Pollution charges and firms’ energy efficiency: evidence from a quasi-natural experiment in China

Abstract

ABSTRACT Pollution charges are an important way to improve energy efficiency. Using the relevant data of Chinese industrial firms from 2003 to 2010, we take China’s Pollution Levy Standard Reform (PLSR) implemented in 2007 as a quasi-natural experiment, and use the staggered difference-in-differences method to empirically test the impact of pollution charges on green total factor energy efficiency (GTFEE) of firms. We find that pollution charges significantly increase firms’ GTFEE. This result is still valid under a series of robustness tests. The potential mechanism is that although pollution charges increase the cost of firms, they also promote technological innovation of firms, and ultimately in the overall effect pollution charges improve the GTFEE of firms. In addition, the positive effect of pollution charges on GTFEE is greater for non-state owned enterprises, non-exporting enterprises and enterprises in heavily polluting industries.