Environmental Regulations in China
Summary and Keywords
China’s environmental challenges are unprecedented in terms of their size and severity. The country’s constantly evolving regulatory systems are a blend of lessons learned from Western market- and information-based regulations, China’s own unique political and administrative context as an authoritarian country, the complex relationship between its central and local governments, and the balance between the needs for environmental protection and economic growth. A close look at China’s environmental regulatory system may offer useful insights to those working toward a more sustainable future.
In the 21st century, the environmental regulatory system in China is entering a new era. Over the last three decades, efforts have focused on developing regulatory standards for air, water, and solid waste, among many other pollutants. This regulatory system primarily follows a command-and-control approach and is often criticized for its failure to curb China’s increasingly severe environmental degradation.
In the future, the Chinese government may pursue two routes. The first is to increase the use of market mechanisms and information tools to enable and incentivize more stakeholders, such as consumers, nongovernmental organizations, and communities, to engage in the development and enforcement of environmental regulations, for instance, through cap-and-trade systems, information-disclosure programs, and environmental insurance. However, existing evidence shows that the usefulness of these new instruments is limited.
Another route is to develop new mechanisms to strengthen the enforcement of traditional command-and-control regulations. Examples include making environmental performance a key performance indicator (KPI) in the performance appraisals of government officials or leveraging the power of financial sectors. These approaches are a footnote to the new argument in favor of environmental authoritarianism, which suggests that authoritarian regimes, setting authoritarian rules, may be more capable of handling complex environmental pressures. More studies need to be conducted on the effectiveness of these new approaches and the mechanisms by which they may achieve success.
The Importance of Studying Environmental Regulations in China
Environmental regulations in China have attracted significant attention for two primary reasons. First, in the early 21st century, China has begun suffering severe environmental deterioration. A 2017 report (Zhongguo Huanjing Zhuangkuang Gongbao) published by the Ministry of Environmental Protection (2017a) found that 75% of cities in China failed to meet national air-quality standards. According to government’s water-quality evaluations, about 32.2% of the country’s surface water received a grade of 4 or below and was deemed unsafe for human contact; moreover, around 60% of China’s underground water was found to be of poor quality. Regarding land pollution, according to a report on the first national general survey of soil contamination during the period between 2005 and 2013 (Ministry of Environmental Protection and Ministry of Land and Resources, 2014), 16.1% of national soils tested exceeded pollution standards, and cadmium and nickel were found to be the major pollutants. Pollution is most severe in east and south China, the most populated regions in the world, leading to serious concerns about human welfare (Zhang, Yin, & Shimshack, 2017). The impact of environmental pollution in China extends far beyond its geographical boundaries. In 2007, China became the largest carbon emitter in the world, contributing to about 30% of global greenhouse-gas emissions in 2014 (US Environmental Protection Agency, 2017). It will be difficult to combat climate change without China’s active participation. But as China confronts environmental pollution, its production costs may rise, negatively impacting its role as the “world’s factory” and reshaping the map of global manufacturing activity.
Second, China has a political, administrative, and cultural regime that is fundamentally different from that of Western countries, sharing more similarities with other authoritative polities. In an effort to curb environmental pollution, China has borrowed policies whose success was applauded in Western countries, but these efforts have largely failed in China. This demonstrates China’s need to develop a new political and economic framework that is different from Western experiences. The framework needs to understand how the government, businesses, nonprofit organizations, and citizens can collaborate in China’s institutional environment to create a more environmentally and economically sustainable future. At the same time, the failures and successes of environmental regulations in China may offer valuable lessons for other nations, especially developing countries undergoing rapid economic growth and urbanization in similar political and social contexts.
Scholars, primarily from the fields of economics, public policy, and environmental engineering, have enhanced the understanding of environmental regulations in China. Environmental engineers are investigating the flow of material, energy, waste, and pollutants between the manufacturing process and the environment, while economists and policy analysts are focusing on developing effective polices that make sense in the Chinese context, the reasons for some of the failures, and the mechanisms for implementing successful policies in the future.
Current Regulatory Regimes: Organizational Architecture
The Ministry of Environmental Protection (MEP) is responsible for the formulation and implementation of environmental regulations in China. The history of MEP dates back to 1974, when the Environmental Protection Leadership Group was established. This group did not become an independent government department until 1988, when the State Council of People’s Republic of China established the Environmental Protection Agency (EPA). The EPA was a vice-ministry-level department, which mean that it had less importance and authority than other departments. The EPA was elevated to the ministry level in 1998, but it remained an administrative unit under the State Council (Zhi Shu Ji Gou), and the head of the EPA was not a member of State Council. Finally, in 2008, the EPA was renamed the Ministry of Environmental Protection; it became a component of State Council and its head became a council member. (In 2018, the MEP was renamed the Ministry of Ecology and Environmental Protection.) This history tracks the increasing importance of and urgency regarding environmental protection in China.
