Analysis & Reviews

5 Regulatory Trends - From Enforcement to Finance (2)

5 Regulatory Trends: From Enforcement To Finance

To achieve the target of a “Beautiful China”, the Chinese government has over the last year issued a series of regulations and standards, such as, the ‘Environmental Protection Tax’ (-released on 25 December 2016, to be enforced on 1 January 2018) and the ‘Measures for Soil Environment Management for Polluted Land (Consultation Paper)’ (-released on 31 December 2016). Such regulations can affect businesses through higher cost of compliance, enforced shutdowns, tax increases and fines.

China’s regulatory landscape is shifting…

…concern is growing among investors

Concern for regulatory risks is also growing. The Industrial and Commercial Bank of China (ICBC) is conducting stress testing focused on the potential risk caused by regulations. In a survey conducted by CWR in 2016, based on water risk valuation research, regulatory risk was found to be the risk of most concern by investors. And in the stress testing workshop held in the People’s Bank of China (PBoC) on 12 January 2017, regulatory risk was discussed and analysed by different institutions including ICBC and CWR.

From 2016 to February 2017, China’s environmental policy landscape has undergone a series of important changes. These signal the growing focus by the government on environmental protection. These regulatory changes are important when looking at potential regulatory risks.

1.    Stronger enforcement and penalties

Enforcement is key to the successful implementation of regulations and policies. Due to different standards and provincial resistance, regulations have sometimes not been fully enforced. Promisingly, since China declared war on pollution and the ‘Water Pollution Prevention & Control Action Plan’ (“Water Ten”) (-released on 2 April 2015) came out, enforcement seems to have greatly improved.

Enforcement has increased between 17 – 42% from 2014-2015

The chart below shows the improvement from 2014 to 2015. There has been a 17% increase in administrative penalties (cases), 34% increase in administrative penalties (mn RMB) and 42% increase in environmental crimes prosecution (arrests).

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The increase in enforcement has been backed by a series of reforms. The first, in May 2016, is the Water Resource Tax Reform that has replaced the water resource fee. Another is the Environmental Protection Tax that was approved by the Standing Committee of the People’s Congress, which replaces the previous pollutant discharge fee. Along with the change in name, the powerful tax administration will be in charge, signalling stricter enforcement.

The ‘Interim Provisions for the Administration of Pollutant Discharge Permit’ (-released on 23 December 2016) was issued by the MEP to support the Environmental Protection Tax. It provides the model and application process for the pollutant discharge permit and corresponding supervision measures.

In addition to an updated environmental protection tax there are also 18 new criminal law scenarios for environ violations

Additionally, there are new criminal scenarios for environmental violations. The Two Supremes (Supreme People’s Court, Supreme People’s Procuratorate) provided interpretations on issues concerning environmental pollution crimes (-released on 27 December 2016). They categorise 18 scenarios as “severely polluting the environment” and 14 scenarios as “resulting in severe consequences”, as well as corresponding criminal penalties. The ‘Measures for the Connection of Environmental Protection Administrative Enforcement and the Criminal Enforcement’ (-released on 25 January 2017) provides guidance on: criminal case transfer from environmental protection administrations to public security organs, collaboration scheme among environmental protection administrations, public security organs & people’s procuratorate and information sharing.

On top of the legislative reform, a series of supervision measures were also published to further assist enforcement, such as, ‘Assessment Measures for Evaluating Objectives of the Ecological Civilization Construction’ (-released on 22 December 2016) and the ‘13th Five Year Plan (13FYP) on Assessment and Review of the Implementation of the Strictest Management System for Water Resources’ (-released on 27 December 2016). A lack of clarity is no longer an excuse.

2.    Clearer responsibility divisions

Water is a trans-boundary resource and in China is managed by different levels of various administrations.  To support greater enforcement, clear responsibility divisions are a must. In the recently published regulations and 13FYPs on different sectors, responsibility division is frequently mentioned.

