Pollution: It Doesn’t Pay to be Naughty
By Feng Hu 10 December, 2014
Violation cost surges with daily fines, new standards & discharge permit trading in a bid to push China to go clean
For a long time, it has been cheaper for business to pollute than to pay for wastewater treatment. Now, it looks like this will come to an end. Here are the reasons:
- The amended Environmental Protection Law will be effect on 1 January 2015;
- MEP has provided clear guidance on daily fines, seizure of pollution sources and information disclosure; and
- State Council recently called for better monitoring and law enforcement, urging local governments and environmental authorities to act with “zero tolerance towards pollution violations”.
So will the new fines be punitive and enforced in the New Year? Here is an example from the textile industry…
Warning! New daily fines can be as high as 30X of the previous fine
Let’s take a small textile dyeing factory in Zhejiang as an example. Assuming, the factory violated the wastewater discharge standard and discharged a total of one tonne of COD during the monitored period, the violation fine at the start of 2014 was RMB1,400. It is clear that it is cheaper to pollute than to install equipment to treat the wastewater.
From 1 April 2014, this violation charge doubled to RMB2,800, as the COD discharge fee (which is used to calculate the fine) was doubled to RMB1.4/kg for Zhejiang. So despite the fact that a more stringent wastewater discharge standard for textile dyeing and finishing being in place and a doubling of discharge fee, it is still cheaper to pollute.
However, with the new Environmental Protection Law taking effect in 2015, factories will face daily fines for pollution violations. That means, starting from 1 January 2015, for 1 tonne of COD, the violation fine could see a 30x increase from RMB2,800 to a high of RMB84,000, assuming a 30 day review period (see table below).
Note that the annual average COD discharge per factory for textile manufacturing is 32.7 tonnes in 2011.
With the new Environmental Protection Law, the violation fine could see a 30x increase from RMB2,800 to a high of RMB84,000, assuming a 30 day review period
More than “daily fines”: for serious violation, the MEP may also seize assets, limit production or even close production facilities
It is clear that the coming new regulation on “daily fines” will greatly increase the cost of violating environmental regulations and standards. But, “daily fines” is not the only new punitive measure in 2015.
For serious violations, the MEP may seize assets, limit production and suspend or even close production facilities; companies’ environmental performance will also be linked with access to bank loan, special funds and government procurement (read more here).
However, setting more stringent standards and putting a higher fine do not mean that the government is anti-business. On the contrary, the MEP is pro-business, but wants it to grow in a cleaner way.
Revisions to textile standard to encourage collective wastewater treatment
Signals that MEP is pro-business …
The existing wastewater discharge standard for textile dyeing and finishing is tough: many small factories face shutdown risk, given the significant capital expenditure to comply plus high operating costs which will eat into their limited profit margins (more here). SMEs cannot afford to treat their wastewater on their own. This view was also shared by Dr. Anthony Ma of the Hong Kong Productivity Council and Hu Kehua of China National Textile and Apparel Council. In addition, Mr. Hu Kehua also worried that “without strong monitoring and punishment, the new standard might “force” some small factories to illegally discharge their wastewater.” So is there a way out for SMEs?
Under the revision, an industrial park with specialized treatment facilities can be seen as “a factory” to meet the discharge limits for textile dyeing & finishing wastewater
The answer is collective treatment of wastewater. In November, the MEP announced a revision to the existing discharge standard regarding the discharge boundary of a factory. An industrial park (including industrial parks, development zones and industrial clusters) with specialized treatment facilities for textile dyeing & finishing wastewater, can be seen as “a factory”. This means, the industrial park as a whole will comply with the limit previously set for a factory, and factories within this industrial park can discharge their wastewater into the collective treatment facility at a higher limit (find the proposed revision here). This revision is currently undergoing public consultation and is expected to pass soon.
…but pro-business is not at the expense of the environment
This revision however, does not compromise on the requirement of wastewater discharged to the centralized wastewater treatment system: it is the same. But, in the meantime, it helps SMEs within industrial parks find a way to reduce their treatment cost. The MEP itself did the cost-benefit analysis to compare collective treatment with individual treatment. Collective treatment simply makes economic sense: it is more efficient, economical and saves land use as summarized in the table below:
The revision makes economic sense…but doesn’t make the standard “less strict”…
This proposed revision clearly points that the government is pro-business. And the fact that such revision doesn’t make the standard “less strict” also signals that pro-business doesn’t have to be at the expense of the environment.
If we look at the big picture, this War on Water Pollution will needs more than RMB2 trillion (USD330 billion) investment. The government will not be able to fight this war alone: firstly, it will encourage cost-effect ways to clean up, as shown in the above; secondly, it will seek private investment, both domestic & foreign (read more in “2014 Investments in Chinese Waters“); moreover, it is also trying to mobilize private investments by encouraging public–private partnerships (read more in China Water Investments: 3 Thoughts) and introducing new market mechanisms such as wastewater discharge permit trading.
New incentive to clean up: trading wastewater discharge permits
In addition to wastewater discharge standards for various industries, companies operating in China also need to pay to obtain a permit from the MEP in order to discharge wastewater pollutants. Currently, these discharge permits are managed at a provincial level. However in November, the MEP issued the “Interim Measures on Managing Pollution Discharge Permits”, elevating the management of these to a national level effective from 1 Jan 2015.