In the early 21st century, the attention of China’s leaders and central government to environmental regulations has steadily increased. In 2007, the premier Wen Jiabao mentioned the words environment, pollution, and environmental protection 48 times in his Annual Government Report (Zhengfu Gongzuo Baogao; Wen, 2007). The 11th (2006–2010) and 12th (2011–2015) national Five-Year Plans established goals for curbing pollution in China. Starting in 2002, the government created more than 40 action plans related to water-pollution prevention and control, air-pollution prevention and control, land-pollution prevention and control, chemical environmental-risk prevention and control, and so on. The plans set clear five-year targets and specified particular rivers and basins. Chairman Xi Jinping has emphasized that “clear waters and green mountains are as good as mountains of gold and silver.” It is clear that China has entered a new, unprecedented stage of prioritization of environmental protection.
Local Environmental Protection Bureaus (EPBs) are responsible for implementing and enforcing environmental regulations. Together with the MEP, the EPBs the provincial, prefectural, and county levels form a vast network that regulates activities that threaten the environment. But besides the MEP, the local-level EPBs are also supervised by local governments (Schreifels, Fu, & Wilson, 2012). The local governments support the local EPBs, providing staff, funding, offices, and many other resources. The heads of the local EPBs are often appointed by and accountable to the local governments. This presents a considerable dilemma for China’s environmental governance: because local governments prioritize economic growth over environmental protection, environmental regulations are often weakly enforced, and noncompliance is common (Zhang, 2011).
Current Regulatory Regime: Institutions
Like many other countries, the Chinese government uses both traditional environmental regulation tools—that is, command-and-control approaches—and economic environmental-policy instruments. Command and control is a primary component of the environmental regulatory regime in any country, but it faces many challenges; specifically, it is hard to enforce (Kunreuther, McNulty, & Kang, 2002; Yin, Pfaff, & Kunreuther, 2011) and costly (Steinzor, 1998; Tietenberg, 1985) and provides little incentive to improve performance (Driesen, 1998; Popp, 2003). To address these challenges, the United States and several European countries have increasingly used market instruments and information disclosure in environmental regulations, and have achieved some degree of success. China’s development of environmental economic policies stems from an effort to learn from Western countries to address its own challenges with enforcing command-and-control regulations.
Command-and-control regulations are the dominant approach to environmental regulation in China. The key characteristic of command-and-control regulations is that the regulator specifies what the individual polluters can and cannot do, and there is the threat of a penalty for noncompliance. The regulator expects to solve problems by controlling the production process (e.g., requiring companies to have certification of environmental management systems recognized by the government or third-party organizations), specifying the use of technology (e.g., requiring companies that produce electricity to install desulfurization equipment), or specifying standards for waste discharge (e.g., requiring the chemical oxygen demand content in waste water to be below a certain level before it is discharged into the environment).
The Chinese government has a huge number of laws, regulations, and rules that regulate input, output, pollution, processes, and technology in a top-down fashion. From 1979 to May 2015, the central government published 825 policies regarding environmental protection and pollution prevention and control, about 700 of which were laws, regulations, and rules that can be described as command-and-control policies. The number of laws is very limited; there are far more rules, even though laws have the highest legal authority while rules have the least (Yin, Spigarelli, Zhang, & Zhou, 2016).
The key enforcement tool is financial penalty. According to article 37 of the Environmental Protection Law of China, “organizations which dismantle or leave idle the pollution prevention and control equipment without ahead-of-time approval, and thereby emit pollutants in excess of standards . . . shall be fined.”1 Article 35 stipulates five cases in which a financial penalty shall be imposed, including refusing to allow agents from the Environmental Protection Bureaus to conduct on-site inspections, failing to submit pollution-discharge status reports or submitting false reports, failing to pay pollution-emission fees, importing technology or installations that do not meet requirements, and transferring facilities that cause severe pollution to other entities that are unable to prevent or control pollution. However, the law does not specify the monetary amount of the fines to be levied, and the local EPBs have discretion to determine what the fine will be. A new amendment to the Environmental Protection Law in 2014 allows criminal charges to be imposed in some cases—article 69, the last article in the law, stipulates that criminal charges be imposed when violations of environmental laws are serious enough to constitute a crime.
Because weak enforcement has the effect of nullifying the power of China’s command-and-control environmental regulations, recent innovations have centered around how to strengthen it.
Sulfur dioxide (SO2) is one of most important air pollutants, and 80% of it comes from burning coal, primarily in power plants. In 1991, the Chinese government introduced the first emission standard; it was based on the stack height for power plants and allowed higher SO2 emission rates for higher stacks. The standard has since been revised several times to set the maximum SO2 concentration based on the age, fuel, location, stack height, and the meteorological conditions of the power plant. To be specific, in 1996, the MEP together with the State Bureau of Quality and Technical Supervision issued the “GB13223-1996 Emission Standards of Air Pollutants for Thermal Power Plants” to regulate SO2 concentrations. The standards set the maximum SO2 concentration at 1200 mg/m3 for coal with a sulfur content of more than 1%, and 2100 mg/m3 for coal with a sulfur content of less than 1%; the aim was to force plants using high-sulfur coal to install SO2 scrubbers—that is, to use flue gas desulfurization process. The standards were revised in 2003 (no. GB13223-2003) to permit all power plants built before 1997 to have a limit of 1200 mg/m3, to be reached by 2010; plants built after 1997 were limited to only 400 mg/m3, except for waste coal or power plants located close to a coal mine. The MEP revised the standards again in 2011, setting the maximum SO2 concentration for existing power plants in eastern and western China, at 200 mg/m3 and 400 mg/m3 respectively, and at 100 mg/m3 and 200 mg/m3 respectively for new power plants in eastern and western China. Western China was permitted the higher levels because it had not experienced as severe environmental degradation as had the eastern region and thus were granted more flexibility to stimulate economic development (Schreifels et al., 2012).
