulsory insurance has not yet been implemented nationwide. The era of compulsory environmental liability insurance is around the corner.
As for the coverage of insurance, China's current environmental liability insurance mainly covers civil liabilities for compensation arising from pollution accidents. As the demand for environmental insurance grows, the coverage will be further expanded.
The Soil Pollution Prevention and Control Law, which came into effect on 1 January 2019, is the fundamental law on land pollution. The law newly established a series of systems including the government responsibility system, the person in charge system, the prevention system, the risk control and restoration system, and the funding system for soil pollution prevention and control, etc. Under this law, the government has the powers and obligations to formulate soil pollution prevention plans and risk control standards, conduct general surveys of nationwide soil pollution at least once every ten years, and monitor the soil environment.
Regarding the risk management and restoration of soil pollution, in order to implement the polluter-pays principle, the law requires the person responsible for soil pollution to control pollution and restore land. If the person responsible for the soil pollution is not ascertained, the land usufructuary is responsible for conducting risk management and restoration. The procedures of soil pollution risk management and restoration are as follows:
Usually, the government is not directly responsible for the implementation of risk management and restoration, but the pollution survey and risk assessment of agricultural land are carried out by the agricultural, environmental authorities of the local government.
In addition to the Soil Pollution Prevention and Control Law, the Administrative Measures for the Soil Environment of the Contaminated Land Parcel (for Trial Implementation), the Measures for the Administration of the Soil Environment of Agricultural Land (for Trial Implementation) and the Measures for the Administration of the Soil Environment of Mining and Industrial Land (for Trial Implementation) also regulate on the protection of land.
China is a party to the United Nations Framework Convention on Climate Change and its Kyoto Protocol and Paris Agreement. It is also a party to the Vienna Convention for the Protection of the Ozone Layer and the Montreal Protocol on Substances that Deplete the Ozone Layer. The Department of Climate Change of the MEE is responsible for organising the implementation of these treaties.
In addition to international treaties, China has promulgated various laws to promote domestic efforts to combat climate change. Although the legislation of the Climate Change Response Law is still in the preparatory stage, the relevant provisions in response to the climate change have been incorporated in other laws, regulations and standards, including:
In addition, some local governments have legislated on climate change issues. For example, Shanxi Province – a major coal province in China – enacted the Shanxi Province Measures in Response to Climate Change as early as 2011; in 2017, the Shanghai Municipal Development and Reform Commission promulgated the Measures of Managing Special Funds for Energy Conservation and Emission Reduction In Response to Climate Change.
Main Principles and Policies
China has formulated the National Climate Change Programme (2014–2020). In this programme, China has continuously strengthened the control of greenhouse gas emissions by optimising industrial structure, energy production and consumption structure. China has also improved urban and rural infrastructure, strengthened water resources management and facility construction, and popularised new crop strains and planting technologies in order to improve the adaptation to climate change.
The Chinese government actively encourages carbon trading, low-carbon product accreditation and provides consumption subsidies for consumers who buy low-carbon products and services. Moreover, energy-saving or low-carbon technology importers can enjoy tax benefits, and green products have a competitive advantage over others in government procurement.
According to the Work Plan for Greenhouse Gas Emission Control in the 13th Five Year Plan issued by the central government, China’s 2016–2020 greenhouse gas emission reduction targets include:
In addition, according to the Enhanced Actions on Climate Change, China’s intended Nationally Determined Contributions submitted to the UNFCCC Secretariat, China's carbon dioxide emissions target is to peak around 2030.
China has not yet banned the use of asbestos and its products nationwide, but the use of asbestos is prohibited under certain circumstances. For example, China banned the production and use of asbestos brake pads in 2003. Some local governments have imposed restrictions on the types and scenarios of asbestos use. Beijing prohibits the use of amphibole asbestos in building materials.
