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Environmental regulation and responses of local governments

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  • Ye, Bing
  • Lin, Ling

Abstract

In 1998, China approved the setup of two control zones and implemented stringent environmental regulation in these zones. This policy enables us to use the difference-in-difference method to investigate local governments' responses to environmental regulation. We find that tough environmental regulation increases tax rate but does not affect local government expenditure. Among the mechanisms through which environmental regulation positively affects tax rate are the negative effects of environmental regulation on investment of fixed assets, number and total profits of above-scale industrial firms in dirty industries of TCZ cities. In addition, the effect of environmental regulation on tax rate is positively related to policy strength and proportion of the secondary industry. Moreover, tough environmental regulation increases the shares of revenue from enterprises and agricultural taxes in budgetary revenue, but decreases the share of value-added tax in budgetary revenue. These findings highlight additional cost of environmental regulation (aside from those mentioned in literature), including increased burdens of the private sector that would lead to large distortions, and aggravated unfair distribution of taxes. The additional cost should be considered when evaluating the environmental policy.

Suggested Citation

  • Ye, Bing & Lin, Ling, 2020. "Environmental regulation and responses of local governments," China Economic Review, Elsevier, vol. 60(C).
    • Handle: RePEc:eee:chieco:v:60:y:2020:i:c:s1043951x20300183
    DOI: 10.1016/j.chieco.2020.101421
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    Cited by:

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    3. Zengming Wu & Mengnan Zhu, 2022. "More air pollution control, less industrial land leasing? Empirical evidence from microland transactions," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(3), pages 647-658, April.
    4. Susan Park, 2021. "Policy Norms, the Development Finance Regime Complex, and Holding the European Bank for Reconstruction and Development to Account," Global Policy, London School of Economics and Political Science, vol. 12(S4), pages 90-100, May.
    5. Xu, Yong & Li, Shanshan & Zhou, Xiaoxiao & Shahzad, Umer & Zhao, Xin, 2022. "How environmental regulations affect the development of green finance: Recent evidence from polluting firms in China," Renewable Energy, Elsevier, vol. 189(C), pages 917-926.
    6. Frick, Bernd & Mainus, David & Schumacher, Paul, 2020. "Die Auswirkungen von COVID-19 auf die Transferaktivitäten der Fußballvereine der fünf europäischen Top-Ligen im Sommer 2020," HWWI Policy Papers 130, Hamburg Institute of International Economics (HWWI).
    7. Wang, Enci & Su, Bin & Zhong, Sheng & Guo, Qinxin, 2022. "China's Embodied SO2 Emissions and Aggregate Embodied SO2 Intensities in Interprovincial and International Trade," Technological Forecasting and Social Change, Elsevier, vol. 177(C).
    8. Yong Geng & Wei Liu & Hanshu Chen & Xinyu Zou, 2023. "The Spillover Effects of Environmental Regulations: A Perspective of Chinese Unregulated Firms' Tax Burden," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 31(2), pages 84-111, March.
    9. Wang, Yuze & Eriksson, Tor & Luo, Nengsheng, 2023. "The health impacts of two policies regulating SO2 air pollution: Evidence from China," China Economic Review, Elsevier, vol. 78(C).
    10. Chen, Gao & Xu, Jian & Qi, Yu, 2022. "Environmental (de)centralization and local environmental governance: Evidence from a natural experiment in China," China Economic Review, Elsevier, vol. 72(C).
    11. Mao, Hui & Quan, Yurong & Fu, Yong & Chen, Shaojian, 2022. "Risk preferences, productive investment and straw return technology adoption by farmers in China," 2022 Annual Meeting, July 31-August 2, Anaheim, California 322087, Agricultural and Applied Economics Association.
    12. Qiwen Dai & Huihua Huang & Xiaoqi Zhang & Yumin Su & Cheyuan Liu & Qiangyi Li, 2022. "Mediation Effect of Corporate Tax Burden and the Relationship between Environmental Regulation and Firm Performance," IJERPH, MDPI, vol. 19(22), pages 1-23, November.

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    More about this item

    Keywords

    Environmental regulation; Taxation; Local government expenditure; Two control zones; China;
    All these keywords.

    JEL classification:

    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue

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