Environmental Tax, Polluting Plants' Strategies and Effectiveness: Evidence from China

Although environmental taxes have become a popular policy tool, their effectiveness for pollution control and impact on the compliance strategies of agents remains questionable. This research uses a quasi-experimental design to examine the effectiveness of the Pay for Permit policy, an environmental tax that has been imposed on water pollution emissions in Lake Tai Basin, Jiangsu, China, since 2009. A plant-level panel dataset from 2007 to 2010 is used for both difference-in-differences and difference-in-difference-in-differences analyses to compare the pollution discharge, pollution abatement, and pollution generation of policy participants and control groups. The results indicate that treated plants reduce their emissions by about 40 percent after two years of the policy implementation. Thus, the policy generated approximately a 7 percent decrease in the industrial chemical oxygen demand emission in the entire Lake Tai Basin based on the emission level of 2007. Pollution is primarily reduced via end-of-pipe abatement instead of cleaner production. Our results show the effectiveness of environmental taxes in controlling industrial pollution, and indicate that the tax may not motivate the adoption of innovative techniques in the short term.