Since asbestos is one of the main hazards in some occupational activities, where exposure may lead to occupational disease, laws governing asbestos are mainly related to labour protection, such as the Law on the Prevention and Control of Occupational Diseases and its affiliated regulations. The judicial interpretation issued by the SPC also shows that the compensation for environmental damage is not applicable to workers who are harmed by asbestos pollution in the workplace. The Standard of Occupational Health Management for Asbestos Work provides in detail the legal requirements for the workplace, protective measures and asbestos warning labels.
For the environmental pollution caused by asbestos in non-labour situations, environmental laws and regulations – including the Environmental Protection Law, the Atmospheric Pollution Prevention and Control Law and the Water Pollution Prevention and Control Law – are applicable. According to the Water Pollution Prevention and Control Law, new production projects involving asbestos, which are inconsistent with the industrial policy of the state, are prohibited.
As the fundamental law regulating solid waste pollution, the newly amended Law on the Prevention and Control of Environment Pollution Caused by Solid Wastes came into effect on 1 September 2020. The Solid Waste Law provides separate regulations for industrial waste, consumer waste, construction waste and agricultural solid waste, and a separate section for hazardous waste. Compared to the former law, notable highlights of the new law include:
It is noteworthy that, according to China's national standard, the General Rules of Identification Standards for Solid Wastes, the definition of "solid wastes" includes solid, semi-solid, and gaseous substances placed in containers.
Whether the entrusting party that produces solid waste needs to bear liability for the environmental pollution and ecological damage caused by the entrusted party in the process of transporting, utilising and treating of industrial solid waste shall be preconditioned upon whether the entrusting party has verified the entrusted party’s qualifications and technical capabilities at the time of entrustment, and whether they have signed a written contract which stipulates the requirements for pollution prevention and control. If not, the entrusting party may be jointly and severally liable for the environmental pollution caused by the entrusted party.
The producers of consumer waste are obliged to sort waste and pay for the treatment of waste. Generally, they are not liable for the pollution caused by operators during the transportation and treatment.
The Solid Waste Law establishes the principles of reduction, recycling and harmlessness for the prevention of environmental pollution by solid wastes, and requires any individual and entity to take measures to reduce the production of solid wastes, promote the comprehensive utilisation of solid wastes and reduce the harmfulness of solid wastes.
Currently, China is establishing the extended producer responsibility system. In this system, producers assume environmental responsibility for the entire life cycle of their products from production and sales to the front end of product design, and to the back end of product recovery and waste recycling. On the one hand, China has established a set of standards consisting of more than 100 types of eco-design or green-design product, which include various consumer products and industrial supplies. The producers of green products will be supported by special funds, preferential credit and government procurement, etc.
On the other hand, although the Regulation on the Administration of the Recovery and Disposal of Waste Electrical and Electronic Products (amended in 2019) does not make it mandatory for electronic products manufacturers, consignees of imported electronic products or their agents to recycle electronic products, the Solid Waste Law does impose the responsibility of recycling on the manufacturers and consignees who produce or import electronics and electrical appliances, lead-acid batteries, and automotive power battery. They can either recycle these wastes by themselves or entrust third parties to do it, but, in either case, they are obliged to make sure the recovery of used product fits their sales volume and the recovery system is disclosed to the public.
In China, when an enterprise or a public institution causes or may cause an environmental emergency, in addition to initiating the emergency response plan and taking measures to prevent the expansion of damage, it shall promptly notify the residents and entities that might be affected and report to the department of ecology and environment. During the emergency response period, they also need to provide the authorities with technical materials related to emergency response.
Administrative agencies shall disclose government information timely and accurately, public environmental information is undoubtedly part of it. Apart from being disclosed voluntarily, government information can be disclosed by application, except for the following circumstances:
Under Chinese law, the major pollutant discharging entities shall comply with the relevant legal requirements for mandatory disclosure of environmental information. The List of Pollutant Discharging Entities under Intensified Supervision is determined by the department of ecology and environment based on the local environmental carrying capacity, total discharge volume control indicators, and the variety, quantity and concentration of pollutants discharged by entities.
