A good medicine tastes bitter: Environmental regulation that shapes China's green productivity

Abstract

This study scrutinizes the effect of the Sewage Charges System (SCS) reform on the green total factor productivity (GTFP) across China's provinces. Employing the global Luenberger productivity indicator based on a non-radial directional distance function, we observe an upward trend in China's GTFP during the study period. However, the SCS reform precipitates a contraction in the GTFP, particularly pronounced in low-income and resource-based provinces of China. Empirical findings withstand a battery of robustness checks of self-selection and placebo tests. Further mechanistic tests suggest that the SCS reform influences the GTFP by escalating pollution treatment costs, curtailing R&D investment, and undermining the quality of green innovation via crowding-out effects. Overall, the SCS reform is effective in curbing SO2 emissions, but it reduces economic efficiency. Therefore, how to synergize emission reduction and economic growth is an important issue to be addressed in the area of environmental policy design in China.