Does target-based performance evaluation system reduce pollution emissions? Firm-level evidence from China

Abstract

This paper sheds light on the effectiveness of a concrete target-based performance evaluation system (TPES) for localities in enhancing local environmental enforcement in China. We conduct a difference-in-differences (DID) specification and exploit unique firm-level data to investigate the effects of the TPES on SO2 emission reduction through the Two control Zones (TCZ) policy. The results suggest that the TPES significantly reduces SO2 emissions of firms located at the TCZ cities, both in extensive and intensive margins. We also find that the treatment effects vary largely across enterprise sizes, ownership types, and local economic development. Our findings further verify how the long-standing distortions in the decentralized implementation of nationwide environmental regulations in China are remedied with a proper performance evaluation system.