Besides regulating emission concentrations, the Chinese government also set a cap on total emissions. To meet the growing demand for electricity, a lot of small coal-fired power plants had been constructed before 2000, which were less efficient and thus heavier polluters. In 2007, to phase out these small power plants, the MEP issued the National Acid Rain and SO2 Pollution Control 11th Five-Year Plan, listing 679 small power plants that were to be closed. The central government’s 9th Five-Year Plan (1996–2000), had established a total emission-control policy to set the targeted total emission quantity of soot, industrial dust, and SO2 emissions and distributed this target to lower-level governments (Ministry of Environmental Protection and National Development and Reform Commission, 1996). The emission of SO2 decreased by about 18.8% from 1995 to 2000. The 10th Five-Year Plan (2001–2005) set a nationwide goal of reducing total soot, industrial dust, and SO2 emissions by 10%, and SO2 emissions in Two Control Zones by 20%, from 2000 to 2005 (Ministry of Environmental Protection, 2001a). Many regions failed to meet these targets, however, and by 2005 total SO2 emissions had increased 27.8% over the 2000 levels. The 11th Five-Year Plan (2006–2010) targeted a reduction of total SO2 emissions by 10% once again (Ministry of Environmental Protection and National Development and Reform Commission, 2007). It named 113 cities as key environmental-protection cities that needed to focus on pollution control. This eventually resulted in a reduction; total SO2 emissions in 2010 were 14.29% lower than in 2005.
In response to widespread concerns over heavy smog, the 12th Five-Year Plan (2011–2015) started the process of regulating particulate matter—PM10 and PM2.5—in addition to SO2 (Ministry of Environmental Protection, 2012a). The central government’s plan was to reduce national PM10 and PM2.5 concentrations by 10% and 5%, respectively, in 2015 relative to 2010. Given the fact of the spatial spread of air pollutants and learning from the government’s experiences trying to control pollution during the 2008 Beijing Olympics, 2010 Shanghai Expo, and 2010 Guangzhou Asian Games, which regulated air quality in several regions across administrative boundaries, the 12th Five-Year Plan thus started exploring a joint air-pollution prevention and control mechanism between several cities and counties which are geographically close. The plan identified 13 regions as key areas, encompassing 47 cities and accounting for 13.81% of the total national land area. These key regions each received a different pollution-reduction assignment from the central government. The regions of Beijing/Tianjin/Hebei, the Yangtze River Delta, and the Pearl River Delta—the centers of political and economic activity in China—were required to reduce their average annual PM2.5 concentrations by 6% between 2010 and 2015. Further, their success in achieving these targets would now be factored into the performance appraisals of government officials. Failure to achieve these goals would jeopardize the political careers of leading officials.
In 2013, to alleviate severe air-quality concerns, the State Council unveiled the Atmospheric Pollution Prevention Action Plan (State Council, 2013), known as the “Ten Articles,” with the goal of improving the national air quality by 2017. Specifically, the plan promised to reduce PM10 levels in cities around the country by at least 10% and PM2.5 levels in Beijing/Tianjin/Hebei by 25%, in the Yangtze River Delta by 20%, and in the Pearl River Delta by 15% compared to 2012.
Confronted with global warming, the Chinese government also promulgated policies to control the emission of greenhouse gases—China has accounted for 80% of the worldwide increase in CO2 emissions since 2008 (Peters et al., 2012). The 12th Five-Year Plan aimed to decrease carbon-emission intensity by 17% from 2010 to 2015 (National People’s Congress, 2011). In 2014, in the National Climate Change Plan (2014–2020), the government pledged to reduce carbon emissions per unit of GDP by 40% to 45% in 2020 compared to 2005 (National Development and Reform Commission, 2014). One year later, in 2015, responding to international pressure to reduce its CO2 emissions, the government published Enhanced Actions on Climate Change: China’s Intended Nationally Determined Contributions (State Council, 2015a), which claims that China will reduce its carbon-emission intensity by 60% to 65% by 2030 compared to 2005.
