Will Environmental Regulation Help Reduce Pollution and Improve Efficiency?

Abstract

In the face of heavy pressure for both steady growth and pollution control, it is very important that we reduce pollution and improve efficiency at the same time with environmental regulations. This chapter, for the first time, uses the State Council’s 2003 air quality control program with set deadlines as a natural experiment and adopts the difference-in-differences (DID) method based on trend score match to evaluate how effective our environmental regulations are in reducing pollution and improving efficiency and reveal the systematic heterogeneity therein. Robustness test has proved the results valid and reliable. Our research findings are as follows: environmental regulation reduces pollution and improves environment quality but hampers technological progress and lowers total factor productivity in the short run; however, with time, environmental regulation will bring economic and social benefits in other aspects, which will gradually offset the loss in economic growth and ultimately do more good than harm. Thus, environmental regulation can indeed help protect the environment and grow the economy. Whether our environmental regulation can achieve this dual goal in practice depends, on the one hand, on institutional arrangements and, on the other hand, on how the external policy environment, especially market factors and the government, play their roles. In this regard, our research finds that by reducing pollution and emissions, environmental regulation helps grow the economy, and a positive institutional environment amplifies the positive effect of environmental regulation and reduces distortion.

CLC: F0626 Document code: A Article ID: 1002-8102(2016)09-0126-18