8 Game-Changing Policy Paths

By China Water Risk 10 February, 2015

China has shifted from ‘economy vs environment’ to ‘economy & environment'. Here are 8 key policies pushing it

Beijing is covering all the bases with a more powerful enviro law, securing finance & tougher industry standards
Water's priority becoming clear with un-siloing of sectors, coming out on top of govt official performance & energy
Pushing more hollistic raw material management with water use/discharge permit trading & circular economies

There are big hopes for Chinese waters in 2015. Policies, regulations, laws & standards introduced and implemented over the past few years have laid the groundwork for change. There has been a fundamental shift from ‘economy vs environment’ to ‘economy & environment’ as Beijing shepherds China towards water security:

Here is a summary of 8 game-changing policies:

1. New Amendments to Environmental Protection Law: More power to the environment & people

On 24 April, 2014, the Standing Committee of the National People’s Congress passed the amendments to the Environmental Protection Law. The amended law gives more weight to officials to punish environmental violations. The new law came into effect on 1 January, 2015. They key changes are:

  • Criminal & Other Punishments: Enterprises, institutions and manufacturers will not only face fines but could face criminal charges
  • Penalties & Fines: no cap and can be applied daily (more here)
  • Shut Down: for overdue pollution treatment
  • Naming & Shaming: of violating enterprises
  • Environmental Impact Assessment (EIA): in the event of fraudulent EIA report content the assessors will be held jointly and severally liable with the enterprise responsible for project construction  (more here)
  • Government Officials Environmental Protection Target Responsibility & Appraisal System: reporting on achieving environmental targets by State Council, provincial, local governments & other responsible officials is now mandatory (see below)
  • Litigation & Civil Suits: social organizations registered with civil affairs department and engaged in litigation on environmental issues for more than 5 years can file a law suit to the People’s court  (more here)

Game-changing because: This is the first legislative change in the Environmental Protection Law since it was enacted in 1989. Most importantly, the new amendments enshrine environmental protection as the country’s basic policy stating that economic and social development should be coordinated with environmental protection. This is a fundamental shift in planning China’s future growth.

 The new amendments enshrine environmental protection as the country’s basic policy
The new law in effect from 1 Jan 2015, gives more power to the MEP and public

In addition, the amendments gave more teeth and tools for the Ministry of Environmental Protection (MEP) to wield over enterprises. Loopholes were also closed providing a strong base for other environment related policies and standards. Finally, the new law also gives more power to the people in trying to make civil ligation easier.

Perhaps the strongest public stance was from China’s Supreme People’s Procuratorate which vowed to severely punish government officials who abuse their power to cover up environmental crimes. It said in June 2014, that official dereliction of duty and malpractice in ecological & environmental protection in 2013 alone has caused: 25 deaths; 12 injuries; and RMB3.1 billion (USD498 million) in economic losses.

To better implement the revised environmental protection law, the Supreme People’s Court has set up a tribunal for environment cases. The tribunal will hear civil cases involving pollution, exploitation of natural resources and conservation of natural environment such as forests and rivers. It will also hear appeal cases forwarded from lower courts, supervise the trial of environment cases at lower courts and draft judicial explanations about such cases.

China’s Supreme People’s Procuratorate vowed to severely punish officials who abuse their power to cover up environmental crimes …
… official dereliction of duty in 2013 caused 25 deaths and RMB3.1 billion in economic losses

The procuratorate also called for enterprises involved to share the blame for serious incidents of pollution but in reality, prosecutors admit the difficulty in finding witnesses or informants in pollution-related crimes. Last year, several cities and provinces have turn to “whistleblowing incentives” rewarding whistleblowers RMB20,000 to RMB30,000 for reporting material pollution.

The impact of the law has already been seen with significant fines and sentencing of violators. In January 2015 Huangchangping Mining was fined RMB1 million and its manager arrested for polluting a reservoir. In the same case 2 local environment officials were sacked for lax supervision.