China has experienced severe water pollution over the past three decades. In 2003, to try to win the battle against water pollution, the central government published the 10th Five-Year Plan (2001–2005) for Water Pollution Prevention and Control for Chao Lake (Ministry of Environmental Protection, 2003a), Huai River (Ministry of Environmental Protection, 2003d), Liao River (Ministry of Environmental Protection, 2003e), Hai River (Ministry of Environmental Protection, 2003c), and Tai Lake and Dian Lake (Ministry of Environmental Protection, 2001b, 2003b), which are often referred to collectively as the “Three Rivers and Three Lakes.”2 The plan aimed to reduce chemical oxygen demand (COD) and ammonia nitrogen throughout the whole country by 10% by 2005 compared to 2000 and to limit total COD emissions and ammonia nitrogen emissions to 13 million tons and 1.65 million tons, respectively, and it presented detailed goals for different water-pollutant indices in different water basins. It also assigned targets to specific administrative regions. The Water-Pollution Prevention and the Control Plan aimed to limit COD emissions in the Huai River to less than 0.643 million tons by 2005, and held the Henan, Anhui, Jiangsu, and Shandong provinces responsible for ensuring that their COD emissions remained below 0.187 million tons, 0.118 million tons, 0.248 million tons, and 0.089 million tons, respectively (Ministry of Environmental Protection, 2008). Unfortunately, China failed to meet these targets. In 2005, as part of the 11th Five-Year Plan (2006–2010), the national government again assigned water-pollutant COD-reduction tasks to key rivers and made the promotions of local officials contingent on their compliance with the plan; this resulted in a 52% reduction of COD intensity per unit of added industrial value in 2010 compared to 2006 (Ministry of Environmental Protection, 2012b). The government summarized its work in the 11th Five-Year Plan as having made positive progress. The 12th Five-Year Plan (2011–2015) strived to reduce COD emissions in key rivers by 9.7% and to reduce ammonia nitrogen emissions in key rivers by 11.3% by 2015 compared to 2010. Total COD and ammonia nitrogen emissions in key rivers were required to be less than 12.925 and 1.207 million tons, respectively, by 2015 (Ministry of Environmental Protection, 2012b). Fortunately, according to a government environmental report, total COD emissions decreased by 12.9% and total ammonia nitrogen emissions decreased by 18% from 2010 to 2015 (Ministry of Environmental Protection, 2016). After achieving this major water-pollutant reduction, the State Council published the Water Pollution Prevention Action Plan (State Council, 2015b) in 2015, setting a new long-term goal of water-quality improvement, and a shifting of focus away from pollutant reduction. Specifically, the government planned to improve the quality of more than 70% of the water in seven major rivers (the Yangtze, Yellow, Pearl, Songhua, Huai, Hai, and Liao Rivers) by exceeding grade 3 in the national water-quality grade system by 2020 and increasing that percentage to over 75% by 2030. As of 2014, the proportion is at about 64.1 (Ministry of Environmental Protection, 2015a).
The central government established specific water-quality goals for urban areas—that is, in prefecture-level cities. It aimed to reduce black, odorous water in urban areas to less than 10% and specified that more than 93% of drinking-water sources should be valued at grade 3 or above. In addition to surface water, the quality of underground water was also under consideration. The central government planned to control the share of national underground water with the poorest quality to be no more than 15%.
Figure 1 summarizes the command-and-control policies for air and water protection. Yet even though the command-and-control regulations may seem a straightforward and direct way to approach regulating pollution, heterogeneous circumstances may complicate decisions regarding proper levels of standardization. Obtaining the information required to establish standards is often costly and the data are often not as accurate as expected. Enforcing the regulations often entails high monitoring and supervision costs. For this reason, in addition to the traditional command-and-control method, the central government also employs new economic policies, such as the cap-and-trade system, information regulation, green insurance, green credit policy, and the like, to curb pollution and promote the development of environmentally friendly industries.
Environmental Economic Policies
Cap and Trade
A cap-and-trade system, also referred to as the tradable permit system, is an environmental regulation method based on the Coase theorem. Cap refers to the setting of an aggregate pollution level (for pollutants such as CO2, SO2, and other forms of industrial waste) for a certain geographic area; trade refers to the government allocation of initial pollution rights and allows firms to buy and sell pollution rights freely. According to the Coase theorem, if trade in an externality is possible, and if there are no transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property rights. Cap and trade is popular in the field of environmental protection; for example, the United States started an SO2 cap-and-trade program in 1990 that covered almost all electricity generators, and the European Union created an emission trading system in 2005, which covered about 11,000 power stations and industrial plants in 30 countries.
China began allowing permit trading in 1987, when the Minhang District of Shanghai initiated a water-pollution-permit transfer system. In 1994, China’s EPA initiated air-pollution-permit trading systems in six cities; and in 2002, started an SO2 trading pilot program in the provinces Shandong, Shanxi, Jiangsu, Henan and the cities Shanghai, Tianjin, and Liuzhou as part of the 10th Five-Year Plan for Prevention of Acid Rain and SO2 Pollution. After 2007, another 11 provinces and cities—Jiangsu, Zhejiang, Tianjin, Hubei, Hunan, Inner Mongolia, Shanxi, Chongqing, Shaanxi, Hebei, and Henan—were approved as pilot areas for the cap-and-trade system.
