China to Address Air Pollution

February 6, 2013


Beijing is in the grip of one of the worst air pollution episodes in its history. Pollution levels, as measured at the United States Embassy, are the highest they have been since measurements were first taken in 2008, and hospitals have reported a surge in patient admissions for respiratory problems. As a result, Chinese government officials have begun looking more closely at regulations and programs aimed at curbing air pollution.

Mobile Sources

Much of the air pollution in China comes from cars and trucks, with Chinese fuel standards taking much of the blame. One of the Chinese fuel standards, “national III standard”, is now applied in most parts of China and generally permits about five times more polluting sulfur than is allowed in the U.S., and fifteen times more than is permitted in Europe. With the central Chinese government controlling the price of fuel, Chinese refiners have not pursued cleaner fuels that generally cost more to produce. As a result, China has had difficulty supplying sufficient quantities of cleaner fuels, leading to delays in implementing new tailpipe emission standards for vehicles.
Unlike many other countries, including the United States, the agency responsible for environmental protection (the Ministry of Environmental Protection, the “MEP”) does not set fuel quality standards. The city of Beijing does have authority to set its own fuel emissions standards and has done so. However, many vehicles entering Beijing come from surrounding cities that do not enforce similar fuel standards, resulting in less progress toward air quality improvement in Beijing.

The Beijing government implemented a stricter emission standard for vehicles, equivalent to the Europe V standard, on February 1, 2013. Shanghai is expected to implement the same standard in the second half of 2013. Beijing officials have also stated their intention to remove 180,000 older vehicles from the road, and promote clean energy vehicle use among government departments, including street cleaners and trash collection vehicles. In addition, compressed natural gas (“CNG”) is now available as a vehicle fuel in Beijing and the market is expected to grow rapidly. CNG has fewer particulate emissions than either gasoline or diesel fuels, and is expected to help Beijing reduce its air pollution.

According to the 12th Five-Year Plan (2011-2015) jointly issued by the MEP, National Development and Reform Commission and the Ministry of Finance, gasoline meeting a higher (cleaner) national standard will be provided by the end of 2013, and diesel fuel meeting a higher national standard will be provided by the end of 2014.

Stationary Sources

While there is evidence that China’s efforts to cut emissions from coal-fired power plants (traditionally a major source of pollution) have had some success, many fear that rapidly rising industrial output, particularly from coal-fueled steel production, will undermine efforts to reduce stationary-source pollution.

Researchers report that particulate matter (“PM”) measuring 2.5 microns and smaller from coal fired power generation fell roughly 21% from 2005 to 2010, while PM 2.5 emissions from iron and steel production rose roughly 39%. Unlike the power sector, the steel industry is fragmented and thought to be more difficult to control.

The MEP has indicated that it would push local governments to promulgate regulations to tackle the air pollution problem, including measures that could close polluting factories. It has also proposed to expedite the monitoring standards for stationary sources. However, no specific timeline for implementing such standards has emerged.

In Beijing, the conversion of district heating plants and electricity-generating plants from coal to natural gas will be completed by 2015. District heating plants must be located inside the city near the residences and businesses they serve. In the past, such plants have contributed to Beijing’s smog problems, particularly during the winter months. Conversion to natural gas is expected to reduce air pollution significantly. The availability of natural gas for household consumers is also rising, with Beijing having around 4.5 million domestic gas connections, representing around 60–70% of all households.

The Beijing government has issued a proposed Air Pollution Control Regulation, which will be open for comments until Feb. 8, 2013. The proposal requires authorities to forecast pollution levels and take actions including suspension of production at factories and ordering vehicles off the city’s roads when pollution hits designated levels. The heating systems of 44,000 old, single-story homes and coal-burning boilers downtown are to be replaced with systems that utilize clean energy. Rule breakers will face fines of from RMB50,000 (approximately USD8,200) to RMB500,000. Some have criticized the proposed fines as not being sufficiently burdensome to stop companies from engaging in illegal behavior. The city also intends to speed up the promotion of clean energy in rural areas and to control dust from construction projects.

New Energy Renewables Plan Announced

In a related development, China’s State Council released a development plan for cleaner energy under the 12th Five-Year Plan (2011-2015). Nonbinding targets for renewable energy are part of the plan, which also includes a goal of capping total energy demand at the equivalent of 4 billion metric tons of coal by the end of 2015, and limiting the annual average growth rate of electricity use to eight percent.
The plan also includes a previously-announced goal of reducing energy intensity (energy use per unit of gross national product) by 16 percent and carbon intensity by 17 percent as compared to 2010 levels.
The plan aims to increase the proportion of non-fossil fuel and natural gas-based energy, and decrease the share of coal-fired energy. Reforms are also planned for the electricity, oil and gas, and energy markets, with the goal of moving the economy to more market-based pricing.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Qiang Li, an O'Melveny partner licensed to practice law in New York, Robert Nicksin, an O'Melveny counsel licensed to practice law in California, and Alan Bao, an O'Melveny associate licensed to practice law in California, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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