A recent circular released in 2015 by the Supreme People’s Court, MEP & Ministry of Civil Affairs, also outlines support from the Supreme People’s Court for NGOs fighting against environmental violations. Any qualified “environmental NGO” will be able to sue violators across the country. The document clarified that court charges shall be paid by the defendant (in this case, violators) if the plaintiff wins the lawsuit. This will help reduce litigation costs and encourage more environmental NGOs to fight against violating companies.

Watch out for more civil suits, daily fines, violators being shutdown, MEP blacklists and EIA reform in 2015.

2. Financing to Play a Dual Role: Relaxed for development of the environmental services sector & tightened for polluting companies

Cleaning up and protecting water resources requires money. The government has been relaxing investments into the water sector, encouraging private investments as well as foreign investments. On 26 November, 2014, State Council issued guidance on promoting public-private partnerships in key sectors and providing financial incentives such as subsidies and subsidised loans for investors, to facilitate easier market access to seven specified sectors; most are related to water:

  • Ecological & environmental protection
  • Agriculture & water conservancy projects
  • Clean energy
  • Infrastructure & grid construction for telecommunications, power, oil & gas
  • Natural resource protection including oil, gas & mineral reserves
  • Transportation
  • Health care & elderly care services

This was followed by more encouragement from the Ministry of Finance and the NDRC, which issued subsequent guidelines in late November & December regarding development of public–private partnership projects. Just in case there was any doubt as to the wishes of the government to develop a third party environmental services industry, State Council issued “Opinions on Promoting the Third-party Treatment of Environmental Pollution” on 14 January, 2015. This states the government will develop innovative ways of financing & related credit services and also promote market mechanisms to support “green business”.

At the same time, State Council is moving ahead with credit evaluation plans. In July 2014, the Enterprise Environmental Credit Evaluation scheme took shape with several provincial governments planning the implementation of this across the 16 Heavy Polluting Industries with the finance community. The evaluation results of companies’ environmental performance will either result in limit access to capital, or provide preferential lending rates.

Game-changing because: Relaxing investments into the environmental service sector is part of the government’s continuing efforts to push the growth of its Strategic Emerging Industry #1 (Energy Saving & Environmental Protection). This is expected to grow to around RMB4.5 trillion. On the water front, more than RMB6 trillion of investment is expected; RMB4 trillion on water infrastructure and RMB2 trillion to tackle water pollution.

Multiple recent polices announced to encourage private capital … the aim is to develop a 3rd party environmental services industry

China is turning to private capital to help reduce provincial debt burdens and to ensure overall water security. Recent government announcements clearly signal this direction. Environmental services will be a sizeable contribution to the country’s economy.

Indeed, NDRC and the Ministry of Finance plan to set up a RMB50 billion National Environmental Fund to provide loans with zero or low interest rates; priority will be given to: 1) factories using third-party treatment services, and 2) environment-related enterprises.

Whilst RMB50bn fund is set aside for preferential loans to enviro-related services…
… State Council is tightening credit to companies with environmental pollution records

As for Enterprise Environmental Credit Evaluation, plans announced last July is only part of the jigsaw. It fits into the grand “National Social Credit System Plan 2014-2020” released by the State Council in June 2014 which aims to establish a government-led national social credit system to assess individuals and government agencies on areas ranging from taxes, municipal bonds to judicial credibility. The four key areas of focus are administrative affairs, commercial activities, social behavior, & the judicial system. This national credit system (drafted by the NDRC and the Bank of China) will punish and reward companies, individuals and officials accordingly and is expected to be in place by 2020.

Financial punishments and incentives are clearly interlinked when it comes to pollution. Risks & opportunities are abound, but you have to be on the right side.

3. Industrial Standards: New and/or ‘more stringent’

The government plans to spend RMB211 million to amend and consolidate 600 existing environmental standards into about 300 by 2015. The government is also targeting heavy polluting industries, demonstrating it has understood the industries for key concern. In the past two years we have seen the revision of existing standards and release of new ones in accordance to the 12FYP for National Environmental Protection Standards.

