1、 Environmental Compliance for US Companies in China Challenges and Best Practices|March 2019 Environmental Compliance for US Companies in China Challenges and Best Practices|March 2019 Authors Jack Kamensky and Owen Haacke Editor Erin Slawson Design Ian Hutchinson Table of Contents Executive Summary
2、.1 Introduction.2 Environmental Policy and Enforcement in China.3 Environmental Compliance Challenges.6 Issue Spotlight:Hazardous Waste Management Capacity.13 Emerging Trends in Environmental Enforcement and Policy.14 Corporate Practices for Optimizing Environmental Compliance.16 Conclusion.21 Appen
3、dix.22 Glossary.24 US-China Business Council 1 March 2019 Executive Summary Since China declared a“war on pollution”in 2014,environmental protection has become a top political priority,evidenced by tough regulations,enforcement campaigns,and an emphasis in official rhetoric.Stronger environmental en
4、forcement has had mixed effects on US-China Business Council(USCBC)members.In many cases,it has helped level the playing field for foreign companies that already had strong pollution controls,since domestic companies are increasingly held to the same environmental standards as foreign companies.At t
5、he same time,the speed of regulatory change and sudden intensity of enforcement has increased costs and uncertainty throughout the supply chain.Core Challenges OneOne-sizesize-fitsfits-all enforcemenall enforcement t:Chinese regulators sometimes demand production capacity cuts regardless of environm
6、ental efficiency.Some industrial parks require all companies to shut down on heavy pollution days with short notice,even those whose individual facility emissions comply with local regulations,rendering companies unable to meet their contractual obligations in some cases.Excessively stringent,nonExc
7、essively stringent,non-sciencescience-based requirementbased requirements s:Some local environmental requirements are more stringent than international standards and can be difficult or impossible to meet,even with the most advanced environmental technologies.Insufficient transparencyInsufficient tr
8、ansparency:Local environmental standards can sometimes be difficult to obtain and new policies often have short implementation timelines.Hazardous waste disposal capaciHazardous waste disposal capacity:ty:A longstanding shortage of certified hazardous waste disposal companies affects members in a ra
9、nge of industries,leading to increased costs,compliance challenges,and disruptions in supply chains.Best Practices Proactively engage with regulatorsProactively engage with regulators:Companies find success in engaging closely with regulators at all levels to understand their goals,communicate diffi
10、culties and policy recommendations,and follow up on inspection results.Closely monitor regulatory changesClosely monitor regulatory changes:Leveraging internal and external resources to monitor policy changes can help identify risks to current operations or future plans.Some companies have also deve
11、loped processes to inform their suppliers and customers about changing policies.Mitigate supply chain risksMitigate supply chain risks:Diversifying suppliers and creating contingency plans for diverting capacity or stockpiling goods can lessen the impact of shutdowns.Conduct due diligence and regula
12、r auditsConduct due diligence and regular audits:To maintain supply chain integrity and ensure regulatory compliance,companies should conduct robust due diligence and regular audits of suppliers,industrial parks,JV partners,and M&A targets.US-China Business Council 2 March 2019 Introduction Stricter
13、 environmental enforcement has had varied consequences for US-China Business Council(USCBC)member companies.Increased enforcement has helped level the playing field between foreign companies and domestic competitors with poorer compliance records.It also has created new opportunities for US companie
14、s to sell environmental technologies in China.At the same time,increased enforcement has led to supply chain disruptions and necessitates that companies consider new strategies to manage risk.Chinas increasingly complex web of environmental policies has also generated other challenges.Companies face
15、 more inspections,slow and unpredictable approvals,inconsistent enforcement,opaque local environmental standards and notifications,and insufficient hazardous waste management capacity.In 2018,29 percent of member companies identified rising environmental compliance costs as a top cost concern,compar
16、ed to 25 percent the previous year.To better understand these developments,USCBC interviewed 30 member company representatives and other stakeholders from a variety of industries about environmental enforcement challenges,effective mitigation strategies,and policy recommendations.Interviewees came f
17、rom a variety of positions within member companies,including environment,health,and safety(EHS);legal;government affairs;and supply chain functions at the local,China,Asia-Pacific,and global level.US-China Business Council 3 March 2019 Environmental Policy and Enforcement in China As with most polic