China started a grand march toward a carbon-trading system in the early 21st century, as indicated by the National Development and Reform Committee’s publication of “The Notice of Starting Carbon Trading Pilots” in October of 2011 (National Development and Reform Commission, 2011). In 2013, seven pilot carbon cap-and-trade programs went online, in Beijing, Tianjin, Shanghai, Chongqing, Hubei, Guangdong, and Shenzhen, with the goal of establishing a nationwide carbon cap-and-trade system in 2015. Since then, heated debates on the carbon-trading system, particularly about the allocation of initial permits, have delayed the plan. Finally, in December of 2017, China started a nationwide carbon-trade market in its power-generation industries; this move is widely interpreted as a step toward a more ambitious system that will cover eight carbon-intensive industrial sectors.
The effectiveness of the cap-and-trade system in China has been questionable. Permit-trading volume in the secondary market is commonly used to measure the functioning of the cap-and-trade system. In China, the permit-trading volume is low, and most of the trading is fulfilled under the requirements and assignments of the governments, especially before 2005. For example, in terms of the water-pollution permit-transfer system in Shanghai’s Minhang District, there were only about 40 transactions between 1987 and 2002, involving a total of 80 plants (Zhang, Liu, Zhang, & Qin, 2017).
In 2002, China began piloting an SO2 cap-and-trade pilot program in seven provinces and cities with aid it received from the World Bank and the U.S. Environmental Protection Agency. As more provinces and cities started pollution-trading programs, the trading market gradually grew, but the development was dramatically uneven across regions. At the end of 2012, the MEP conducted special research on the pilot programs in the pollution permit trade market and reported that two-thirds of pollution permit-trading in the whole country occurred in Zhejiang province, and Jiaxing City in particular, accounted for one-third of the national pollution permit-trading volume (Zhao, Gu, & Gu, 2016).
Information disclosure works by alleviating the information asymmetry between corporate stated environmental-management procedures and their performance of those procedures. Polluters are required to mandatorily or voluntarily disclose environmental information about their production processes and products. The best-known information-disclosure program may be the United States’ Toxics Release Inventory (TRI) Program, which was started in 1986 and mandates that companies report the annual emissions of toxic chemicals at each of their US facilities. These information-disclosure programs are usually effective; they’ve been shown to have an impact on the future behavior of firms, resulting in lower levels of pollution. As expected, the TRI Program led to a meaningful reduction of chemical emissions (Konar & Cohen, 1997).
China started using information regulation for environmental protection purposes as early as 1989, when the Standing Committee of the National People’s Congress adopted the Environmental Protection Law, providing the legal basis for reporting environmental-impact assessments, pollutant emissions pollution, environmental accidents, and other information. However, for a long time, it only remained a principle. In 2003, the MEP published the “Bulletin on Disclosure of Corporate Environmental Information,” requiring firms that discharged pollutants at levels exceeding the limits specified by the government to disclose information about their previous year’s emissions by March 31 of every year. Mechanisms were put in place meant to ensure the firms’ compliance. In 2003 Executive Order No. 101 of the MEP required firms in all of the 13 polluting industries to undergo environmental audits and to publicize the results when applying for a public listing on the stock exchange or for refinancing in the stock market.3
In 2007, the MEP published the “Rules of Environmental Information Disclosure (Trial),” which clearly established the principle that governments and companies should make environment-related information available to the public.4 Since then, information disclosure in China has become more common. In 2013, the MEP required enterprises subject to intensive monitoring—that is, those on the annual list of enterprises whose emissions exceed 65% of total pollutants from enterprises, to self-monitor and to publicize emissions and company information in a timely manner. These enterprises are also supervised and monitored by the MEP. Many provincial Environmental Protection Bureaus started to identify their own key polluters and to establish monitoring platforms that enabled them to disclose information online in a timely manner. In 2014, the Standing Committee of the National People’s Congress amended the 1989 Environmental Protection Law, adding the requirements for information disclosure and public participation in a new chapter comprising articles 53 through 58.5 The new Environmental Protection Law was a turning point in China’s environmental regulations. Between April 2003 and October 2015, the Chinese government published a total of 23 total laws and policies about environmental information disclosure (Zhang, Mol, & Yang, 2017).
Ecolabeling is another significant method for helping to manage the environment; ecolabels inform consumers about the energy used during an item’s production or consumption, or both. The goal is to inform consumers about the policies and practices of companies whose products they buy and to allow consumers to impact companies’ decisions through their purchasing behavior, by penalizing companies with bad environmental practices and rewarding those with good ones (Borin, Cerf, & Krishnan, 2011; Ward, Clark, Jensen, Yen, & Russell, 2011).
There are 59 ecolabels in China. One of the most common is the China Energy Label, which requires certain products listed by the government to carry information about that product’s ranking on an energy efficiency index. Most studies find that consumers in China are willing to pay more for products that score high enough on the index to be considered “energy efficient” or “environmentally friendly” (Cai, Xie, & Aguilar, 2017; Shen, 2012); however, Wang and Zhang (2018) found that people did not want to pay extra for plastic bags that were certified to be 100% degradable.
However, there is little evidence that environmental-information regulation in China has improved environmental conditions. In a 2008 assessment of the effectiveness of implementing environmental information disclosure, most officers in the Environmental Protection Bureaus claimed that in the initial phase, they treated environmental information disclosure as a burden, and enforcement is quite weak (Zhang et al., 2017). Information regulation faces a lot of challenges. The environmental information disclosed by enterprises or governments is more than a year out of date, and the reported information is often inaccurate. To be specific, the data system is incomplete and highly fragmented, and different authorities use different standards to collect data for different purposes (Zhang et al., 2017).
