China’s new way of tackling pollution is to make companies buy environmental insurance

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Image: AP Photo/Greg Baker

China’s annual environmental report card out this week contains a brief mention of a new tool to rein in industrial contamination—requiring companies to buy environmental liability insurance.

Over 2,000 environmental lawsuits are filed against companies that pollute Chinese soil, water and air every year, according to the Center for Legal Assistance to Pollution Victims in Beijing, but few are ever held accountable. The rationale behind pollution insurance is it ensures environmental accidents and degradation are paid for without public funds, but keeps companies solvent. At present, Chinese polluters often avoid paying compensation by declaring bankruptcy.

In February, China’s ministry of environment expanded a pilot program that requires companies that “pose serious environmental risk” to buy environmental insurance, adding heavy industries like mining, smelting, battery making, leather goods, chemicals, and product manufacturing. According to the report yesterday, China’s ministry of environmental protection has implemented the program in 15 provinces (pdf in Chinese, p.7).

The broadening efforts show the growing influence of the environmental ministry, which only gained voting power in China’s powerful state council in 2008.  But it’s not time to celebrate just yet—China’s environmental report gave no details about the program’s successes or failures, and the 21st Century Business Herald reported that in a survey of 26 publicly listed ((link in Chinese) companies making paper and other goods, none had bought the insurance.

For mandatory insurance to work, insurers have to be independent of the companies they monitor and have the power to enforce their recommendations, according to Julien Combeau, executive director of a Willis, a global risk adviser. That may be a problem in China, where the insurance industry is new and government commitment to environmental clean-up is inconsistent.

Combeau wrote in April, “if mandatory insurance is not implemented with authority-driven incentives to enhance pollution prevention and control, along with strong enforcement and sanctions, it is probable that we will see insurers pulling out of coverage areas or walking away from markets, rather than seeing them leverage industries on behalf of governments.”