Working Paper: NBER ID: w26540
Authors: Haichao Fan; Joshua S. Graff Zivin; Zonglai Kou; Xueyue Liu; Huanhuan Wang
Abstract: This paper examines the effect of stringent environmental regulations on firms' environmental practices, economic performance, and environmental innovation. Reducing COD levels by 10% relative to 2005 levels is an aim of the Chinese 11th Five-Year Plan. Using a difference-in-differences framework based on a comprehensive firm-level dataset, we find that more stringent environmental regulations faced by firms are positively associated with a greater probability of reducing COD emissions; also, there exists an evident heterogeneous effect across industries with different pollution intensities. Stricter environmental regulations also account for the sharp decline in firms' profits, capital, and labor. After executing a complete chain of tests of the underlying mechanisms, we find that firms rely more on recycling and abatement investment than on innovations when meeting environmental requirements.
Keywords: environmental regulations; pollution reduction; economic performance; green innovation
JEL Codes: D22; K32; O31; Q53
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Stricter environmental regulations (Q52) | Greater probability of reducing chemical oxygen demand (COD) emissions (L99) |
| Greater probability of reducing chemical oxygen demand (COD) emissions (L99) | Reduction in pollutants (Q53) |
| Stricter environmental regulations (Q52) | Declines in firms' profits, capital, and labor (D25) |
| Technique effect (pollution abatement facilities and cleaner production processes) (Q52) | Reducing emissions (Q52) |
| Stricter environmental regulations (Q52) | Little evidence of increase in green patent applications (Q55) |