These new & improved standards should help meet the 12FYP pollution emissions targets and the Three Red Lines. Below are some of the key revised/new standards in the particularly polluting industries being targeted by the government:

Game changing because: Prior the above stricter standards, the conflicting wastewater discharge and raw water quality standards plus inadequate pricing have led to low water prices and high untreated wastewater discharge. They have also failed to encourage companies to adopt water-saving technologies in their production facilities. These combined with an inefficient wastewater fee collection system have meant that it is cheaper to pollute than to clean up. This vicious cycle is well-explained by Professor Ma Zhong, Dean of the College of Environmental Sciences of Renmin University of China in his interview with us here.

Previously, standards were set so it was cheaper to pollute than clean-up but new industrial standards tackle this for direct discharge on an industry-by-industry basis

The new standards bypasses vicious cycle for direct discharge into bodies of water by setting more stringent industry standards with discharge limits that are not dependent on the quality of water bodies the wastewater is being discharged into. The approach has been carried out on an industry-by-industry basis; tackling issues be it pollutant or location specific for that industry.

Though all of the above industrial standards were in put in force prior to 2015, it is this year by which all enterprises must comply with these standards. Moreover, many of the standards are the first of its kind like the wastewater discharge standard for livestock and leather industry. Changes for these industries will be significant in 2015.

Priority is to tackle pollution so less stringent indirect discharge to centralised treatment is now encouraged…

However, many industry associations have complained that the standards are too stringent and too costly to meet. As a result, the government relaxed the standard for some sectors such as textiles late last year, allowing factories ‘less stringent’ indirect discharge to collective/ centralised wastewater treatment facilities. Some NGOs have raised concerns over this relaxation as the mismatch in industrial discharge standards & water quality standards for industrial wastewater treatment is yet to be addressed.

But centralized treatment plants are not subject to new standards exposing a pollution loophole …

Nevertheless, the stringent direct discharge limits still remains in place and this should discourage illegal discharge. Collective treatment will make monitoring easier for the government which we expect will move to close this loophole in the soon-to-be-released Water Pollution Prevention & Control Action Plan.

Know your industry exposure to new standards.

4. Water Pollution Prevention &  Control Action Plan: Key in holding one of the Three Red Lines

In 2014, the government declared war on pollution on air, water and soil. An action plan is expected to be in place for each of these elements. The Air Pollution Prevention & Control Plan was released in 2014. The Water Pollution Prevention & Control Action Plan was also expected to be released in 2014 to date is not announced. Rumours say it has passed State Council’s internal review and they are now deciding its release date. We expect this to be released just before/ during the National People’s Congress meetings in early March 2015.

The plan is expected to clearly define stringent pollution control targets, aiming to significantly reduce industrial pollution, manage municipal pollution and recover rural rivers. It will also likely:

  • Set targets to improve overall water quality by 30% to 50%;
  • Highlight the importance of water pollution control in the most polluting industries like textile, leather and paper & pulp (see changes in industry specific standards aove);
  • Encourage investments in technologies such as wastewater treatment, recycling and membrane technology; and
  • Encourage third-party wastewater treatment services and promote public-private partnership in investment of wastewater treatment plants.

Game-changing because:  The plan outlines action in order for the government to enforce the ‘pollution red line’ of the Three Red Line Policy. As discussed above, there is a mismatch in industrial discharge standards & water quality standards which means makes it cheaper for industry to pollute than to clean up. In preventing, controlling and reducing water pollution, we expect the plan fully to address this mismatch.

… pollution loophole in centralized wastewater treatment expected to be addressed in the new water pollution action plan
… new plan expected to be issued in late Feb/early March

This could tighten treatment quality from current wastewater treatment facilities which are already over-burdened with excessive loads. Indeed, NGOs are worried that centralised wastewater treatment could bring about centralised pollution: from 2008 to June 2013, wastewater treatment facilities average 1.4 violations per facility – more here.

More investment in current wastewater treatment facilities to meet new standards may be required and violating treatment facilities may be subject to fines, so watch this space before making any wastewater investments.

