Can foreign demand shocks reduce the pollution emission intensity? Evidence from exporters in China

Abstract

This paper investigates the impact of foreign demand shocks on emission intensity using data from Chinese manufacturing exporters. We construct a Bartik instrument for changes in foreign demand by incorporating firms' initial specialization patterns and the portion of foreign demand changes independent of fluctuations in China's exports. We observe a significantly negative effect of increased foreign demand shocks on SO2 emission intensity (emission intensity effect), yet the overall impact on firms' SO2 emissions is minimal and statistically insignificant. Our decomposition reveals that although positive foreign demand shocks lead to increased SO2 emissions through output growth (scale effect), this effect is largely counteracted by the negative emission intensity effect. Further analysis shows that the emission intensity effect can be attributed to firms' adoption of cleaner technologies and the reallocation of product sales towards those with lower emission intensities.