The impact on global supply chains

China’s ambitious environmental policies, including carbon peaking and neutrality targets, are reshaping global supply chains, presenting both challenges and opportunities for European businesses. By investing in green technologies, diversifying supply chains and collaborating with suppliers, European companies can thrive in the country’s evolving regulatory landscape, argues Giulia Interesse of Dezan Shira & Associates.

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In recent years, China has increasingly prioritised environmental sustainability as part of its broader economic and social development strategy. As the world’s largest emitter of greenhouse gases (GHGs), China’s ambitious goals of peaking carbon emissions by 2030 and achieving carbon neutrality by 2060 represent a major shift in its approach to climate change.[1] These policies have global implications, particularly for industries that rely on Chinese manufacturing and supply chains. The country’s focus on reducing emissions, enhancing energy efficiency and promoting cleaner technologies is reshaping how businesses operate both within China and internationally.

For European companies operating in or sourcing from China, understanding the impact of these environmental policies is crucial. With China moving towards stricter environmental regulations, European businesses face the dual challenge of complying with new standards while navigating the evolving regulatory landscape.

China’s environmental policies

China’s approach to environmental sustainability is framed by a series of ambitious policies and targets aimed at reducing the nation’s carbon footprint. In 2021, the country submitted an updated Nationally Determined Contribution (NDC) to the United Nations Framework Convention on Climate Change (UNFCCC), outlining its commitment to reaching carbon neutrality by 2060 and peaking CO₂ emissions before 2030.[2]

These targets are complemented by the 14th Five-year Plan for Economic and Social Development, which sets clear guidelines for reducing coal consumption, enhancing energy efficiency and boosting the share of non-fossil fuels in the country’s energy mix.[3]

Key objectives shaping the trajectory of China’s environmental policies include:

• Carbon peaking and carbon neutrality targets: These targets outline the roadmap for reducing carbon emissions.
• Energy transition plan: China aims to reduce its reliance on coal, increase the share of renewable energy in its energy mix, and support large-scale wind and solar power projects.
• Forest carbon sink programme: Through large-scale reforestation and landscape restoration, China has significantly increased its carbon sink capacity, absorbing a notable percentage of the country’s GHG emissions.

Recent regulatory developments underscore the urgency of these goals, as seen in the establishment of comprehensive frameworks like the ‘1+N system’, which includes detailed action plans for carbon peaking and carbon neutrality.[4]

In addition to these long-term targets, the country has enacted robust environmental laws, including the 2015 amended Environmental Protection Law, which introduced stringent penalties for non-compliance, including heavy fines and criminal charges.[5] Regulations also target specific pollution reduction goals under the Air Pollution Prevention and Control Action Plan,[6] the Water Pollution Prevention and Control Action Plan[7](also known as the ‘Water Ten Plan’) and the Soil Pollution Prevention and Control Action Plan[8] (also known as the ‘Soil Ten Plan’), further reinforcing China’s commitment to reducing environmental harm. Moreover, in July 2021, China introduced its national emissions trading system (ETS), the largest carbon market in the world, covering five billion tons of CO₂ from more than 2,200 fossil-fuel power plants.[9]

Meanwhile, as China’s carbon intensity decreases, it faces increasing pressure from foreign markets, including the European Union (EU), to meet stricter environmental standards.

Alignment with global standards: a comparative analysis with the EU

In terms of alignment with global standards, China’s policies bear notable similarities to international frameworks such as the European Green Deal.[10] Both China and the EU are advancing ambitious climate goals through systemic policy changes. China’s 1+N policy framework echoes the EU’s Fit for 55 package, which comprises targeted measures to achieve emissions reductions and foster sustainable practices across key sectors like energy, industry and transportation.[11]

Both sides are also prioritising energy transition. The EU’s commitment to increasing the share of renewable energy to 42.5 per cent by 2030 is mirrored in China’s push for a greener energy mix, with significant investments in renewable energy sources such as solar and wind. Additionally, both frameworks emphasise energy efficiency. While the EU targets a 1.49 per cent annual reduction in final energy consumption, China’s policies include stringent efficiency standards and the promotion of green manufacturing practices.

However, a key area of divergence lies in the international dimensions of these policies. The EU’s Carbon Border Adjustment Mechanism (CBAM), effective from 2026, extends its climate obligations to trading partners, requiring imports of high-carbon products to comply with EU carbon pricing.[12]  China’s approach, by contrast, remains more focussed on domestic implementation, though its policies increasingly recognise the importance of global cooperation in addressing climate change.

Overall, while China and the EU pursue similar objectives in their environmental policies, their methodologies and areas of emphasis vary. Both demonstrate a commitment to integrating sustainability into their economic frameworks, setting a benchmark for other regions to follow.

Impacts on supply chains

Regulatory compliance and costs

China’s environmental regulations are becoming increasingly stringent, particularly with the introduction of the national carbon trading system in 2021 and the revised Environmental Protection Law, which imposes hefty fines and even criminal charges for non-compliance. This is driving up costs for businesses that must invest in cleaner technologies, energy-efficient machinery and pollution control systems. According to the National Development and Reform Commission (NDRC), sectors with high emissions, such as steel, cement and coal face stricter enforcement, leading to increased production costs.

