Banking competition and the effectiveness of environmental regulations: Evidence from China

We find that the effectiveness of environmental regulations is contingent on local banking competition in China. Specifically, firms located in cities with more concentrated banking markets are less likely to reduce their SO2 emissions or increase investment in abatement equipment when faced with regulation tightening. Instead, these firms switch to cleaner coal, which is more costly in reducing pollution but requires less upfront investment. These results suggest that firms in cities with limited banking competition face difficulties accessing the credit necessary for effective pollution abatement. A competitive local banking sector is thus a necessary complement to environmental regulation efforts in China.