Accidents related to environmental pollution happen frequently in China, affecting public health, social security, and ecosystems. According to statistics from the MEP, there were more than 14,000 environmental accidents between 1998 and 2006, leading to the loss of 1.24 billion RMB. Dong and Fu (2009) reported that on average, four environmental-pollution accidents happened every day. Faced with this dire situation, in 2007, the MEP and the China Insurance Regulatory Commission, published a guide to using environmental liability insurance to manage environmental risks in China (Ministry of Environmental Protection and China Insurance Regulatory Commission, 2007). It advocated developing environmental liability insurance during the 11th Five-Year Plan (2006–2010) and implementing it nationwide before 2015.
Six years later, in 2013, the Ministry of Environmental Protection and China Insurance Regulatory Commission (2013) published a more detailed guide. Unlike the one from 2007, this guide identified sectors in which the purchase of environmental liability insurance would be mandatory. These included enterprises in sectors related to heavy metals, including mining, smelting, tanning, lead-acid battery manufacturing, and chemical industries. Other enterprises with high environmental risks were encouraged but not required to buy insurance. The 2013 guide also requires the suspension of environmental subsidies to the enterprises that are required to purchase insurance but do not do so. The insurance status of these enterprises would also be reported to financial institutions such as business banks, potentially impacting companies’ credit rating and ability to secure loans. The year 2013 saw the beginning of pilot work on compulsory environmental liability insurance for companies in several specific industries in China.
In 2016, the central government released the “Guidelines for Establishing the Green Financial System” (People’s Bank, 2016), which suggested strengthening the relevant laws and administrative regulations on compulsory liability insurance. Then, in 2017, the MEP published a draft about the measures for environmental liability insurance management and solicited opinions from the stakeholders on how to further develop the insurance system (Ministry of Environmental Protection, 2017b), indicating the government’s intentions to further develop environmental insurance.
The Future Environmental Regulatory Regime in China
China’s move to market- or information-based regulations is fueled by the aspiration to learn from the experiences of the West and avoid the difficulties associated with command-and-control approaches. But the question remains of whether China can achieve success using these market- or information-based instruments.
Frustration with Environmental Economic Policies
Market- and information-based approaches do not seem to work effectively in China. For example, the SO2 cap-and-trade systems have been in effect since 2002 but are viewed as complete failures. According to a report by the Environmental Protection Bureau in Jiaxing City (Zhao et al., 2016), trading statistics indicate that the pollution permits mainly flow from the government to polluters, and that very few permits are traded between polluters or from polluters to the government unless the polluters are out of business or bankrupt and have to be sold. Because the secondary market in pollution-permit trading is inactive, achieving emission reductions still relies on commands from the government, lacking the cost-effectiveness expected from the cap-and-trade system. Dr. Wang, the chief economist at the Academy of Environmental Planning in the MEP, wrote that “most SO2 permit tradings are not real market behavior. They are carried out under the coordination of local environmental protection bureau. . . . In this kind of arranged transaction, the permit price is more guided by government, and does not reflect the relationship between supply and demand” (Wang, Dong, Yang, Li, & Yan, 2008). The SO2 permit-trading pilot projects in China have been described as “a ‘state-led’ pseudomarket, instead of a full and ‘autonomous’ market” (Tao & Mah, 2009). The lack of the technology needed to accurately monitor and calculate every polluter’s emissions, the inappropriate allocation of initial pollution rights, the absence of explicit legal basis, and the government’s regulation of trading prices are frequently cited as factors related to the inactiveness of the secondary market for pollution-permit trading (Yang & Schreifels, 2003; Zhang et al., 2017; Zhao et al., 2016).
The cap-and-trade system for carbon emissions has been piloted since 2011. According to the data that has been collected, the market for carbon-permits trading, like the one for sulfur dioxide, is also not active, leading to a doubt on whether the efficiency gain that the system is supposed to provide can be materialized (Xiao & Yin, 2017). In spite of this doubt, a nationwide carbon cap-and-trade system is being implemented. It is important to learn from the failure of the SO2 cap-and-trade program and of the carbon emissions pilot to avoid similar results in the carbon cap-and-trade effort. Reliable carbon data, fair credit allocations, and carbon-market transparency would be highly beneficial (Liu et al., 2013).
Concerns about the use of information disclosure for environmental protection are also widespread. According to The New Environmental Protection Law Implementation Assessment Report in 2015 produced by scholars from several Chinese universities (Wang, 2016), though the 2007 amended law encouraged information disclosure and public participation, 36% of cities in the assessment sample failed to provide a list of key polluters. Moreover, Xu, Zeng, and Tam (2011) revealed that the Chinese stock market responded only weakly to the disclosure of the negative environmental events by the listed companies, a much smaller response than has been seen in similar studies in Western contexts. Lyon, Lu, Shi, and Yin (2013) focused on companies’ positive environmental news, such as the winning of Green Company Awards, and found that stock prices did not respond to the release of positive environmental news. Scholars have discussed how to make environmental information disclosures more meaningful in China. Zhou and Yin (2017) argued that the manner of delivery plays an important role; if the bad environmental news is presented directly to targeted investors in an easily understood manner, then the stock market often penalizes associated firms with a negative price shock.