18、ymaking in China,recent efforts to improve environmental protection began with high-level commitments and priority statements,and have since filtered down into more specific policies.Enforcement campaigns for these new,stricter environmental policies have been led by central-level regulators.Develop
19、ment of Chinas high-level environmental policies Chinas central government declared a“war on pollution”in 2014 in an effort to transition to a more environmentally sustainable economic model and stem Chinas deteriorating water,air,and soil quality.Around this time,the central government also release
20、d pollution prevention and control action plans,starting with an air pollution action plan in(2013)and followed by similar action plans for water pollution(2015)and soil pollution(2016).These plans have served as a guide for many of the regulations that followed.In 2015,China implemented an updated
21、Environmental Protection Law,the first revision in 26 years.Updates include enhanced polluter punishments and allow qualified NGOs to file environmental public interest lawsuits.The following year,China ratified the Paris Agreement on climate change,committing to significantly cut carbon emissions a
22、nd bolstering the governments commitment to environmental protection.Chinas Paris Agreement targets and others were reflected in the governments 13th Five Year Plan,covering the period from 2016-2020.At Chinas 2017 Central Economic Work Conference,an annual meeting outlining top economic priorities,
23、environmental protection environmental protection was labeled one of three“tough battles”that must be won over the following three years,along with financial risk and poverty alleviation.Recent and upcoming policies tighten requirements Policies promulgated in 2018 have further tightened environment
24、al requirements,and a number taking effect in 2019 continue this trend.TaxationTaxation:China implemented its new Environmental Tax Law in 2018 to further institutionalize costs for polluting.Although most companies determined that their financial liabilities will remain equivalent to costs under th
25、e previous pollutant discharge fee system,many reported needing additional resources to ensure full compliance and avoid severe penalties.Air emissionsAir emissions:As a continuation of the 2013 air pollution action plan,Chinas State Council released a Three Year Action Plan to Win the Battle for Bl
26、ue Skies in 2018 which focuses on reducing air pollution in regions where it is most severe.Water pollutionWater pollution:The revised Water Pollution Prevention and Control Law which took effect in 2018 applies a discharge quota to key water pollutants and increases penalties for excessive discharg
27、es.It also further institutionalizes the“river chiefs”system,which holds local officials accountable for the condition of rivers and lakes under their jurisdictions.US-China Business Council 4 March 2019 Solid wasteSolid waste:In July 2018,Chinas central environmental regulator released a draft revi
28、sion to the Solid Waste Pollution Prevention and Control Law which would increase penalties for polluters,institutionalize a ban on scrap imports,and incorporate solid waste into the emissions permitting system.Soil pollutionSoil pollution:A new Soil Pollution Prevention and Control Law took effect
29、in January 2019.The law creates a standalone legal framework for soil pollution,which was previously addressed through a patchwork of laws and regulations.Increasingly centralized oversight and enforcement regime In recent years,China has devoted more central government attention and resources to lo
30、cal environmental enforcement.In 2016,China began a national environmental inspection campaign covering all 31 provinces.These inspections were led by the Chinese Communist Party(CCP)Central Committee and the State Council,shielding the work from local government influencea perennial challenge,as lo
31、cal officials have a record of prioritizing economic development over environmental protection.Compared to previous efforts,the central inspections have had more teeth.A second round of nationwide inspections began on January 1,2019 and is scheduled to last around three years.The central government
32、has also undertaken regionally targeted inspection campaigns,including a 2017 air pollution inspection campaign focused on Beijing,Tianjin,and 26 cities in surrounding provinces(the“2+26 cities”).The second round of this campaign is currently underway and will last until April 2019.It involves 18,00
33、0 personnel and has been expanded to cover 11 additional cities in Chinas Fenhe and Weihe Plain area,along with limited coverage of the Yangtze River Delta.These centralized campaigns correlate with an overall increase in nationwide environmental enforcement borne out in official data.In 2016,the nu
