DOES STRICTER ENVIRONMENTAL REGULATION PROMOTE PRODUCTIVITY? EVIDENCE FROM THE RISING OF POLLUTION DISCHARGE FEE IN CHINA

Abstract

Environmental pollution has become a serious problem in the past decades, especially in developing countries with rapid economic growth. As the world’s largest developing country with incredible speed of development, China provides a unique perspective to investigate the productivity effect of environmental regulations. The main finding of this study supports the Porter hypothesis, that stricter environmental regulations significantly promote productivity in China. We also explore three potential impact channels leading to this productivity improvement, including rising technical innovation, optimizing financial management and reducing resource misallocation. The latter two mechanisms are rarely discussed in relevant studies. However, these two additional effects are of great importance since they can help establish a more comprehensive market environment and a more optimized industrial structure, especially in developing countries. Overall, this study proves that China has achieved dual goals of protecting the environment and economic growth by implementing stricter environmental regulations, which is worthy of reference for other developing countries facing similar problems.