Major pollutant discharging entities shall disclose the following environmental information to the public:
In addition, the China's Securities Regulatory Commission requires the major pollutant discharging entities and their important subsidiaries to disclose environmental information in the annual reports and semi-annual reports. Non-major pollutant discharging entities among listed companies shall give deliberated reasons for its non-disclosure.
According to the listing rules of the Shanghai and Shenzhen Stock Exchanges, if a listed company receives a major administrative penalty or undergoes a major environmental accident, it should immediately disclose that information and the potential impact on the company. It is expected that, by early 2021, all listed companies in China will be compelled to disclose environmental information.
In Chinese legal practice, it is not common to conduct professional environmental due diligence in M&A, financial transactions and asset transactions. It is more likely for the transactional parties to obtain some routine environmental information through general legal due diligence. The scope and depth of environmental legal issues, in a general legal due diligence, seldom meets the requirements of risk control.
However, this situation has changed in recent years as China's environmental supervision and enforcement has been strengthened. Investors have begun to pay more attention to environmental due diligence, especially in M&A, investment and financing involving energy and natural resources, smelting, petrochemical and other industries under intensified environmental supervision. Investors usually try to obtain the actual status and potential risks of the transaction object through environmental due diligence so as to allocate their respective rights and obligations in the final agreement. Professional environmental due diligence may also create opportunities for the buyers, as with the knowledge of the potential risks and weaknesses of the transaction, they have more bargaining chips to achieve the most favourable transaction terms.
In addition to voluntary environmental due diligence, the law may require environmental due diligence under certain circumstances. China’s Securities Law requires that issuers of stocks or convertible bonds by means of underwriting shall retain a sponsor. According to the Guidelines for Due Diligence of Sponsors, sponsors should conduct due diligence on the issuer's pollutant discharge, environmental protection investment, the operation of environmental protection facilities, and environmental violation penalties.
The seller is generally not obliged to disclose environmental information to the buyer; this disclosure is, in fact, based on a case-by-case situation. However, the principle of good faith in contract law gives rise to pre-contract obligations for all parties. The pre-contract obligations include notification. If the seller fails to truthfully inform the buyer of environmental information vital to the transaction, the buyer can request the court to rescind the contract on the grounds of fraud. In this case, the seller may also be held liable for the buyer’s losses because of its fault in contract formation.
In China, enterprises that directly discharge taxable air pollutants, water pollutants, solid wastes and noises to the environment shall pay environmental protection tax. To encourage enterprises to reduce pollutant discharges, the environmental taxes are calculated on the basis of the pollutant equivalents, which means enterprises that discharge more pollutants will pay more tax. For enterprises that discharge air pollutants or water pollutants, if the density of the pollutants is 30% and 50% lower than the pollutant discharge standards, their tax payable will be reduced to 75% and 50% compared with the original amount respectively.
Environmental protection tax evolved from the pollutant discharge fee. Although both environmental protection tax and the pollutant discharge fee are charged on the basis of the polluter-pays principle, they are essentially quite different. Specifically, the pollutant discharge fee is a type of administrative fee and is collected by environmental authorities. Enterprises will be subject to administrative penalties if they break the rules by refusing to pay. In line with international practice, environmental protection tax, however, is a category of tax which is collected by the taxation department. As the environmental protection tax replaces the pollutant discharge fee, the “money collection” and law enforcement intensity increases significantly because, apart from stricter administrative penalties, enterprises who fail to comply with the Environmental Protection Tax Law face mandatory enforcement measures, overdue fine, and even criminal penalty.
Resource Tax could be regarded as green tax to some extent. Enterprises engaging in mining of taxable resources within the territory of China and other sea areas under the jurisdiction of China should pay resource tax. For specific taxable resources, subject to the range of tax rates as prescribed by law, tax rates are determined by the provincial government. The resource tax can be reduced or exempted in certain circumstances where the developer of taxable resources promotes the economical and intensive use of resources or environmental protection.