For example, manufacturing plants must meet air, water and soil pollution reduction targets under the Air Pollution Prevention and Control Action Plan, and companies operating in these sectors must bear the cost of upgrading infrastructure to comply. Companies unable to comply face temporary shutdowns or hefty penalties, leading to delays in production and supply chain disruptions. This has caused ripple effects in global supply chains, particularly for industries reliant on Chinese manufacturing.

As a result, businesses are also seeing an increase in transportation and raw material costs, as supply shortages can occur when non-compliant suppliers are forced to shut down. While there may be short-term cost increases, businesses that invest in cleaner technologies will eventually reduce operational expenses, especially with energy-efficient equipment and renewable energy sources that lower energy consumption over time.

Shifting production models and innovation

China’s energy transition plan, which focusses on reducing coal consumption and increasing renewable energy share, is driving manufacturers to adopt cleaner technologies. The push for greener energy sources such as solar, wind and hydroelectric power is reshaping production models. China aims to have 25 per cent of its total energy mix generated from renewable sources by 2030.[13]

The transition to sustainable manufacturing practices has spurred innovation across multiple sectors. For example, China’s solar and wind energy industries are booming as companies work to meet the country’s energy goals. The push for greener practices is also leading to advances in clean technologies like electric vehicles, energy storage and green building materials.

Supplier selection and management

As environmental regulations tighten, selecting and managing suppliers that comply with China’s sustainability standards is becoming more critical. Chinese authorities now require businesses to report emissions data and environmental practices, creating an increasingly transparent supply chain. Companies that fail to meet emissions reduction targets or fail to demonstrate adherence to environmental laws face sanctions, including fines or shutdowns.

For European companies sourcing from China, this means the need for greater diligence in supplier selection. Firms are increasingly conducting environmental audits and requiring suppliers to provide certifications such as ISO 14001 (Environmental Management) to prove their environmental compliance.

Logistics and transportation

With the introduction of carbon pricing mechanisms such as the national carbon trading system, businesses are likely to see higher transportation costs, especially for carbon-intensive products. According to the International Energy Agency (IEA), the transportation sector is a significant emitter of GHGs, and stricter emissions regulations are expected to increase the costs associated with shipping.[14]

Moreover, China’s commitment to reducing carbon emissions has led to a growing focus on green logistics, including the use of electric trucks, energy-efficient shipping methods, and carbon-neutral warehouses. The Chinese Government has been promoting green transportation infrastructure, with a target of 20 per cent of all vehicles on the road to be ‘clean vehicles’ by 2025. As a result, businesses will need to factor in the rising costs associated with green logistics and shipping options.

Challenges for small and medium enterprises (SMEs)

SMEs may face particular challenges as they adapt to China’s environmental regulations. While large multinational corporations typically have the resources to invest in compliance measures, SMEs often struggle to bear the cost of upgrading their operations to meet new standards. For example, installing energy-efficient systems or complying with pollution-reduction targets may be prohibitively expensive for smaller businesses.

However, there are also opportunities for SMEs to thrive in this regulatory environment. By adopting green technologies and sustainable practices early on, SMEs can differentiate themselves in global markets that increasingly prioritise sustainability. For example, SMEs can leverage certifications like ISO 14001 to gain a competitive advantage and access green procurement networks.

Ripple effect

China’s environmental policies are not only transforming its domestic manufacturing sector but also influencing global supply chains. As the world’s largest exporter, China’s regulatory shifts are having a profound impact on international businesses.

In response to these challenges, many companies are diversifying their supply chains to mitigate risks associated with China’s tightening environmental standards. The ‘China Plus One’ strategy has become increasingly popular and involves companies expanding their operations to neighbouring regions such as Southeast Asia, where environmental regulations may be less stringent.

At the same time, China’s push for sustainability is encouraging increased cross-border collaboration. This alignment not only helps businesses meet their own environmental objectives but also opens doors to new markets, especially in regions where sustainability is a key consumer demand. As a result, the global supply chain landscape is evolving towards greater cooperation and innovation in clean manufacturing.

Adapting to Chinese environmental policies: strategies and opportunities for European businesses

As China’s environmental regulations continue to evolve, European businesses must recognise the challenges and opportunities these changes present. While the tightening of environmental laws may seem daunting at first, these regulations should be viewed as part of a larger global shift towards sustainability.

