China Lays the Foundation Stones for Its Own Clean Air Act and Clean Water Act

On Tuesday May 5th, China’s state council (the highest government branch) introduced a 35-clause guideline emphasizing the need for more economic and efficient use of resources. The guidelines reiterate existing targets such as a 40% to 45% reduction of carbon intensity by 2020 compared to 2005 levels as well as sourcing 15% of total energy use from renewable energy technologies. This aligns with the US-China Climate Change Agreement which requires China to reach peak net carbon emissions and source 20% of total energy from renewables by 2030 or earlier.

It’s no secret that China is tackling an environmental pollution crisis, exacerbated by rapid urbanization. The statistics are sobering. In 2014, only eight of 74 major cities in China met the national PM 2.5 air quality standards based on data from the Ministry of Environmental Protection. Among them, the ten worst performing cities averaged air pollution levels nearly 13 times higher than the World Health Organization guidelines. 60% of China’s freshwater supplies are "too toxic for contact" or "seriously polluted" and nearly 80% of China’s 278 cities have no sewage treatment facilities. These resource constraints and poor governance structures will continue to face escalating pressures as urbanization adds an additional 350 million people (the entire population of USA) by 2030.

While firms have historically managed to evade fines and community backlash, built up latent dissatisfaction will test political enforcement willpower and social licenses to operate. Firms can expect that the status quo of lax environmental law enforcements in China will come to an end. Just last week, Beijing Simplot Food Processing Co Ltd, a supplier of McDonald’s frozen french fries, were fined 3.92 million yuan ($632,370) for discharging contaminated wastewater that exceeded regulated levels. For the same reason, six plants in Hebei province were also fined a total of 20.48 million yuan ($3.3 million) by the Hebei Provincial Environmental Protection Department last month. In 2014, total environmental pollution investigations by the Chinese government increased 11% from 2013 (73,000 investigations) and total fines increased 34% to 3.4 billion yuan ($548 million).

Heightened Chinese enforcement can be partially attributed to the revised Chinese Environmental Protection Law which came to effect January 2015. The revised law replaces the cap on fines with cumulative daily penalties and formally mandates all national and regional government officials be evaluated on environmental protection records in addition to economic growth. Of course, increased social media transparency also present added pressures in the form of social instability, potential NGO lawsuits and even public backlash against corporate revenue growth activities.

The Chinese government is just beginning its long and steady path towards attempting to improve national environmental standards. Witness the release of China’s Action Plan for Water Pollution Prevention and Control in April 2015 which will flat-out ban "small plants that fail to meet pollution control standards" by the end of 2016 and also require "local governments to publish their supervision reports every three months". Newly appointed Environmental Protection Minister, Chen Jining, expects that the total demand for environmental protection technology and services will surpass 8 trillion yuan ($1.3 trillion) in the next few years.