The world is increasingly paying attention to environmental issues. On 16 September 2020, the G20 Environment Ministers’ Meeting was held online to conduct in-depth discussions on issues such as promoting green recovery following the COVID-19 pandemic. China is implementing and will continue to adhere to the principles of giving priority to protection, focusing on prevention, conducting comprehensive treatment, engaging the general public, and enforcing accountability for damage.
Since 2015, China's ecological and environmental legislation and enforcement has fully demonstrated the characteristic of strictness. On one hand, China has promulgated and amended dozens of national environmental protection laws and administrative regulations. On the other, with the advance of comprehensive law enforcement reform, China has greatly intensified law enforcement against environmental non-conformities.
Meanwhile, with the development of ESG investment philosophy, investors, asset owners and service providers are placing more emphasis on the environmental performance of enterprises. As a consequence, enterprises are under greater pressure in terms of environmental protection, and ecological and environmental compliance is drawing more attention. The latest trends and developments of Chinese environmental law can be summarised as follows.
Accelerated Legislation and Amendment Toward an Integral Legal System
Since the implementation of Environmental Protection Law (2014) on 1 January 2015, China has witnessed a new era of accelerated legislation and amendments of environmental laws and regulations which have significantly improved the environmental legal system. In 2017, the Marine Environment Protection Law and the Water Pollution Prevention and Control Law were amended. The year 2018 saw the amendments of the Environmental Protection Tax Law, the Atmospheric Pollution Prevention and Control Law, the Law on Prevention and Control of Pollution from Environmental Noise, and the Law on Environmental Impact Assessment. The Soil Pollution Prevention and Control Law came into force on 1 January 2019.
Alongside the above-mentioned laws enacted by the National People’s Congress, numerous administrative regulations concerning environmental protection were promulgated. For example, the Regulation on the Implementation of the Environmental Protection Tax Law came into effect in 2018. The newly released regulations covered a wide range of measures, including the recovery of electronic waste, survey on pollution sources, administration of ozone-depleting substances, prevention and control of vessel-induced pollution, management of hazardous chemicals, and nature reserves.
It is noteworthy that the amended Law on the Prevention and Control of Environment Pollution Caused by Solid Wastes (Solid Waste Law) came into effect on 1 September 2020. The system of environmental information disclosure will also be further improved. Besides, the Law on Environmental Impact Assessment, the Law on Prevention and Control of Pollution from Environmental Noise and the Marine Environment Protection Law are now in the amendment process, based on a clear schedule proposed by the Ministry of Ecology and Environment (MEE).
Amendment of the Solid Waste Law
Unlike the Solid Waste Law (2016), the 2020 amendment prescribes that industrial solid waste producers shall obtain a pollutant discharge permit and the solid waste import shall be gradually reduced to zero. As more detailed provisions on storage, utilisation and disposal of wastes come into force, categories of illegal acts prescribed by law are also increased, such as failure to establish a solid waste management ledger and truthfully record the category, quantity, treatment and other metrics of wastes. Punishment for illegal acts is also intensified.
Notably, the amended Solid Waste Law imposes liability of detention or fine not only on the directly responsible persons, but also the legal representatives in more legally stipulated situations – for example, engaging in the business activities of collecting, storing, utilising, or handling hazardous wastes illegally, or dumping, stacking, discarding or shedding sludge without authorisation, or transferring hazardous wastes without approval. On the contrary, under the Solid Waste Law (2016), only in case of environmental pollution incidents caused by solid wastes shall the persons in charge who are directly responsible be subject to administrative sanctions.
Further improvement of environmental information disclosure
According to the existing laws and regulations, major pollutant discharging entities shall disclose their main environmental information. While enterprises other than major pollutant discharge entities may choose to disclose their environmental information with reference to the aforesaid notion, non-major pollutant discharging entities, being listed companies, shall give deliberated reasons for their non-disclosure.