A ‘River Chief’ mechanism was released in Dec 2016

The ‘Opinions on Fully Promoting River Chief Mechanism’ (-released on 11 December 2016) was issued by the general office of CPC Central Committee and the general office of the State Council. River chiefs are to be designated in four administrative levels: province, city, town and village. River chiefs will be responsible for water resources management and conservation in corresponding rivers and lakes, as well as the coordination between different administrations for trans-boundary lakes/rivers. River chiefs conferences and information sharing scheme will be established to report the management and protection of rivers and lakes.

3.    More transparency, disclosure and information sharing

Transparency and disclosure of environmental information are key to environmental risk analysis and public supervision. However, current disclosure in China still has issues, including the lack of detailed and relevant information, as well as sometimes even fabricated data. This situation is expected to improve as transparent information platforms are required by different new regulations and plans. In the ‘Interim Provisions for the Administration of Pollutant Discharge Permit’, companies are required to provide relevant information on the pollutant discharge permit management platform. In the ‘13FYP Work Plan on Energy Saving & Pollution Reduction’ (-released on 5 January 2017) and the ‘13FYP on the Construction of Water Saving Society’ (-released on 17 January 2017), companies on blacklists will be published on the national information platform.

Falsifying and fabricating data & disrupting monitoring are no longer just violations but crimes

Fabricating and falsifying data or disrupting monitoring equipment are no longer just administrative violations. In the Two Supremes’ interpretation mentioned before, those acts can be considered as both a crime that “pollute the environment” and a crime that “destroy information systems”. Incidents like the Volkswagen’s emission scandal are likely to be considered as a crime in China in the future.

Complete and accurate disclosure can also be a useful resource for business. In the ‘13FYP on Development of National Strategic Emerging Industries’ (-released on 29 November 2016), environmental protection equipment/service trading and bidding platforms are encouraged, which can take advantage of the pollution data disclosure in different sectors. In the ‘13FYP on Water Conservation Reform and Development’ (-released on 27 December 2016), water conservation technology sharing platforms are also encouraged, which can bring more opportunities.

4.    More subsidies and government support

As environmental protection plays a more important role in the government’s plan, more subsidies are expected in the future. In the ‘13FYP Work Plan on Energy Saving & Pollution Reduction’, it is suggested that a special fund should be provided for pollution reduction projects and corresponding promotions, and tax benefits should be provided to  enterprises actively reducing pollution.

In the ‘13FYP on the Water Conservation Reform and Development’, subsidies for agricultural water conservation are to be provided. In ‘13FYP on the Construction of Water Saving Society’, water saving facilities are applicable for subsidies. In ‘13FYP on the Construction of Urban Wastewater treatment and Recycling Facilities’ (-released on 31 December 2016), water treatment and recycling facilities which are not open to capital markets can apply for policy and financial support for construction and operation.

5.    Finance plays a more important role

As green finance becomes mainstream and the “Public-Private-Partnership (PPP)” model becomes more popular, the role of finance has grown in environmental protection. In recently published regulations, finance support is encouraged by the government through various ways including permit exchange, green credit, PPP, disaster insurance, etc.

The pollutant discharge permit will likely be a popular commodity

With the Environmental Protection Tax approved and the stronger enforcement, pollutant discharge permits will likely be a popular commodity. The ‘13FYP on Ecological Environment Protection’ (-released on 24 November 2016) suggests the perfection of the scheme for initial pollutant discharge permit distribution and trade. It also encourages new projects to secure their pollutant discharge quota by trading, thus not adding to the total amount of local pollutant discharge. The ‘13FYP Work Plan on Energy Saving & Pollution Reduction’ aims to: facilitate the pollutant discharge permit scheme, build the pollutant discharge permit exchange scheme by the end of 2017, expand the range of pilot projects for permit exchange and develop trans-boundary pollutant discharge permit exchange.

The Bank of China issued a record breaking USD3 bn green bond

In the ‘Guiding Opinions on Establishing a Green Finance System’ (released on 31 August 2016), a green finance system was first initiated. After that, different financial institutions have moved on green finance, including the Bank of China (BOC), which issued a green bond of USD3 billion in July 2016, breaking the record of international green bond issuance. In the ‘13FYP Work Plan on Energy Saving & Pollution Reduction’: banks are encouraged to provide different kinds of financial support to key pollution reduction projects, financial institutions are encouraged to perfect the green credit scheme, mandatory insurance is suggested in fields with high environmental risk and private capital should establish a fund for energy saving investments.