The development of environmental-pollution insurance in China is also stagnant. Despite the government’s great efforts to promote it, the performance of the environmental-pollution liability insurance market in China leaves much to be desired. Between 2007 and 2015, more than 45,000 pieces environmental liability insurance contracts were signed, and the accumulated risk security provided by insurance companies was over 100 billion RMB (Ministry of Environmental Protection, 2015b). According to data released by the MEP (Ministry of Environmental Protection, 2015b), in 2014, more than 5,000 enterprises were covered by environmental liability insurance; whereas at the end of 2015, about 4,000 enterprises were covered. The inactivity of the environmental-insurance market likely has two reasons: enterprises and insurance companies. From the demand perspective, enterprises are unwilling to purchase environmental liability insurance because of a small-firm dilemma (the insured are only interested in the liability that is capped under their assets, and not with the total potential loss) and some behavioral bias (the insured tend to become more risk-seeking in a region with small probability). An officer in the Jiangxi province stated that between 2013 and 2015, only 57% of insured enterprises bought environmental liability insurance, and none had renewed it so far (Sun, 2015). The situation was similar in Shenzhen, a city pilot region. According to a survey of 239 enterprises in Shenzhen in 2014 (Zhong, Chen, Yang, Che, & Yuan, 2016), only about 52% voluntarily purchased environmental pollution liability insurance. The major reasons for remaining uninsured included a lack of basic knowledge and understanding about the insurance and the high fees. The survey also found that about 45% of the enterprises that had renewed their policies had done so because of the enforcement of the local government. To insurance companies, the supply of green insurance was limited and unsatisfactory. In 2017, only six companies were supplying environmental liability insurance (Peng & Deng, 2017). Most insurance companies did not offer risk-management services because they lacked the technology and relative data on environmental risk evaluation (Li, Shen, & Yuan, 2016). Table 1 shows the numbers of insured enterprises in five pilot provinces from 2011 to 2015.
Table 1. Number of Insured Enterprises in Five Pilot Provinces (2011–2015)
Note: (a) Data for 2011, 2013, and 2015 are from Li, Shen, and Yuan (2016).
(b) Data for 2014 are from The 2014 list of enterprises insured by environmental liability insurance at the website of MEP.
Two observations are clear from the table. First, insurance purchases increased sharply in 2013 in the pilot provinces because the requirement to purchase insurance was mandatory. However, this number declined thereafter, a signal that the market cannot sustain itself when governmental enforcement weakens. Second, the insurance purchase amounts to 3,196 in the five pilot provinces, but the total national number of purchases was only about 5,000. This suggests that few companies actually purchase insurance when it is not mandated. The data as of 2018 did not suggest that environmental insurance is likely to become a primary mechanism for managing environmental risks in China.
Strengthening the Enforcement of Command-and-Control Regulations
Faced with mounting environmental challenges, the Chinese government has attempted to solve the enforcement problems that have plagued command-and-control approaches even as it has experimented with new market and information regulations. A number of methods to strengthen enforcement have been tried, many of which reflect China’s unique political, economic, and cultural characteristics.
Holding Government Officials Accountable: Environmental Goals as a Key Performance Indicator (KPI)
Before 2005, although the central government had established control zones in cities with high levels of acid rain to reduce SO2 emissions, the effect was small and temporary. From 2000 to 2005, SO2 emissions increased by 27.8%. To encourage the enforcement of pollution reduction, in the 11th Five-Year Plan (2006–2010), the central government implemented a new requirement that progress towards the pollution reduction target should receive midterm evaluation in 2008, with final assessments in 2010, and that the results should serve as KPIs for local officials (Ministry of Environmental Protection and National Development and Reform Commission, 2007). In the 12th Five-Year Plan (2011–2015), environmental performance became a KPI in the overall performance evaluation system of officials (Ministry of Environmental Protection, 2012a). Officials who failed to meet the environmental targets would have limited chances for promotion and would be asked to take part in a political conversation with high-level government representatives. In May of 2014, the MEP issued interim regulations about the nature of the political conversation (Ministry of Environmental Protection, 2014), stipulating 11 situations in which such political conversations should be applied. Categorizing environmental performance as a KPI led to satisfactory outcomes in pollutant reduction. After the central government imposed new regulations in 2005 by including emission quotas in the performance-evaluation systems for city mayors and party secretaries, the control-zone cities experienced a significant decrease in SO2 emissions (Chen, Li, & Lu, 2018).
When the national government specified the total quantitative emission-reduction targets for chemical oxygen demand (COD), one of the major water pollutants in the 11th Five-Year Plan, it also linked the fulfillment of these targets with the promotion of local officials. In the 12th Five-Year Plan, a total of nine binding environmental targets were implemented. Thanks to the policy, COD more or less decreased (Kahn, Li, & Zhao, 2015).