In 2020, the environmental information disclosure system is further improved. On one hand, the amended Solid Waste Law requires enterprises which produce, collect, store, transport, utilise, and treat solid wastes to disclose the pollution prevention and control information of solid waste. On the other, it is probable that all the listed companies and bond issuers will be compelled to disclose their environmental information, as this is proposed by the State Council in the Guiding Opinions on Building a Modern Environmental Governance System and relevant legislation procedures pending in progress. It is reported that China will implement the mandatory disclosure regulation of environmental information for listed companies by the end of 2020. The listed companies and bond issuers will bear civil, administrative and even criminal liabilities if they violate the information disclosure rules right after the strengthened disclosure regulation is enacted.
Intensified Environmental Law Enforcement
In recent years, the MEE and other regulatory authorities have intensified the investigation and punishment of environmental violations, and launched several special actions to address environmental problems. In addition, inspections on ecological and environmental protection against state-owned enterprises, relevant regulatory authorities and other entities are underway.
Combating environmental crime
According to Articles 338 and 346 of Criminal Law, if an enterprise discharges, dumps or disposes any radioactive waste, any waste containing pathogens of any infectious disease, any poisonous substance or any other hazardous substance in violation of the national rules of law, and causes serious environmental pollution, it may be convicted of environmental pollution crime. In this case, the enterprise itself shall be fined and the directly responsible persons could be imprisoned.
As stated by the Supreme People’s Court, the courts at all levels have admitted 39,957 criminal cases related to environment and resources and incriminated 114,633 suspects in 2019. The number of aforementioned cases admitted by courts climbed 50.9% compared with that in 2018.
Heightened administrative penalties
In practice, enterprises usually violate environmental rules by failing to design, construct and operate pollution prevention and control facilities simultaneously with the construction project, commencing constructions without approval, commencing production without inspection and acceptance, discharging pollutants beyond statutory standards, or failing to store, transport or dispose solid waste in accordance with the law, etc. The above-mentioned illegal acts may lead to administrative penalties, such as fines, business suspension subject to rectification and close-down. As reported by the MEE, a total of 28,369 administrative decisions on environmental penalty were rendered from January to April 2020.
Special actions against environmental illegalities
In order to comprehensively strengthen ecological and environmental protection and take resolute actions against pollution, China carries out special actions to prevent and control air pollution, water pollution and soil pollution, in order to keep skies blue, waters pure and lands clean.
To improve air quality, the State Council developed and implemented the Three-Year Plan to Prevent and Control Air Pollution in 2018, ensuring that air pollution will be prevented and controlled by stepping up industrial pollution treatment, adjusting energy structures and transportation structures, VOCs special rectification and diesel locomotive pollution control. China is now at the final stage in terms of achieving the target. According to the latest statement from the MEE, significant progress has been made and it will continue to implement the territorial supervisory responsibility and departmental supervisory responsibility.
To improve water quality, China launched the Action Plan for Prevention and Control of Water Pollution and introduced the system of chief-in-charge for rivers and lakes. Meanwhile, China has been taking measures to promote emission reduction, speed up the containment of industrial, agricultural, domestic pollution sources and ameliorate water ecology, ensure drinking water safety, and eliminate seriously polluted urban water to prevent and control water pollution.
China has also comprehensively implemented the Soil Pollution Prevention and Control Action Plan. More concretely, China has been focusing on controlling soil pollution from key fields, industries and pollutants, and taking measures to effectively ensure the soil environment safety of farming and construction land. In order to strengthen the enforcement of the Solid Waste Law, in September 2020 the MEE held a conference advocating a three-year special treatment action against hazardous environmental waste, in order to reinforce the environmental supervision of hazardous wastes.
Inspections on ecological and environmental protection
China has been carrying out various central and provincial inspections on ecological and environmental protection, including routine inspections, special inspections and re-examination. The inspection group supervises the relevant state-owned enterprises engaged in production and operation activities that have a great impact on the ecological environment, the relevant departments of the State Council that undertake the paramount duty of environmental protection and other entities.
The scope of specific inspection includes the enforcement of environmental protection laws and regulations, the treatment of key environmental problems, and the permanent mechanism of accountability. The second batch of the second round of the central inspection groups have been led by minister-level officials stationed in state-owned enterprises from 30 August to 1 September 2020. The pilot monitory inspections on the National Energy Administration, the National Forestry and Grassland Administration and other relevant departments are also underway. During this batch of inspection, 101 environmental cases have been admitted and the amount of fines has so far reached CNY12,438,200.
