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Combating cross-border externalities: Evidence from China’s inter-provincial ecological compensation initiatives

Author

Listed:
  • Chen, Shiyi
  • Graff-Zivin, Joshua
  • Wang, Huanhuan
  • Xiong, Jiaxin

Abstract

We examine China’s Ecological Compensation Initiative (ECI), which facilitates cross-provincial payments to reduce pollution in the Xin’an River. Using firm-level data, we find the policy significantly reduced upstream emissions, especially among firms closer to the river’s boundary. The ECI also increased firm exits and reduced new entries. A cost-benefit analysis shows that both upstream and downstream provinces benefited, as did the central government, supporting the ECI’s long-term feasibility and durability. Evidence from similar later programs highlights the ECI’s broader relevance, suggesting that well-designed compensation schemes can effectively address cross-jurisdictional environmental externalities.

Suggested Citation

  • Chen, Shiyi & Graff-Zivin, Joshua & Wang, Huanhuan & Xiong, Jiaxin, 2025. "Combating cross-border externalities: Evidence from China’s inter-provincial ecological compensation initiatives," Journal of Public Economics, Elsevier, vol. 252(C).
    • Handle: RePEc:eee:pubeco:v:252:y:2025:i:c:s0047272725001938
    DOI: 10.1016/j.jpubeco.2025.105495
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    JEL classification:

    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
    • K32 - Law and Economics - - Other Substantive Areas of Law - - - Energy, Environmental, Health, and Safety Law
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis

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