34、mber of cases involving daily fines,property seizure,suspension or restriction of production,administrative detention,or criminal investigations for environmental infractions increased 93 percent to a total of 22,730 cases.In 2017,use of these five types of enforcement measures increased again by 74
35、 percent to 39,593 cases.It does,however,appear that enforcement tapered off in 2018,likely due to regulators balancing growth and environmental protection objectives as Chinas economy slows and taking more nuanced enforcement measures.From January to November 2018,the number of cases involving thes
36、e five types of enforcement increased only 1.78 percent.However,the intensity of enforcement remains high compared to historical levels.Enforcement Statistics for the First Round of Chinas National Environmental Inspection Campaign(2016-2017)Source:Xinhua US-China Business Council 5 March 2019 Gover
37、nment reorganization increases clout of Chinas central environmental regulator In March 2018,Chinas central government underwent a sweeping restructuring aimed at streamlining the bureaucracy and increasing central authority.The new central environmental regulator,the Ministry of Ecology and Environ
38、ment(MEE),incorporates the responsibilities of the now-defunct Ministry of Environmental Protection(MEP)as well as certain functions of six other government bodies.MEEs restructuring plan places a Central Ecology and Environment Protection Inspection Office in the new ministry,indicating that the na
39、tionwide central-level inspections of the past few years have become a permanent institution rather than a temporary campaign.Functions Absorbed by the New Ministry of Ecology and Environment Source:Xinhua US-China Business Council 6 March 2019 Environmental Compliance Challenges Varied,divergent,an
40、d sometimes hastily crafted or poorly conceived policies and implementation efforts have created a variety of compliance-related challenges for US companies in China.Challenge:One-size-fits-all enforcement Especially during months with heavy pollution,ahead of national events,and during targeted env
41、ironmental enforcement campaigns,capacity cuts and temporary shutdowns are often ordered without discretion.Even when authorities do not issue blanket shutdowns,they may still take other measures with a similar effect,such as shutting down boilers that supply steam to an industrial park or refusing
42、to accept wastewater generated by company operations.During the fall 2018 China International Import Expo in Shanghai,temporary area restrictions on the transport of hazardous waste forced some companies to reduce output despite not having been directly ordered to reduce capacity or shut down operat
43、ions.Not only are such inflexible enforcement measures costly and inefficient,they also discourage companies from meeting high environmental standards.When companies that have employed superior environmental technologies and minimized their operations environmental footprint are nevertheless subject
44、 to the same capacity cuts and shutdown orders as heavy polluters that have not incurred the same expenses,they suffer an unfair cost disadvantage.When the regional air pollution action plan for Beijing,Tianjin,and surrounding cities was implemented in the fall and winter of 2017-2018,USCBC members
45、with operations in the area reported an uptick in indiscriminate enforcement measures.In August 2018,USCBC advocated that senior central government officials adopt science-based enforcement techniques,instead of relying on such one-size-fits-all approaches,and the Chinese government has since taken
46、steps in that direction.The current action plan improved upon the previous years by explicitly prohibiting of one-size-fits-all measures.Companies with emissions levels“clearly better than peer companies”are also exempt from mandated capacity cuts.USCBC member companies noted improvement in transpar
47、ency of regulators in the winter of 2018-2019 and less disruptive enforcement actions compared to the previous winter.ProvinceProvince Jiangsu CasesCases 1004 Shanxi 606 Shaanxi 499 Sichuan 470 Anhui 462 Guangdong 365 Guangxi 310 Jiangxi 275 Hubei 222 Zhejiang 203 Top Ten Provinces Where Production
48、was Suspended or Restricted(Jan.-Nov.2018)Source:MEE US-China Business Council 7 March 2019 To the extent this plan is enforced,it would constitute a more nuanced policy approach that incentivizes companies to employ advanced environmental technologies.Despite this example,and recent public statemen
49、ts from Chinas environmental regulator about prohibiting one-size-fits-all approaches,companies report that this is still occurring in 2019,particularly during major central government events.Such shutdowns and capacity cuts resulting from one-size-fits-all enforcement have disrupted supply chains i
50、n China,both at the supplier and customer ends.In one example,during centrally-led inspections,a companys suppliers were shut down for months with little information about when they could restart operations.During this period,the company needed alternative suppliers,which doubled costs in some cases
