Evidence of Firm-level Pollution Leakage resulting from Clean Air Policy in China

Pollution leakage occurs when firms shift pollution-intensive activities to lessregulated regions, potentially undermining environmental policies. Given data limitations in developing countries, investment flows offer an alternative to traditional leakage measures. Using manually collected investment data from 390 listed pollution-intensive firms in China, our study evaluates whether regionally differentiated regulations under the 2013 Clean Air Policy triggered domestic pollution leakage. Applying a difference-in-differences approach, we find that regulated firms significantly increased pollution-related investments in subsidiaries located in less-regulated areas after the policy. Pollution leakage patterns vary by region, with firms in the Three Regions (centered around Beijing, Shanghai, and Guangzhou respectively) relocating investments to both nearby provinces and distant western China, while those in ten other major city clusters primarily shifted investments to nearby areas. We also show that industrial agglomeration, transport infrastructure, and weak innovation capacity drive this relocation. Our findings suggest that investment flows offer a valuable lens for identifying pollution leakage, and that unintended east-to-west transfers may undermine environmental gains. Policymakers should strengthen disclosure requirements, target pollution control funding to affected regions, and support green innovation to reduce relocation incentives.