Abstract
This paper studies the firm-level impact of the river chief system (RCS), which is a decentralized policy in China for water protection, by investigating polluting firms’ emission abatement and the net operating profits. We have four main findings. First, on average, the RCS significantly reduced firm-level COD emissions by 3.7 percent, which was mainly caused by the emission abatement of firms in heavily polluting industries, non-state-owned firms, and firms in the eastern provinces. On the other hand, the RCS also significantly increased polluting firms’ profit by 3.1 percent, which was mainly caused by heavily polluting firms. Second, different regions adopted different strategies for pollution abatement, exhibiting a pattern consistent with the “pollution paradise” assumption in the central and western provinces. Third, polluting firms at provincial boundaries did not reduce their COD emissions, while polluting firms in the interior significantly reduced their emissions by 5.6 percent, indicating the strong free-riding incentive of local governments. Fourth, the increase in the profits of heavily polluting industries was mainly caused by the significant increase in market concentration and a possible transfer of the negative shock from the RCS along the production line. All results were also robust for firm-level NH3-N emissions. This paper provides new and insightful implications for policymaking for environmental protection.
Highlights
The rapid economic development of China since 1978 has caused severe environmental problems
Emissions and polluting firms’ net operating profits. (Both the net operating profits and the net total profits could be obtained from the Annual Surveys of Industrial Firms (ASIFs))
Yikt = αRCkt + βXikt + f i + yt + ε ikt where yikt is emissionikt and pro f itikt, representing the log of the annual COD emissions and the log of the net operating profit of firm i located in prefecture k in year t; RCkt is a dummy variable that equals 1 if prefecture k has implemented the river chief system by year t
Summary
The rapid economic development of China since 1978 has caused severe environmental problems. In 2003, the central government officially claimed its target to be balancing the economic development and environmental sustainability. The highly decentralized political regime, the information asymmetry between local governments and the central government, and the fact that economic development is still a critical measure in local leaders’ performance evaluation mitigate local governments’ efforts to reduce water pollution [1]. Wuxi pioneered an innovative system, known as the river chief system (RCS). This system assigns leading officials of local governments to be “heads” of certain parts of rivers and lakes to enhance their incentives and responsibility for emission abatement. The responsible official’s name and contact information are carved on an iron plate planted by the part of the river or lake for which they are responsible
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