The effect of environmental regulation on the marginal abatement cost of industrial firms: Evidence from the 11th Five-Year Plan in China

Abstract

The Chinese government set specific provincial reduction targets for sulfur dioxide (SO2) and chemical oxygen demand (COD) in the 11th Five-Year Plan. However, due to the limitations of firm-level data, there is a research gap on the impact of this policy on the marginal abatement cost (shadow price) of targeted pollutants for industrial firms. First, we estimate the shadow prices of SO2 and COD emissions for industrial firms in China from 1998 to 2009 using the quadratic output directional distance function based on the stochastic frontier analysis (SFA). We also use the Environmental Survey and Reporting database, which is a unique nationwide firm-level database including firm-level emission information. Then, using the difference-in-difference-in-differences (DDD) strategy and combining the variation in pollution reduction targets across provinces with the before-and-after policy change, as well as the firms' emissions, we identify the effect of the provincial reduction targets on the shadow prices of the two pollutants. The estimated average shadow prices of SO2 and COD emissions are 3454.96 yuan/ton and 17,560.18 yuan/ton, respectively. The heterogeneous characteristics show that non-state-owned enterprises (non-SOEs), large-scale firms, and firms in the eastern region have higher shadow prices than state-owned enterprises (SOEs), small and medium-scale firms, and firms in the central and western regions. The DDD estimations show that the setting of provincial reduction targets significantly increases the shadow prices of SO2 and COD emissions for industrial firms. Specifically, when the pollution reduction target is one standard deviation higher than the mean, the shadow prices of industrial firms' SO2 and COD emissions increase by 26.11 yuan/ton and 85.52 yuan/ton, respectively, whose SO2 and COD emissions are 10% higher than the average value. Finally, several policy implications are hereby proposed.