Multinationals should be capitalizing on potential market-based opportunities created by China’s green policy change, write Paul Davies, Kimberly Leefatt and Andrew Westgate

In recent decades, the US and Europe have introduced a variety of market-based incentives as instruments of environmental policy and reduced their reliance on command-and-control-style regulation. Examples include fees on the discharge or emission of pollutants, such as the UK’s climate change levy, tradeable credit programmes such as the acid rain programme in the US, and carbon-trading programmes including the EU emissions trading system (ETS) and the California cap-and-trade programme.

Until recently, China employed a predominantly command-and-control-style approach to environmental regulation, where regulators specified both the standards that must be achieved and the technology and pollution control strategies to be employed by potential polluters. This approach was exemplified by the environmental impact assessment (EIA) system in China.

For many years, the EIA system provided the only method by which pollution control requirements were imposed on companies, by incorporating the requirements into the EIA. EIAs have not, however, proved an effective basis for permitting discharge, from either a regulatory or a business perspective. As China has sought to modernize its environmental governance, the country has also shifted its environmental policy emphasis and increased its use of fiscal and market tools in environmental governance.


China is the largest consumer of energy and producer of pollution, which poses great challenges for its much-desired green transition. Driven by the recognition that command and control measures tend to be reactive and do not incentivize industrial firms to protect the environment, China is redirecting its efforts and employing its powers under the Environmental Protection Law (EPL) to change direction.

In particular, article 21 of the EPL calls for direct incentives for environmental industries in the form of “fiscal assistance, taxation, prices and government procurement to encourage and support the environmental industries”. Article 22 focuses on incentives to improve the environment in excess of mandated requirements, and provides that “governments shall adopt policies and measures in finance, taxation, price, and government procurement, among others, to encourage and support further pollutant discharge reduction by enterprises, public institutions, and other businesses after meeting the statutory requirements for the discharge of pollutants”.

Although the EPL is primarily a framework providing for more detailed requirements, this emphasis on market-based measures represents a marked shift in policymakers’ thinking with regard to environmental compliance.

The Measures for the Implementation of Consecutive Daily Penalties by the Responsible Environmental Protection Departments – issued by the former Ministry of Environmental Protection (now the Ministry of Ecology and Environment, or MEE) shortly after release of the EPL – standardize the implementation of daily penalties imposed against polluters. The measures specifically identify five types of environmental crime relating to illegally discharging pollutants and falsifying monitoring data, but also allow local authorities to increase, as necessary, the types of offences that are punishable by consecutive daily penalties. There is no limit to the number of consecutive daily penalties, which incentivize polluters to address compliance violations quickly.

China is now aggressively developing policies to establish economic incentives for industry and the general public to change their culture of growth at all costs, under which China has prospered but which has also led to massive environmental issues as a result of the nation’s rapid industrialization. By setting goals and performance standards without relying solely on reactive penalties, China is embracing market tools in order to develop a more effectual culture of environmental protection.

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Paul Davies is a partner at Latham & Watkins in London. Kimberly Leefatt and Andrew Westgate are associates at Latham & Watkins in Washington DC and New York, respectively.

This article was prepared also with the assistance of Olivia Featherstone in the London office of Latham & Watkins and Zhuoshi Liu of the Environmental Law Institute in Washington DC