State Control as a Substitute for Environmental Regulation? Evidence from Chinese Cities

Abstract

We investigate the role of state control of industry following an increase in the stringency of an environmental policy in a large developing country. Focusing on a national sulfur dioxide (SO2) cleanup campaign in China, we find that the pre-existing extent of state control over the primary targeted industry, coal-fired power and heat generation, predicts superior cleanup performance in cities. We find this effect is specific to state capital controlled by higher (central and provincial) levels of government, while the state capital share controlled by lower (prefectural cities and below) levels of government is negatively correlated with cleanup performance. Our results suggest that in China’s incomplete contractual environment, central state control partly substitutes for regulatory enforcement, providing an important societal benefit but ultimately implying limits to the impact of environmental campaigns.