Cutting ties with local bureaucrats: How does the environmental vertical management reform affect firm pollution in China?

Abstract

China's local environmental protection agencies are the basic government units that implement the country's environmental regulations. Initiated decades ago, the vertical environmental management reform was gradually rolled out throughout the country with the aim of enhancing the independence of local environmental enforcement by shifting the control of the agencies' resources from local governments to higher-level environmental protection authorities. This research investigates the effects and influencing channels of this reform on firm pollution behavior in China. Combining manually collected data on the timing of the reform at the county level with a unique firm-level emission dataset, we use a difference-in-differences approach to estimate the effect of the reform. Our results suggest that the reform leads to a significant reduction in firms' pollution, and this reduction is achieved mainly through a scaled-back production and a cleaner production process. A further analysis shows that the reform weakens local bureaucrats' political and economic incentives that could distort environmental enforcement. Our findings highlight the importance of minimizing political interventions in environmental governance in a large country like China to achieve environmental targets.