5. Provincial Report Cards: GDP is ‘out’ & Water is ‘in’

In 2013, the Central Committee of the Communist Party stated in its “Decision on Some Major Issues Concerning Comprehensively Deepening the Reform” that “we will improve the development progress evaluation system and correct the bias of evaluating political achievements merely by the economic growth rate. We will increase the weight of other evaluation indicators such as resources consumption, environmental damage, ecological benefits, excess production capacity, science & technology innovation, production safety and new debts; while put more emphasis on employment, residents’ income, social security and public health.”

Building on this, 13 February, 2014: ten ministries including the MEP, MWR, NDRC, MoF and six other ministries, jointly issued the “Work Plan on Implementing Assessment of the Most Stringent Water Management System”. This states the result of water assessments will be a performance indicator for the evaluation of provincial government leaders. Moreover, provinces with outstanding performance will be given priority in relevant future projects; while, those who fail the assessment, need to report to the State Council setting out corrective measures in writing within one month of the failed assessment. Reporting on achieving environmental targets by State Council, provincial, local governments & other responsible officials is now mandatory according to the new environmental law.

Last year we also saw several provincial governments announcing that they will remove the GDP indicator from performance reviews. In July 2014, both Shanxi and Fujian removed the GPD indicator in the performance reviews.

Game changing because: The environment has suffered as a result of the ruthless pursuit of GDP growth in the past.

Reporting on achieving environmental targets is now mandatory for all officials under the new environmental law…
… clear signal to provincial officials that China’s priorities are shifting to re-balance the economy & environment

Removal of GDP as an indicator and the addition of water management in performance reviews demonstrates to provincial government officials that China’s priorities are shifting and they need to rebalance the economy & environment in order to march towards an “ecological civilisition”. The combination of these changes will also help enforce the Three Red Lines set out in the “Most Stringent Water Management System”.

Shanghai’s removal of GDP growth target in 2015 signals more changes to come. Within the municipality, at the sub-district level, there will be no indicator related to economic development and investment in performance reviews. This makes Shanghai the first major city/municipality in China to remove such indicators, clearly demonstrating a shift in focus towards quality growth.

Shifts in realignment in reporting will bring about new priorities – ‘old habits’ may not persist and ‘the usual way to doing things’ may not work in 2015.

6. Water-for-Coal Plan: Water limits the development of China’s energy bases

On 17 December, 2013, the MWR introduced the “Water Allocation Plan for the Development of Coal Bases”.  This Water-for-Coal Plan pertains to the development of large scale coal bases in China and includes:

  • Total water allocation control for coal bases to be “taken seriously”
  • Water use must be within provincial quotas
  • Coal mines & coal fired power plants must coordinate water usage
  • Implementation of water efficiency measures for the development of coal bases
  • Construction of coal mines must complete feasibility reports to be submitted to the MWR & other bodies for approval
  • Implementation of water efficiency measures for new build coal-fired power with a “first save water, then use water mentality”; power plants in particular those located in the North to prioritise water reuse & water efficient technologies encouraged
  • Stricter use of surface water
  • Prohibited use of groundwater with the exception of mine drainage
  • Water pollution control for coal bases & coal-fired power plants through treatment of wastewater & mine drainage
  • Restrictions on the transfer of water use rights by the coal base

This Water-for-Coal Plan is part of the “Most Stringent Water Management System” and helps ensure that the nation stays within the Three Red Lines.

Game changing because: The Water-for-Coal plan is a prime example of the un-siloing of sectors. It is a key policy to address China’s water-energy nexus and it indicates that regional water availability in China will dictate plans for future coal development. In short, it is saying water security  is more important than energy security.

The Water-for-Coal plan is a prime example of the un-siloing of sectors & that water comes first
Watch the water-energy-food nexus becuase what happens here matters for other industries

This view is echoed by Li Junfeng (Director General of the National Center of Climate Change Strategy Research at the National Development and Reform Commission). At the same time, energy security is also important. Some water experts feel that water needs in China’s energy bases can be met – Professor Jia Shaofeng (Deputy Director of the Center for Water Resources Research of the Chinese Academy of Sciences) expands in Will Energy Bases Drain the Yellow River?“.

Does this mean less water for other industries?

