The Impact of Pollution Levies on Firms’ Energy Consumption and Production: Evidence from China’s Pollution Levy Standard Reform

This paper investigates the impact of pollution levies on firms’ energy consumption and production activities using a difference-in-differences design for China’s 11th Five-Year Plan pollution levy standard reform. This reform was rigorously enforced due to the crucial role of emission reduction targets in political assessments. Using a firm-level pollution and production dataset from 2001 to 2014, we find that (1) compared to firms in an unreformed region, those in a reformed region reduced their energy consumption by 4.2%, SO2 emissions by 12.16%, and lost TFP by 4.82%. (2) Reform-induced energy savings are mainly driven by polluting industries, occur only after the government links emission reduction targets to performance appraisals, and are mainly driven by reformed districts under politicians with promotion prospects. (3) Increased investment in energy-efficient equipment and technologies, reduced production, and a more rational allocation of energy are the main channels through which energy savings and emission reductions are achieved, but they also result in TFP losses. (4) Cost estimates for the study sample indicate that about 1.31 × 104 RMB will be lost for every ton of standard coal saved. This paper provides important policy implications for enhancing energy saving and reducing emissions through pollution levies in developing countries.