Continuous Development of ESG Investment
The basic philosophy of ESG (environmental, social and governance) is to accentuate enterprises’ performance in terms of their management of issues regarding natural resources, the society, and the corporate internal governance rather than just their financial performance. Studies have proved that, compared with enterprises with bad ESG performance, enterprises with good ESG performance are more capable of resisting risks and also have better financial performance.
In China, more and more private equity funds and their investors have integrated ESG elements into their investment decisions and portfolio management strategies. The Stock Exchange of Hong Kong (HKEX) has already required listed companies to disclose ESG information. This new rule poses new challenges, especially from the environmental perspective, to Chinese companies listed on the HKEX.
The status quo and the challenges of ESG investment in China
ESG evaluation system and corresponding indexes
Many international organisations and rating agencies have developed ESG evaluation systems and corresponding indexes. With the growth of ESG investment in China, the ESG evaluation and index products created by Chinese organisations are, for example, the RKS ESG rating and ECPI ESG index. In the RKS ESG rating system, 11 key parameters – such as climate change, waste water discharge, hazardous solid waste and toxic or hazardous atmospheric pollutants discharge – are evaluated.
More Chinese institutes in PRI
With the support of the United Nations, the Principles for Responsible Investment (PRI), the most influential network of responsible investors worldwide, was initiated and established in 2006. According to the latest data released by the PRI, 49 Chinese institutions become the signatories of PRI. Among them, 14 institutions joined the PRI in 2020, accounting for 29% of the total. Foreseeably, with the continuous attention to ESG by regulatory authorities, the development of ESG will accelerate.
ESG information disclosure of HKEX
For the listed companies in HKEX, the new version of the Environmental, Social and Governance Reporting Guide and its corresponding Main Board Listing Rules and GEM Listing Rules (new rules) are applied to issuers for disclosing ESG information in the fiscal year commencing on or after 1 July 2020. Listed companies shall compile ESG reports in accordance with the new rules. The new rules establish the principle of “comply or explain”, which means companies listed on the HKEX shall disclose their ESG information or provide deliberated reasons for non-disclosure in their ESG reports. Obviously, the new rules have set higher standards for Chinese companies listed on the HKEX in terms of their environmental behaviour and disclosure.
Establishment of an environmental compliance system
The Research Report on Environmental, Social and Governance of Chinese Listed Companies (2020) points out that, within the framework of environmental, social, and governance, Chinese listed companies have a relatively worse performance and face greatest management challenges in the environmental dimension. Therefore, the ESG investment has brought new financing challenges and opportunities to Chinese enterprises. The ESG performance of enterprises, especially regarding the environmental elements of ESG, is becoming more and more important.
In China, ESG investment philosophy and environmental issues are integrated with China's existing environmental protection laws and regulations, and are in line with the trend of stricter government regulation on environmental protection. Establishing an enterprise environmental compliance system is a way to cope with new financing challenges and enhance corporate reputation, whether for listed companies wishing to improve ESG performance and meet regulatory requirements, such as information disclosure, or for non-listed enterprises wishing to attract investors' attention by improving their ESG performance.
In practice, an enterprise would establish its environmental compliance system by way of the following steps: identifying and assessing environmental risks within the framework of current internal regulations; making plans for environmental risk management and control; establishing compliance management organisation structures; formulating compliance guidelines, drafting environmental compliance documents; and, finally, implementing and improving an environment compliance system.
In the future, under the guidance of the latest national environmental protection policies and principles of sustainable development, and with the constant improvement of environmental protection legislation, enterprises will assume heavier responsibilities in terms of environmental protection and environmental information disclosure. Meanwhile, supervision authorities will continue to strengthen the enforcement of environmental protection. Therefore, enterprises should keep abreast with the above-mentioned trend to ensure that their operations comply with environmental protection laws and regulations.