As warned by China Institute for Water Resources and Hydropower Research (IWHR) in their recent report The Strictest Water Resources Red Lines Ask for Coal Production and Use Control”, even under “water conservation scenarios” which “have notably lower water consumption levels compared to reference scenarios”, “in the near term, water conservation alone will still fail to meet water consumption red lines; only with stricter limitations on water-intensive industries such as power generation and coal-to-chemicals can the red lines be satisfied”.

Perhaps it is wise to also prioritise water… Watch the water-energy-food nexus – what happens here matters for other industries.

7. Water Resource Allocation: Trading water use & wastewater discharge permits

No corporate can operate without water. Two water permit systems are being put in place to enforce the Red Lines: Wastewater Discharge Permits: to control the total amount of wastewater discharge; and Water Use Permits: to manage the total water use.

These have a dual purpose, acting as both carrot and stick. Companies that operate in more water-efficient and cleaner ways, will accumulate water savings within their Water Use Permits and/or Wastewater Discharge Permits, which can then be sold; other companies that want to expand their production, may fall short of permits and can buy these (more on this here)

Although pilots for trading Wastewater Discharge Permits have been in place since 2007, Water Use Permit trading pilots were only introduced in 2014. Regardless, recent developments in both these market mechanisms point to the fact that they are here to stay:

Game changing because: We see these two types of permits as another way for government to control total water use and total wastewater discharged within an industry.

Water permit trading acts as both carrot & stick
The Wastewater Discharge Permit trading market is now RMB4bn …
…Water Use Permits trading may mean you might not be able to afford water in the future

By allowing companies to trade these two types of permits, a price reflecting the level of water scarcity & cost of pollution can be formed. This will allow government to fine-tune water allocation among different sectors – from agriculture to industry and also within industries.

Ultimately, Beijing is striving for one fully integrated water permit to regulate both water quality and water quantity. This is still far from realisation due to the current dispersed responsibilities of water management between the MEP & MWR. Finally, if the water quantity and quality permit trading between provinces are successful, these market mechanisms could be applied on China’s transboundary rivers, providing a market-led solution for transboundary resource sharing.

These new developments could mean that you may not be able to afford water in the future. Don’t be blindsided by these pilots – they are here to stay.

8. March Towards a Circular Economy: A must-do not a nice-to-have

The State Council’s ‘Circular Economy Development Strategies and Action Plan’ issued on 5 February 2013, pushes for circular economies across ten industries and China’s industrial parks. A circular economy means less water, less energy, less resource waste and more recycling –  all crucial for China if it is to ensure growth with its limited resources. The ten industries are:

  1. Coal
  2. Power
  3. Steel
  4. Nonferrous Metals
  5. Petroleum & Petrochemicals
  6. Chemical
  7. Building Materials
  8. Paper
  9. Food
  10. Textile

Circular economy will protect key industries from intensifying water competition

The circular economy plan details strategies and action for each industry including flow charts setting out various parts of the new circular economy. The focus is on a complete “close loop” for each industry – the ‘recycling’ indicated from raw materials input all the way through the manufacture of the product including end-use disposal.

Water, power, coal and agriculture (where necessary) inputs are also highlighted in each industry clearly giving weight and recognition to the underlying water risk. China’s limited water and limited farmland means that it must make the most from its raw materials. Since power is reliant on water, power must also be ‘saved’. Incidentally, these nine sectors are not only water intensive, they are also amongst the 16 Most Polluting Industries.

Game changing because: This points to the long term direction of China’s economic growth. A “business-as-usual” scenario – in other words, a continuation of the linear economy means that China will be short of water by 2030.

To meet the Red Lines’ national water quotas, China must march towards a circular economy. China needs to shift these nine sectors and its industrial parks towards a circular economy to insulate them from ‘shocks’ of intensifying competition for water in the future.

A circular economy is a must-do for China

So in China, circular economy is not a “nice-to-do” as part of a water corporate stewardship strategy, it is a “must-do”. Circular economies are also another way of ensuring water for agriculture and energy. Perhaps it’s time to take a closer look at this sooner rather than later.

