Does Chinese Environmental Policy Affect Income Inequality? Evidence from the Central Environmental Protection Inspection

This paper investigates the effect of environmental policy on income inequality. It focuses on the central environmental protection inspection led by the central government in China. Using a difference‐in‐differences approach, it finds evidence that environmental regulation decreased the per capita income and enlarged the gap between urban and rural income while showing an insignificant effect on employment. Although the policy can reduce pollution levels and bring environmental benefits in aggregate, the findings of this study suggest that the regulations appear to have reduced the proportion of manufacturing industry and hindered general innovation and investment from entrepreneurs, which resulted in greater inequality. Rural residents suffered more from environmental regulation due to relatively high migration costs and their disadvantaged human resources on the aspects of health, education level, and skills. The local government's execution incentive can also play a key role in the effectiveness of environmental policy. Regions with lower GDP growth targets and younger government leaders were affected significantly with regard to the income growth of local residents and the urban–rural income gap.