Go with the wind: Spatial impacts of environmental regulations on economic activities in China

Abstract

This paper assesses the spatial effects of environmental regulations on economic activities. By exploiting the progressive rollout of a national pollution control program in China, which constructed a monitoring network that covered the urban center of every city, we find that polluting firms located in the unmonitored upwind region of the city experienced a substantially larger reduction in output than non-upwind firms after the program. Because the wind can transport upwind pollution emissions to the monitoring network-covered urban center, local governments are incentivized to enforce tighter regulations on upwind firms. Although industrial activities were suppressed, commercial businesses and residential services were promoted in the upwind region, accompanied by a greater supply of corresponding land and increased land prices. Altogether, the monitoring program led to a substantial reduction in population exposure to air pollution and an redistribution of industrial and residential activities within the city. Our findings shed light on the policy-making of future environmental regulation programs.