Further Reading

  • China Water Risk’s 5 Trends for 2015 – As China moves to re-balance its economy and environment, Beijing will shepherd the nation towards water, food & energy security. For the Year of the Goat, it is better to be the surefooted goat than the sacrificial lamb so check out our top 5 trends in water for 2015
  • Will Energy Bases Drain the Yellow River? – The Deputy Director of the Center for Water Resources Research at the Chinese Academy of Sciences, Prof. Jia Shaofeng shares his views on how water demand  by China’s energy bases are over-exaggerated by NGOs and explains how it can be met
  • No Need to Sacrifice River for Power – International Rivers China Program Director Grace Mang warns of prematurely celebrating China’s lower coal targets as 500GW of ‘clean’ hydro by 2050 brings its own risks. The time to discuss a ‘river conservation’ scenarios versus a ‘high renewable’ scenario is now
  • New Trading Markets to Enforce Red Lines – China has been experimenting with market mechanisms. Can China’s new water permit trading markets (discharge & use) help the nation hold its Three Red Lines on water use, efficiency & pollution as well as catalyze a bigger water market? Feng Hu expands
  • Risks Shifting Beyond the Wall – In China’s printing & dyeing sector centralised wastewater treatment brings centralised pollution, Ma Yingying of the Institute of Environment & Public Affairs tells China Water Risk. Lax supervision & vague responsibilities between factories & treatment facilities leave brands are exposed
  • The War on Water Pollution – Premier Li Keqiang 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

Water & Energy

  • Water Over Energy Security – In-depth interview with Li Junfeng, the Director General of China’s National Center of Climate Change Strategy Research on the future of coal, gas, nuclear, hydro & renewable energy given limited water and why China has to “walk on two legs” towards energy security
  • 2014 World Water Week: Takeaways – Check our key takeaways on ‘Water & Energy’ from World Water Week 2014. What are the challenges ahead for Asia & the rest of the world? Dawn McGregor expands
  • Water Drives Coal Reform – To ensure energy security, China needs to protect its No 1 fuel source against water scarcity. Feng Hu takes a closer look at what the new water-for-coal plan and other related policies mean for coal and coal-related industries

Industrial Standards

  • Pollution: It Doesn’t Pay to be Naughty – State Council wants to use the enforcement of law & regulation “to force the economy to transform and upgrade”. See how violation cost surges with daily fines, new standards & discharge permit trading in a bid to push China to go clean
  • 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 yuan
  • Fundamental Issues: Industrial Wastewater – Professor Ma Zhong, dean of the School of Environment of Renmin University gives his in-depth views on the industrial wastewater standards & pricing. Is it cheaper to pollute than to treat?

Investments in the water sector

  • China Water Investments: 3 Thoughts – Investing in the water sector looks attractive with the Chinese government & consumers wanting water tariff hikes. Will water supply or wastewater treatment be the larger market? Debra Tan shares some on-ground views distilled from recent conversations
  • 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
  • China Encourages Investment to Clean Water
  • Consumers Willing To Pay More for Water – Lu Shuping, President of Xylem China, shares the findings of a survey of six Tier 1 & Tier 2 cities in China which show that consumers understand the seriousness of water issues & are willing to pay more for safe drinking water
  • 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

Water Permits & Rights

  • Water Rights in China – Professor Jia Shaofeng, Deputy Director of the Center for Water Resources Research of CAS, shares his in-depth insights on water rights in China – what they are, who owns them, how can they be “traded” & why a market trading system should be the way forward
  • Water Permits: How to Get Water in China – How are water total water quotas set? How can you access water in China? China Water Risk gives an overview on these and the risks associated when China’s water permit system is reformed
China Water Risk
Author: China Water Risk
We believe regardless of whether we care for the environment that water risks affect us all – as investors, businesses and individuals. Water risks are fundamental to future decision making and growth patterns in global economies. Water scarcity has emerged as a critical sustainability issue for China's economy and since water powers the economy, we aim to highlight these risks inherent in each sector. In addition, we write about current trends in the global water industry, analyze changes occurring both regionally and globally, as well as providing explanations on the new technologies that are revolutionizing this industry.
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