Expert Commentary

Compliance with environmental regulations when the rule of law is weak: Evidence from China

2014 study in Journal of Public Administration Research and Theory on how companies decide to comply environmental regulations in developing countries.

In November 2014 the United States and China reached a historic agreement to tackle global warming. The deal, announced at the Asia-Pacific Economic Cooperation (APEC) forum, involved commitments from both countries: The United States pledged that by 2025 it would cut greenhouse-gas emissions by as much as 28% relative to 2005 levels. China, whose emissions have grown rapidly since the mid-2000s and now greatly exceed those of the United States, pledged that carbon emissions would peak “around 2030.” To achieve this goal, renewable energy would make up 20% of the country’s energy production by that year.

The agreement is significant, but it’s also raising questions: Is it sufficiently ambitious given the pace at which China’s emissions have been growing? And what of the environmental damage caused by the contry’s overwhelming dependence on coal? A study from the Chinese Academy of Environmental Planning put the cost of environmental degradation for just 2010 at $230 billion, the equivalent of 3.5% of the country’s GDP that year. A 2013 study published in the Proceedings of the National Academy of Sciences found that air pollution in northern China, mostly caused by the burning of coal for heating, shortened average life expectancy by 5.5 years. Further, another 2013 study, “Outsourcing CO2 within China,” shows the complicated nature of equitably enforcing emissions targets among China’s provinces, “with rich regions consuming and exporting high-value goods and services that depend upon production of low-cost and emission-intensive goods and services from poorer regions in the same country.” This question of internal “carbon flows” in China will remain a significant policy challenge.

The environmental crisis has also pushed some of China’s residents — even Communist Party faithful — to protest, posing a political challenge to a government that prioritizes social stability. During the opening of the National People’s Congress in 2014, Prime Minister Li Keqiang responded by saying that the government would “declare war against pollution.” During the first three months in 2014, the Beijing city government fined more than 7,000 companies a total of 88 million renminbi, or $14 million, for violating environmental regulations — 10 times the amount levied during the same period last year.

In the past 10 years, the Chinese government has gradually shifted from intermittent environmental campaigns to a more legislative approach, focusing on requiring enterprises to save energy and cut emissions. However, the vague wording of regulations often leaves room for interpretation, and without a fully independent legal system, the effectiveness of reforms depends on local enforcement. Some local officials ignore the environmental regulations in their pursuit of economic growth, while others arbitrarily target enterprises for violations of environmental regulations.

In such situations, how do enterprises decide on their environmental practices? A 2014 study published in Journal of Public Administration Research and Theory, Regulatory Compliance when the Rule of Law Is Weak: Evidence from China’s Environmental Reform,” examines this question. Researchers based at the National University of Singapore, the University of Southern California and Hong Kong Polytechnic University surveyed executives of Hong Kong companies that manufacture goods in southern China’s Pearl River Delta region, one of China’s major industrial bases. About 380 executives responded to a survey; follow-up interviews were conducted with 27 executives and managers from 17 companies. The researchers examined environmental practices, from basic waste recycling to more proactive practices such as “developing certifiable environmental management systems,” and examined the factors that shaped companies’ environmental behaviors.

The study’s findings include:

  • Because China does not have a fully established legal system, executives base their environmental practices largely on perceptions about regulators rather than concerns for legal issues. One executive interviewed said that China’s environmental regulations were “comprehensive” but yet “vague,” leaving local officials with large discretion in terms of enforcement.
  • If executives think local officials may arbitrarily target their enterprises for enforcement, they are likely to adopt proactive practices, but not basic ones. “Enterprise executives from Hong Kong are personally well acquainted with the rule of law. Yet when they operate in Mainland China, they are less influenced by a concern for legality, and are driven by their wish to avoid potential exploitation from regulatory officials.”
  • Avoiding possible punishment is a major motive for enterprises to take on basic environmental practices, but not proactive ones.
  • The better executives understand environmental regulations, the more likely they are to adopt both basic and proactive practices, as they become less suspicious about local officials’ intentions and more willing to comply.
  • If executives are asked by peer groups to comply with environmental regulations, they tend to use proactive strategies. However, pressure from groups in civil society doesn’t have a significant impact on executives’ decisions, as environmental protection hasn’t yet become a social norm in China.
  • Previous research suggests that the best enforcement approach is a flexible one that “punishes non-cooperative regulatees but forgives cooperative ones, who show credible commitment to the regulatory goal, for occasional minor violations.”
  • However, “simply adopting a more reasonable and regulatee-friendly approach in a developmental context like China’s is likely to encounter setbacks.” In particular, if the regulations as written don’t serve as a reliable guide, firms can become confused about the laws’ actual meaning and suspicious of regulators. In addition, threats of punishment and targeted enforcement have their role in increasing compliance.

“The rule of law and the extent to which it is ‘recognized and accepted’ in a specific governance context are important factors shaping regulatory enforcement and compliance,” the authors conclude. “Policymakers must examine carefully a country’s governance context before recommending regulatory approaches.”

Related research: A 2013 study published in the Proceedings of the National Academy of Sciences (PNAS), Coal and Public Health: Scientific evidence from the U.S. and China,” looks at the relationship between coal consumption and mortality in China.

Keywords: China, Asia, pollution, environment, law, regulatory enforcement, regulatory compliance, development, coal, corruption

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