Update on Air Pollution Control and Enforcement in China

September 15, 2014


Beijing to phase in Ban of High-Polluting Fuel Combustion

In accordance with the Regulation on Prevention and Control of Air Pollution in Beijing promulgated by the Beijing municipal legislature earlier this year, the municipal government is responsible for the “High-Polluting Fuel Combustion-Banned Zone” and has issued the Beijing High-Polluting Fuel Combustion-Banned Zone Delineation Program (Trial) (the “Program”) on July 16, 2014.

The Program bans the use of high-polluting fuels as coal, fuel oil, petroleum coke, combustible waste, and biomass (such as wood and straw) within the combustion-banned zone, requiring that they be replaced with natural gas, liquefied petroleum gas, and other clean energy. The Program is expected to directly impact both fossil fuel fired power plants and industrial emitters located within the designated “combustion-banned zones.”

The Program identifies the following areas in Beijing as “combustion-banned zones”: (i) the entire geographic area of the six urban districts of the city and the Beijing Economic and Technological Development Zone, (ii) ten newly built towns in the suburb districts of the city (the “New Towns”), and (iii) development zones at the city’s municipal level and above. According to the Program, the Beijing Economic and Technological Development Zone will become the first combustion-banned zone to implement a full ban by the end of 2014; while Dongcheng District and Xicheng District, located in the heart of Beijing, will begin implementation of the full ban by the end of 2015. Shijingshan District will implement the ban by the end of 2017, followed by the Chaoyang, Haidian, and Fengtai districts by the end of 2020. The Program also requires that 40% of the New Towns located at suburb areas within the Beijing municipality implement the full ban by the end of 2017, and 80% by the end of 2020.

The Beijing Municipal People’s Congress passed the Regulation on Prevention and Control of Air Pollution in Beijing on January 22, 2014, banning new construction and instating measures for the reduction of air pollution in response to widespread public dissatisfaction with and negative investor sentiment toward prior enforcement efforts. The regulation came into effect on March 1, 2014.

Shanghai to Implement tougher air pollution control enforcement measures

On July 25, 2014, the Shanghai Municipal People’s Congress passed the amended Regulation on Prevention and Control of Air Pollution in Shanghai (the “Regulation”), which will take effect on October 1, 2014.

The new Regulation includes heavier administrative penalties with fines of RMB50,000 to RMB500,000 (US$8,200 to US$82,000), representing a five-fold increase over the previous range (i.e., RMB10,000 to RMB100,000). In addition, violators are potentially liable for daily penalties up to the amount of the original fine for each day of continuing violation after the compliance deadline provided. Responsible officers are separately liable for fines ranging from RMB10,000 to RMB100,000 (US$1,640 to US$16,400).

From a broader perspective, the Regulation stresses the importance of joint efforts by, and coordination among, all provinces and cities located in the Yangtze River Delta region in combating air pollution. In this regard, the Regulation sets forth specific actions to be taken by the Shanghai municipal government. The effectiveness and efficiency of such joint efforts, however, are something to be tested after the Regulation is implemented.

Update on the Pilot Carbon Emission Trading Scheme in China

Thus far, seven municipalities and provinces across China have implemented “pilot carbon emission trading programs” in their respective jurisdictions. Shenzhen, Shanghai, Beijing, Tianjin, and Guangdong are now into the second year of their programs, whereas Chongqing and Hubei are still in their first year of trial.

Among the five municipalities moving into their second year of implementation, Guangdong is the first to publicize an allocation plan. On August 18, 2014, the Development and Reform Commission of Guangdong Province released the Implementation Plan for Allocation of Carbon Emission Quota for 2014 of Guangdong Province (the “Plan”), which provides that the province’s total carbon emission quota is 408 million tons for 2014. The total quota allocated to emission-controlled companies (which currently include companies in the power, cement, steel, and petro-chemical sectors) increases to 370 million tons in 2014, up by 20 million tons from 2013, while the reserved quota (for market adjustment and new entrants to the program) is 38 million tons. Of all the quotas, the vast majority will be allocated to enterprises free of charge, with the balance to be sold via an auction process to be held quarterly.

Shenzhen, as the first city to launch the pilot program, may also become the first Chinese carbon market open to foreign investors. The State Administration of Foreign Exchange (the “SAFE”) issued an official reply to Shenzhen Branch of SAFE on August 8, 2014, approving the scheme for foreign investors to participate in the secondary trading of carbon emission quotas on the Shenzhen carbon market via foreign currency or RMB-denominated cross-border accounts. Detailed implementation rules are to be issued. It is expected that the participation of foreign investors will enhance the liquidity of the Shenzhen carbon market and help to discover the true value of carbon emission quotas. Foreign institutional investors with deep experience in carbon trading and carbon assets management are also expected to help enterprises in Shenzhen to reduce carbon emission.

Heavy Fines on China Power Enterprises for Failing to Desulfurize

On May 23, 2014, the National Development and Reform Commission (the “NDRC”) and the Ministry of Environmental Protection (the “MEP”) imposed RMB 519 million (US $85 million) in fines on ten coal-fired power suppliers who failed to operate their desulfurization facilities as required by law. Yangcheng International Power Generation CO., Ltd. in Shanxi province was subject to the heavy fine of RMB125,588,600 (US$20 million). The NDRC and MEP also advised local government authorities to more closely monitor the operation of coal-fired power suppliers and to take stricter measures against any violator of statutory requirements. These announcements come as the National government considers amendments to the Air Pollution Prevention and Control Law (last amended in 2000), which would increase fines and enforcement measures in all provinces, including a new maximum fine of $163,000 for operation without a permit.

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. Eric Rothenberg, an O'Melveny partner licensed to practice law in Missouri and New York, Qiang Li, an O'Melveny partner licensed to practice law in New York, and Stewart Wang, an O'Melveny associate licensed to practice law in New York and Shanghai, 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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