Environmental regulation policy, corporate pollution control and economic growth effect: Evidence from China

Abstract

This paper constructs a theoretical framework including pollution accumulation that describes the corporate pollution treatment mechanism, and uses the shooting method to find the equilibrium solution on saddle path of the neoclassical model. It simulates the effects of pollution reduction and economic growth under the three scenarios of “no environmental regulation policy”, “with environmental tax policy”, and “with a combination of environmental tax policy and subsidy policy for pollution control”. The results show that in the absence of any environmental regulation policy, firms will not incorporate the social cost of pollution emissions into their own production cost and have no incentive for pollution control. When implementing environmental tax policy, firms will be motivated to invest more into pollution control because the cost of penalties on firms rapidly increases as environmental tax rate rises and the negative impact of pollution on business production continues to deepen, and the marginal return on energy input begins to fall. Compared with sole implementing environmental tax policy only, a combination of environmental tax policy and subsidy policy for pollution control can further stimulate firms’ incentives, which achieves a virtuous cycle between output growth, pollution reduction and corporate treatment, reaching effects of pollution reduction and economic growth.