Navigating the Haze of Environmental Compliance

By Owen Haacke

Costs of complying with China’s environmental protection laws are rising as companies operating there face higher compliance costs, more frequent inspections, and a swath of new laws and regulations on emissions. Already held to high expectations of energy efficiency and low emissions, companies operating in China should prepare for inevitably stricter standards to come.

More top-down oversight

A more top-down approach to environmental oversight is expected after the State Council on December 22 required central authorities to review local governments’ implementation of environmental standards and guidance. Results of the review will factor into the promotion of local officials, adding additional heft to the regulatory regime.

While local environmental protection bureau inspections are routine, US-China Business Council (USCBC) members have seen more central Ministry of Environmental Protection (MEP) officials conducting compliance investigations in local districts and industrial parks. Companies expect the central MEP to be more involved and anticipate more heavy-handed punishment of companies and local governments that may not be implementing national guidelines, such as the January 2015 Environmental Protection Law.

What are the top concerns?

Since the implementation of the Environmental Protection Law, compliance staff say they remain occupied by operational tasks, such as those entailed in environmental impact assessments for new projects, but new challenges have also arisen:

• Environmental costs  Environment-related expenses continue to rise each year. Stricter requirements and increased inspections, for which companies pay, are adding up. Companies note this is expected given the development of China’s regulatory environment, and companies need to be prepared to address such costs.
• Government location policies   Companies should understand the local policy climate, which may include requirements that are not apparent in the central government’s five-year plans and other blueprints. Companies with manufacturing operations close to urban areas or outside of designated industrial zones should take note if they are being required to cut production, temporarily close, or are told for unclear reasons that a permit or license may not be extended by local governments. The long-term objective might be to move certain industries out of an area. In one example, a company was told it was not meeting technical requirements and was encouraged to buy new emissions reduction equipment, but after doing so, it was still required to move.
• Waste management   Waste management continues to be a challenge because of limited waste management licenses for companies to dispose industrial waste. Often delayed by administrative approval processes and red tape, companies note continuing challenges in the timely removal of waste, increasing storage costs.
• Environmental tax changes   Companies are also looking at how they might be affected by the recent Environmental Tax Law, which brings new tax implications to companies that are unable to meet existing emissions quotas, raising risks of cost overruns.

Best practices for environmental compliance

USCBC member companies cite a number of best practices to improve strategy in the environmental compliance function, including:

• Be an educator   Demonstrate the ability to reduce emissions and improve efficiency. One company was told they needed to move, but after demonstrating their capabilities to reduce emissions and efficiency and submitting a detailed plan to the local EPB, they were approved to stay.
• Gather insights on long-term trends   It is important for companies to have an understanding of long-term development plans for their region. Some companies suggested weighing the cost of relocating when it seems the directive to move may becoming, rather than investing in operations that will be forced to close.
• Engaging the right official   Engaging the right official is important. Companies should develop close relationships with industry zone officials, and cultivate connections with provincial-level authorities. Provincial government authorities can be helpful allies, especially where zone leadership reports to the central government.