Estimating the Economic Impact of Intensifying Environmental Regulation in China

Faced with serious environmental degradation, China under Xi Jinping has pursued a massive and sustained campaign against pollution, especially air pollution, since 2013. How much of a burden has the campaign-style escalation in environmental enforcement had on manufacturing firms? Using firm-level environmental supervision records, we directly measure the environmental regulation intensity. We combine a regression discontinuity design based on Qinling–Huaihe winter heating policy with a first difference approach to estimate the causal effect of environmental regulatory enforcement on firm performance. We find that, for high air-polluting manufacturing firms, a 1% increase in the probability of being penalized for environmental violations lowers their total factor productivity by 2.5%. We also find that the campaign-style environmental enforcement has affected larger enterprises and state-owned enterprises less while deterring the entry of new firms. While we appreciate the importance of improving air quality, our research offers a more well-rounded understanding of China’s environmental enforcement initiatives and especially the costs of such enforcement on industry. Our findings suggest that the reward and punishment of local officials and of firms need to be sensitive to the costs of adjustment.