By proactively adapting to China’s stringent environmental policies, businesses can ensure compliance and set themselves apart as leaders in a rapidly evolving marketplace. Key strategies include:

• Investing in green technologies: One of the most effective ways to navigate China’s environmental regulations is to invest in clean technologies and energy-efficient manufacturing processes. These investments not only reduce long-term operating costs but also enable businesses to stay ahead of the curve in terms of compliance.
• Strengthening supplier networks: A crucial aspect of navigating these regulatory changes is working closely with suppliers who are already compliant with China’s environmental standards. By building stronger relationships with these suppliers, businesses can ensure continuity in their supply chains while avoiding the risk of disruptions caused by non-compliance.
• Diversifying supply chains: While aligning with compliant suppliers within China is essential, it is equally important to diversify supply chains across different regions. By working with international suppliers who meet similar sustainability standards, European businesses can reduce their exposure to regulatory risks and disruptions.
• Leveraging technology for compliance and efficiency: The rapidly changing regulatory landscape in China demands that businesses invest in technologies that provide real-time compliance tracking and visibility. Tools such as the internet of things, artificial intelligence and blockchain can enhance transparency and streamline supply chain operations, making it easier for companies to monitor their adherence to environmental standards.
• Engaging with policymakers and industry networks: To stay ahead of regulatory shifts, businesses should engage with policymakers, industry groups and local authorities.

China’s environmental policies are reshaping global supply chains, but they also present European businesses with a significant opportunity to lead the way in sustainability. By embracing China’s regulatory framework, adopting green technologies, diversifying supply networks and strengthening supplier partnerships, businesses can ensure their long-term growth and competitiveness. Sustainability is no longer just a regulatory requirement – it is a key differentiator in the global marketplace.

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Giulia Interesse is an editor at Asia Briefing, a subsidiary of Dezan Shira & Associates.

Dezan Shira & Associates assists foreign investors in China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen and Hong Kong.

The company has offices in Vietnam, Indonesia, Singapore, the United States, Germany, Italy, India and Dubai (UAE), as well as partner firms assisting foreign investors in the Philippines, Malaysia, Thailand and Bangladesh.

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[1] The Carbon Brief Profile: China, Carbon Brief, 30^th November 2023, viewed 9^th January 2025, <https://interactive.carbonbrief.org/the-carbon-brief-profile-china/index.html>

[2] Working Guidance for Carbon Dioxide Peaking and Carbon Neutrality in Full and Faithful Implementation of the New Development Philosophy, National Development and Reform Commission, 24^th October 2021, viewed 14^th January 2025, <https://en.ndrc.gov.cn/policies/202110/t20211024_1300725.html>

[3] Wong, D, What to Expect in China’s 14th Five Year Plan? Decoding the Fifth Plenum Communique, China Briefing, 12^th November 2020, viewed 9^th January 2025, <https://www.china-briefing.com/news/what-to-expect-in-chinas-14th-five-year-plan-decoding-the-fifth-plenum-communique/>

[4] China to release implementation plans to achieve carbon goals: Xi, Xinhua, 12^th October 2021, viewed 9^th January 2025, <https://english.mee.gov.cn/News_service/media_news/202110/t20211012_956262.shtml>

[5] Qian, Z, Green Compliance in China – How to Prepare for Environmental Regulations, China Briefing, 20^th June 2022, viewed 9^th January 2025, <https://www.china-briefing.com/news/chinas-environmental-regulations-compliance-for-foreign-companies/> 

[6] Air Pollution Prevention and Control Action Plan, State Council, 10^th September 2013, viewed 18^th February 2025, <http://english.www.gov.cn/policies/latest_releases/2013/09/10/content_281475127013234.htm>

[7] Water Pollution Prevention and Control Action Plan,State Council, 16^th April 2015, viewed 18^th February 2025, <https://english.www.gov.cn/policies/latest_releases/2015/04/16/content_281475090170164.htm>

[8] Soil Pollution Prevention and Control Action Plan, Ministry of Environmental Protection, 13^th December 2016, viewed 18^th February 2025, <https://english.mee.gov.cn/Resources/Plans/Plans/201712/P020171213578786221890.pdf>

[9] Koty, A, China Launches Carbon Trading Market as Urgency to Cut Emissions Grows,China Briefing, 26^th July 2021, viewed 9^th January 2025, <https://www.china-briefing.com/news/china-launches-carbon-trading-market-as-urgency-to-cut-emissions-grows/>

[10] The European Green Deal: Striving to be the first climate-neutral continent, European Commission, 11^th December 2019, viewed 14^th January 2025, <https://commission.europa.eu/strategy-and-policy/priorities-2019-2024/european-green-deal_en>

[11] Erbach, G, and Jensen, L, Fit for 55 package, European Parliamentary Research Service, 14^th July 2021, viewed 14^th January 2025, <https://epthinktank.eu/2024/08/01/fit-for-55-package/>

[12] REGULATION (EU) 2023/956 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 10 May 2023 establishing a carbon border adjustment mechanism, European Union, 16^th May 2023, viewed 14^th January 2025, <https://eur-lex.europa.eu/eli/reg/2023/956/>

[13] Stanway, D, and Xu, M, China plans to raise minimum renewable power purchase to 40% by 2030: government document, Reuters, 10^th February 2021, viewed 9^th January 2025, <https://www.reuters.com/article/us-china-climatechange-renewables/china-plans-to-raise-minimum-renewable-power-purchase-to-40-by-2030-government-document-idUSKBN2AA0BA/>

[14] Transport, IEA, viewed 14^th January 2025, <https://www.iea.org/energy-system/transport>