Does Water Resource Fee to Tax Policy Help Reduce Water Pollution in China?

Abstract

This research uses a time-varying difference-in-differences (DID) model to assess the impact of the water resource fee to tax (WRFT) policy on water pollution in China from 2004 to 2020. The study finds that the WRFT policy can reduce chemical oxygen demand (COD) emissions by 17.7% and ammonia nitrogen (NH3-N) emissions by 31.6% on average. These findings are supported by various robustness tests, such as the parallel trend test, the placebo test, and the changing standard errors. The study also finds that the impact of the WRFT policy is stronger in regions with higher economic development levels and lower water pollution levels, but does not show heterogeneity in water resource abundance. The mechanism analysis suggests that the WRFT policy achieves the effect of reducing water pollution by reducing sewage discharge, increasing intensity of water pollution prevention, and promoting green R&D innovation. The study addresses potential endogeneity issues such as reverse causality, sample self-selection, and omitting variable bias. Based on these findings, the study offers some policy recommendations to further enhance the WRFT policy effects and reduce water pollution in China.