At present, China's environmental protection industry has reached a certain scale, with a large number of market entities involved in technology research and development, equipment manufacturing, project construction, investment operation, and planning consulting. A comprehensive environmental protection industry system covering all elements, the entire chain, and all aspects has been initially formed. The investment scale of China's environmental protection industry is continuously increasing and is in a stage of continuous improvement. Under the framework of carbon neutrality, the environmental protection industry has encountered new opportunities, with three major directions: low-carbon energy, energy conservation and efficiency improvement, and recycling and regeneration, helping to reduce environmental pollution and carbon emissions.
Conceptual Framework of the Broad Sense Environmental Protection Industry
For a long time, due to the relatively strong penetration of the environmental protection industry into other industries, the industry boundaries are blurred and it is difficult to form a very unified and clear definition. Internationally, the definition commonly adopted is that provided by the Organization for Economic Co-operation and Development (OECD): it considers the environmental protection industry as providing products, services, and clean technologies to control and eliminate pollution, improve resource utilization rates, and reduce environmental risks. This is also considered the narrow concept of the environmental protection industry and is adopted by most European countries.
China basically adopts the definition provided in the 'Guiding Opinions on Further Promoting the Development of the Environmental Protection Industry by the Environmental Protection System' issued by the Ministry of Environmental Protection in 2011:The environmental protection industry is an activity that provides environmental products and services for social production and life, providing a material basis and technical guarantee for pollution prevention and control, ecological environment improvement, and resource protection.
It can be found that the OECD's definition of the environmental protection industry is narrow, focusing on terminal control and end-of-pipe treatment. In contrast, the definition provided by China's Ministry of Environmental Protection clearly puts forward the key points of improving ecological environment and protecting resources, with a broader scope. Looking at the development of the connotation of the world's environmental protection industry, it can be seen that the definition of the environmental protection industry is showing a trend towards development from narrow to broad.The broad environmental protection industry mainly focuses on life cycle management. The boundaries of the environmental protection industry are nearly disappearing, reaching a highly developed stage of ecological civilization. The environmental protection industry will penetrate into all industries of the national economy.
Source: Public information, Frost & Sullivan
Environmental protection industry chain and current development status
The upstream mainly involves design consulting and material equipment aspects.In recent years, China's environmental governance has entered an era of comprehensive development involving large regions and major projects. The environmental protection industry has gradually extended from single engineering implementation and equipment manufacturing to the upstream and downstream of the industrial chain. The upstream mainly includes design consulting services, with common providers such as survey and design institutes, planning and design institutes, etc. Typically, large environmental protection enterprises rely on their own design institutes to complete this service or carry out strategic cooperation with design institutes to improve this design process. The upstream also includes the design and manufacturing of materials and equipment, which is one of the capabilities currently lacking among most Chinese environmental protection enterprises.
The midstream is one of the most value-producing areas in the implementation of environmental protection projects, as it involves a significant investment in resources.Generally speaking, even for engineering-based environmental protection enterprises, their construction is handed over to local contractors, with the environmental protection enterprise appointing personnel to manage the construction site. The implementation of different types of environmental protection projects varies. Large-scale equipment installation projects are typically installation projects, while water treatment projects tend to be construction projects.
The downstream mainly involves the maintenance and operation of environmental protection facilities.The operation of downstream pollution control environmental protection facilities generally has a strong public utility attribute, and there are regional barriers. The operators have relatively stable and sustained profitability but face growth ceilings. The pricing mechanisms of some facilities also need improvement. Overall, the threshold for operation is relatively high, with many barriers, such as municipal sewage treatment and waste-to-energy generation-related operations. Such enterprises have extremely stable cash flows and are capital-intensive industries, requiring high asset scale and capital costs, usually dominated by state-owned enterprises. Industrial hazardous waste treatment operation enterprises have high license restrictions and technical requirements. However, as more capital and resources enter this field, enterprises in the operation sector can achieve growth through financing and mergers and acquisitions.
Source: Public information, Frost & Sullivan
Investment scale of environmental protection industry
Since the 18th National Congress of the Communist Party of China, China's emphasis on environmental protection has been continuously increasing, and investment in environmental governance has also grown steadily. Especially driven by the PPP model, the proportion of the environmental protection industry in GDP has increased significantly; China's proportion of the environmental protection industry in GDP grew from 1.5% in 2016 to 1.9% in 2021, with an annual compound growth rate of 5.0%. In the future, it is expected that the proportion of China's environmental protection industry in GDP will reach 2.3% in 2026, with an annual compound growth rate of 3.9%, further increasing the market scale.
According to international experience, when investments in environmental pollution control account for 1% to 1.5% of GDP, the trend of environmental deterioration can be controlled. When this proportion reaches 2% to 3%, environmental quality can improve.
Source: Public information, Frost & Sullivan
Challenges Faced by the Environmental Protection Industry
There are many but not strong environmental protection enterprises:China has a large number of environmental protection enterprises, but their scale is generally small, with serious low-level homogenization. Market concentration is low, and there are few leading enterprises with large scale and strength. Even within niche fields, there are leading companies, but globally, there is still a lack of multinational enterprises capable of competing with international giants such as Suez, Veolia, and Pepsico.
Weak independent R&D capabilities of enterprises:The environmental protection industry has a low technical level, weak independent innovation capabilities, low specialization, an unreasonable industrial and product structure, and weak technological competitiveness. Apart from having certain local technological advantages, most basic research and technology development in environmental science and technology are in a state of catching up.
Insufficient mastery of core enterprise technology equipment:China ranks among the top in the world in terms of the number of papers published and patent applications in the environmental protection industry, but the overall quality is not high. The frequency of paper citations is significantly lower than that of developed countries, and there is a lack of core patent technologies that support environmental quality improvement. In particular, 'neck-sticking' core technologies and equipment rely on imports from abroad or follow in imitation.
The cross-integration of multidisciplinary technologies has progressed slowly:In China, the research and development of environmental protection technology mainly occurs in universities and research institutes, with insufficient innovation capabilities of enterprises. The channels for the transfer and transformation of scientific and technological achievements are not smooth, and there is a prominent problem of disconnection between technology research and development and application transformation. The system integration ability of technologies and equipment is weak, making it necessary to improve policy support methods and carry out corresponding institutional and mechanism reforms. In recent years, disciplines such as materials science, biology, big data, information technology, and artificial intelligence have developed rapidly. In contrast, the development of environmental science and technology has been relatively lagging behind. The environmental protection industry has not fully absorbed and applied the latest technological achievements, lacks cross-integration with other disciplines and fields, and has failed to achieve major technological innovation breakthroughs.