Stronger enforcement indicates a higher regulatory risk for companies, while better transparency and disclosure provide a basis for more accurate analysis. New projects also provide different opportunities for the participation of financial institutions. More interactions between the environment and finance  can be expected.

Recently issued regulations are listed below:

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Further Reading

  • 5 Trends For The Year Of The Rooster - The Rooster crows a new pecking order as China leads the global climate fight & drives structural changes at home. Stay on top with our 5 trends and make sure you are not walking on eggshells but laying golden eggs
  • Dug-Up In China: The World’s Critical Raw Materials - China is the largest global supplier of many critical raw materials but growing domestic demand could mean it becomes a net importer. How will other countries secure these materials that are key to a low carbon future? China Water Risk’s Hongqiao Liu explores China’s direction in the 13FYP
  • Fall of The Cement Industry: A Painful Transition - To combat air pollution in China, polluting industries are being shutdown but what are the impacts to local economies? Zhang Chun from chinadialogue looks at the cement industry in Yi’an, Hebei, where only one plant remains from over 100 previously
  • Oil To Fall As Electric Vehicles Take Off - The growth of electric vehicles in China could displace 1mn barrels/day of crude oil by late 2020s. How will this impact companies with fossil fuel assets? How can Asian investors minimise their exposure? WWF’s Jean-Marc Champagne on their latest report
  • T Park: Waste-to-Energy In Hong Kong -Hong Kong’s increasing waste load by 2030 will put tremendous pressure on its management capability.  Veolia’s Nina Cambadelis introduces T PARK, a state-of-the-art sludge treatment facility that turns waste into energy while achieving ‘zero wastewater discharge’  
  • 8 Game-Changing Policy Paths – There has been a fundamental shift in planning China’s future growth with changes in regulatory landscape due to multiple polices set & changes in law. Many come into full effect in 2015. Get on top of these
  • China’s Water Resource Tax Reform - The recently launched water resource tax reform will ultimately supersede the existing resource fee system. China Water Risk’s Yuanchao Xu on how the two systems compare and why Hebei is taking lead as the pilot city
  • Water Risk Valuation – What Investors Say - See what 70+ investors have to say on different valuation approaches we applied to 10 energy stocks listed across 4 exchanges. Is there consensus? What are they most worried about?
  • Corporate Disclosure: Can We See Clearly Now? - Global climate targets are connected to day-to-day operations of companies and with COP 22 underway China Water Risk’s Dawn McGregor reflects on how clearly we are seeing corporate disclosure, the obstacles in our way & if there will be a sunny day
  • Financing Water Resilience: Climate Bonds for China - Climate bonds are rapidly growing but there’s verification concerns & gaps for water-related investments. A new approved standard for water bonds tackles these, hear from some of its creators
  • Water PPPs To Lead In China - All new water & wastewater projects in China need to follow the Public-Private-Partnership (PPP) model. Will this mean big change and how have other water-related projects been funded in China? China Water Risk’s Yuanchao Xu takes a look
Yuanchao Xu

About Yuanchao Xu

Yuanchao uses his analytical proficiencies towards the assessment and visualization of water risks for China Water Risk. Prior to joining, Yuanchao was based in Europe completing the Erasmus Mundus Master Program where he specialsed in hydro-informatics and water management. He applied his skills in climate forecasting and water resource modelling to the EUPORIAS project with DHI (Danish Hydraulic Institute) which resulted in a conference paper on seasonal climate forecasting. Building on this work, he went on to develop hyfo, an open-source R programme for climate scientists and modellers to analyse and visualize data. Yuanchao’s bachelor degree was from the China Agricultural University where he specialized in heat energy and power engineering. During his time there, he also patented a testing instrument for hydraulic machinery. He has studied and worked in Beijing, Nice, Newcastle and Copenhagen. - See more at: http://chinawaterrisk.org/about/network-people/china-water-risk-team/#sthash.to7q8xkw.dpuf

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