The effect of environmental regulation on air pollution, productivity, and factor structure: a quasi-natural experiment evidence from China

This paper makes a first empirical attempt at estimating the effects of environmental regulation on air pollution, total factor productivity (TFP), and factor structure based on a quasi-natural experiment method using a novel dataset of 216 prefectural-level cities during the years 1998–2016 in China. Specifically, we are focused on the policy impact of the listed key environmental protection (KEP) prefectures which subject to more stringent environmental regulations than non-KEP prefectures. Our empirical results show that the PM2.5 intensity, environmental performance, and TFP of the KEP prefectures are significantly lower than the non-KEP prefectures. The environmental policy also affects the factor structure of KEP cites. Heterogeneity analysis indicates that the policy significantly lowered the PM2.5 for central and western cities while it is unclear for eastern cities. Our findings also document that the policy effects are unclear in the long term. Various robustness checks confirm the internal validity. These estimation results are instructive to the policymakers. We suggest that the central government should measure the effectiveness of policies within 5 years of policy formulation. Governments at all levels should make targeted adjustments based on actual impact effects. The central government should be granted local governments more speaking power and flexibility in policy implementation when formulating environmental regulatory policies. Otherwise, the central government also needs to improve the communication medium with provincial governments.