China plans to popularize this approach. In 2015, China started a new initiative on natural resource audits. The audits were implemented nationwide in 2018. Based on this initiative of natural resource audits, the Auditing and Accounting Office (AAO) develops natural resource and environmental accounts. When a governmental official leaves office, the AAO will audit the changes in natural resource and environmental accounts during his or her term. A clear deficit would significantly damage that official’s political career. In addition, starting in 2016, the central government sent “working teams” to local governments to monitor the enforcement of environmental regulations. The working teams solicit complaints from the general public, carry out independent investigations, and hold environmental officials accountable if they have failed in their responsibilities.
It is still unclear whether holding environmental officials accountable for their performance will better align the central government and local governments on the interests of protecting the environment and natural resources or whether this approach would balance the trade-off between environmental protection and economic development. More studies need to be conducted to address these concerns. However, it is clear that this approach requires a centralized political and administrative system, and therefore, it is quite unique for China.
Leveraging the Power of Banks: Green Credit Policy
The Chinese government has also attempted to take advantage of its control over financial institutions to regulate the environment by encouraging green or environmentally friendly behaviors.
For instance, the Chinese government has employed a green credit policy to control credit to high-polluting industries and to support credit to environmentally friendly industries. The green credit policies in China started in 2007, when the China Banking Regulatory Commission asked all the banks in China to strictly enforce loan risk-prevention and control for enterprises in high-energy consumption and high-pollution sectors, aiming to slow the growth of polluting industries (People’s Bank, 2007). In 2009, the MEP publicized a notice to push for collecting and recording environmental violations and environmental-assessment information of enterprises in the credit reference system of the People’s Bank (Ministry of Environmental Protection, 2009). In 2010, the National Development and Reform Commission, central bank, China Banking Regulatory Commission, and China Securities Regulatory Commission jointly published a notice requiring financial institutions to actively give special credit support to circular economic programs. In 2012, the China Banking Regulatory Commission promulgated the Green Credit Guidelines to standardize the means by which banking financial institutions could carry out the green credit regulations.
Green credit policies restrict access to bank loans for enterprises with poor environmental performance, increasing the costs of polluting environment. To incentivize banking financial institutions to carry out these green credit policies, in 2014, the China Banking Regulatory Commission published a notice requiring banks to submit annual self-evaluations of their green credit implementation before the end of May (China Banking Regulatory Commission, 2014). The assessment index includes the amount of loans for energy-saving projects, loans for environmental-violation-related enterprises, carbon reduction per 100 million loans, and many other measures.
The development of green credit policies has received attention from the academy. According to Zhang, Yang, and Bi (2011), Jiangsu province fully integrated green credit policy with its existing corporate environmental information program, whereas at the national level, green credit policy was not fully merged with existing environmental management system. Faced with continuing pressure from the government, financial institutions have started to pay more attention to sustainable investments. Scholars have found that historically, the polluting firms in China have received more loans from banks than nonpolluting firms, but recently that trend has changed (Li, Yin, & Liu, 2017). In 2009, the nationwide loans for energy-saving projects were 856 billion RMB, and in 2015, according to social response reports in the banking system, the green credit balances of 21 major banks in China became 7010 billion RMB, accounting for 9.68% of the total balance of loans, with the Industrial Bank of L.T.D. having the highest percentage at 22.85, and Minsheng Bank having the lowest percentage at 0.57. In a study of the earliest pilot program in the city of Jiangyin, the green credit policy was found to have significantly improved the environmental performance of enterprises, warranting nationwide promotion (Sun, Wang, Yin, & Zhang, forthcoming).
In the early 21st century, the environmental regulatory system in China is entering a new era. As one of the world’s major greenhouse-gas contributors and an environmental hotspot, China’s commitments to and the actions it takes on environmental protection will be critical in creating a more sustainable planet in the future, particularly to address the challenge of global warming.
Over the last three decades, China has focused on developing regulatory standards for air, water, and solid waste, among many other pollutants. This regulatory system primarily follows a command-and-control approach and has often been criticized for its failure to curb China’s increasingly severe environmental degradation.
In the future, the Chinese government may experiment with two plans. The first is to utilize more market mechanisms and information tools to enable and incentivize more stakeholders to develop and enforce environmental regulations, including consumers, nongovernmental organizations, and communities; this will include the cap-and-trade system, information disclosure, and environmental insurance. However, the existing evidence shows that the usefulness of these new instruments is limited.
Another route is to develop new mechanisms to strengthen the enforcement of the traditional command-and-control regulations. Examples include integrating environmental performance into the KPI system of government-official appraisal and leveraging the power of financial sectors. These approaches are footnotes to the emergence of the belief that environmental authoritarianism may be the best way to effect change; that is, a system in which authoritarian rules may prove to be capable of addressing complex environmental pressures in authoritarian regimes (Beeson, 2010). More studies need to be conducted to evaluate at the effectiveness of these new approaches and investigate the mechanisms by which these new approaches may achieve success.
The authors greatly appreciate the financial support received from the National Natural Science Foundation of China (No. 71322305, 71774107, 71632007, 71690241, 71421002) and the Shanghai Institute of International Finance and Economics.
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