Wastewater discharge permit sets the max amount of pollutants to discharge & hence max production capacity
This wastewater discharge permit sets the maximum amount of pollutants that a company can discharge every year, and hence sets the maximum capacity of production. This system aims to control the total quantity of the discharged wastewater pollutants.
However, it can be also used to promote more efficient treatment if factories are allowed to trade their “surplus discharge” by selling to a factory that wants to expand production.
Trading of discharge permits is piloted in several provinces …
,,,if successful, State Council will establish a national permit trading market
Such trading of discharge permits is currently piloted in several provinces and will be expanded to other selected provinces by 2017. Clear guidelines have been provided by the State Council for this. If these pilots are successful, State Council will establish a national discharge permit trading market providing an incentive framework to clean-up.
Will factories buy in? The answer is yes. Zhejiang has an established pollution discharge permit trading market. In a recent auction of permits, a Zhejiang textile company spent a total of RMB12 million for 41.06 tonnes of COD. This amounts to RMB292/kg of COD, 200x the actual discharge fee of RMB1.4/kg!
In a recent auction, a Zhejiang textile company spent RMB12 million of 41 tonnes of COD paying RMB292/kg of COD … 200x more than then actual discharge fee of RMB1.4/kg
Such aggressive bids should indicate the seriousness of the MEP in enforcing discharge standards – the new daily fines are essentially establishing a floor price for the trading of “surplus discharge” amongst factories. Factories will also have to take into account profits lost through production forgone if they are unable to obtain such discharge permits.
During a textile workshop organized by the MEP, one textile factory told us that they foresee the tightening of environmental regulations and they are also no longer competing in the global market on low price: quality is now more important. They are willing to pay to upgrade their wastewater treatment facilities or buy more wastewater discharge permits to scale up production.
China wants “to force the economy to transform and upgrade”…
Factories’ mindsets are changing. The government is also pushing for change. State Council recently reiterated that through enforcement of law and regulation, it wants to “to force the economy to transform and upgrade”.
It seems everyone is on board and heading in the same direction.
For regulations & policies related to public–private partnership, click here.
Investment in water
- China Water Investments: 3 Thoughts – It seems the water industry, government and consumers are all finally ready for a water tariff hike. Debra Tan shares her thoughts on the investing in China’s water industry – wastewater vs water supply, rural markets & the growing opportunities for private capital.
- 2014 Investments in Chinese Waters – With the government encouraging public & private sector water spend, check out investments in 2014 from agriculture, wastewater, water infrastructure, drinking water to Israeli cleantech
Water policy review
- Christmas Came Early – Xi’s carbon emission promise, increased regulatory risk are a few reasons why Debra Tan thinks Christmas came early for China’s waters. Industry beware; as China is expected to aggressively enforce some of these new polices
- 2013 State of Environment Report Review – MEP’s 2013 State of Environment Report says the ‘overall environmental quality was average’ but a closer look reveals mixed news, whilst discrepancies found in sets of pollution data add uncertainty of the real state of the environment
- Pollution: 5 Reasons to Remain Optimistic – Given the recent release of depressing groundwater & soil pollution statistics, Debra Tan gives us 5 reasons to stay optimistic – from changes in the law to water tariff hikes in Beijing
- Prioritising EIA Reform in China – Fraudulent & substandard EIA reporting persist. How does China’s EIA process compare to the US & HK? We examine the reforms in store for companies & EIA assesors
- The War on Water Pollution – Premier Li has just declared war on pollution. Tan expands on the government’s stratagems & offensives and fundamental changes required to shore up the MEP’s arsenal in order to wage a successful war
- MEP Reform: From Mountaintop to Ocean? – The MEP is currently regarded as too weak to punish polluters due to dispersed authority & overlapping functions. Given the ‘war on pollution’, is reform to make a Super MEP necessary to improve China’s ‘mountains, water, forest, farmland & lakes’?
- Dirty Thirsty Wars – Fashion Blindsided – CLSA report titled “Dirty Thirsty Fashion: Blindsided by China’s water wars”, examines how China’s water risks could blindside the US$1.7 trillion global fashion industry. Is this the end of fast fashion? Debra Tan expands
- OEM: Stuck in the Middle – China National Textile & Apparel Council’s Hu Kehua on challenges ahead for textile OEMs in meeting the new textile industry standards and brands’ product needs and why joint efforts all parties along all stages of the supply chain including design are needed to move towards a circular economy
- 5 Takeaways from Aquatech China 2014 – How real is China’s war on pollution? Will it translate into a growing domestic water market? See what local & foreign industrial leaders have to say in Shanghai and check out our 5 key takeaways from Aquatech China 2014
- Industrial Water: Meeting New Standards – Dr. Anthony Ma from Hong Kong Productivity Council introduces HSBC’s new programme to help industries meet water standards and calls for government support to the factories to install pollution control and efficiency improvement facilities that cost millions of RMB.
- Textiles: Enzymes to the Rescue – Dupont’s Scott Brix on how enzymes can help reduce water & chemicals in textile manufacturing, offering the industry a way forward in water efficiency and pollution
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