Environmental compliance laws should now be a top priority for almost any company engaged in Chinese manufacturing. because the government is now giving its enforcement efforts more teeth, at least in part. For many years, in order to keep the economy moving forward, authorities did not enforce environmental rules. Nonetheless, it closed thousands of factories for environmental non-compliance in 2017 alone.
Businesses should think about the costs of compliance and non-compliance more than before. Paying for audits and inspections, getting government-approved equipment for pollution monitoring, and paying taxes on pollution are all part of upholding environmental rules.
Alternatively, the costs of non-compliance are significantly higher and may spell the end for your Chinese manufacturing operation. In fact, China now routinely completely shuts down companies for non-compliance.
Authorities primarily keep an eye on the following categories of pollution: air pollution, water pollution, noise pollution, soil contamination, and general garbage.
Chinese local governments are currently under pressure from the national government to achieve a number of objectives. They include sustaining regional economic expansion and—more and more—environmental objectives. As a result, local officials could think that occasionally the two objectives of economic expansion and environmental compliance are at odds.
For instance, closing a large number of factories in one city due to environmental violations will have a significant effect on employment opportunities there. The company’s suppliers experience a decline in business as a result. Hence, the local economy suffers.
The need to preserve economic growth prevents municipal officials from implementing environmental restrictions in the absence of creative economic planning concepts. For many years, this posed no issue for the local government. Because the nation placed a high priority on the economy, they were mostly able to disregard or downplay environmental issues.
The federal government is now forcing local governments to implement current restrictions as it pushes environmental initiatives harder. Even if it results in immediate financial costs, this is now frequently the case.
A study of how well provinces and cities adhered to environmental regulations was mandated by the State Council at the conclusion of 2016. Regarding the career opportunities and promotions of regional officials, this investigation is used. Municipal authorities that succeed in achieving environmental objectives may have bright futures at the federal level. Municipal officials that have a poor track record with the environment are also reprimanded.
Most disciplinary officials were found in the provinces of Hunan, Shanxi, and Henan. By permitting local governments to now keep all of the money they get from environmental taxes, the central government also encourages local enforcement.
Environmental Compliance and the Effect on Business
Textiles, oil, heavy metals, coal and gas, mining, cement, paper, automotive, and consumer products are the industries most affected by the current crackdown. Recent environmental crackdowns have resulted in the closure of an estimated 80,000 companies. The negative economic repercussions of the crackdown are reportedly most felt in Beijing and Tianjin. Beijing has brought legal action against around 13,000 polluters who were deemed to be in violation.
The crackdown has had some positive effects on business and has created winners and losers. Larger businesses are likely to gain from the crackdown at the expense of smaller ones. Particularly in the steel and energy industries, many of the closed factories were smaller manufacturers.
In the future, smaller businesses may find it too expensive to maintain compliance, but larger, more productive businesses would adapt more easily. Modern industrial companies can rely on factory technology to be productive and cut down on waste and pollution. Smaller manufacturers will be at a disadvantage since they may not be able to afford these capital expenses.
Market share from non-compliant, inefficient manufacturers who have exited the market is being absorbed by larger producers.
Supply Chain Disruption
If the production of their inputs and raw materials results in pollution, even non-polluting businesses should be aware of the new regulations.
In order to avoid production interruptions, it is crucial to select suppliers and subcontractors that are ready to comply with environmental regulations. The authorities’ closure of tens of thousands of firms has significantly disrupted supply chains.
Costs of Environmental Compliance
Today, many manufacturers must install pollution monitoring equipment. In essence, this will serve as a meter to calculate the pollution tax that the corporation must pay. Businesses are also responsible for paying for inspections, which are more frequent and stringent now.
The environmental pollution charges include several exceptions and restrictions. Small- and medium-scale agricultural output, as well as pollution from cars, trains, roads, and ships, are all exempt. Just the top three air pollutants produced by a company operation will be taxed.
The water pollution tax is also subject to limitations. Exemptions apply to water pollutants that are transported directly to municipal waste treatment facilities.
Environmental Tax and Non-Compliance Fees
Businesses that were found to be in violation of environmental regulations in the past would be subject to local penalties, which varied widely between cities.
Now, there is a standardized set of national rules. For instance, sulfur dioxide pollution currently carries fines ranging from 1.2 to 12 RMB per kilogram discharged across the country.
There are still some local regulations and regional standards in place. Within the range specified by the central government, local governments have discretion over the specific tax rate. Additionally, under the new environmental tax law, local governments receive 100% of the tax revenue, whereas a significant portion went to the central government.
The last few years have seen a significant shift in China’s environmental governance, which will almost certainly have a significant impact on business. It would be a mistake to interpret the central government-initiated crackdown as implying a diminished role for local governments.
Instead, the central government delegated significant authority to local governments while significantly increasing the incentives to enforce environmental laws. For example, while the central government has created a standardized, national framework for the pollution tax, local governments can consider their local development situation as well as the company’s situation when determining the precise tax rate.
*This article was written prior to the COVID-19 pandemic. However, while there was an initial relaxation of environmental constraints in China following the initial wave of the pandemic in an attempt to compensate for factory shutdowns, environmental compliance regulations in general continue to tighten.