Do industrial pollution activities in China respond to ecological fiscal transfers? Evidence from payments to national key ecological function zones

Abstract

The policy of payments to National Key Ecological Function Zones (NKEFZs), a type of instrument for Ecological Fiscal Transfers, has been introduced in China. We employed propensity score matching and difference in difference estimation to investigate the effectiveness of this policy on the reduction of industrial pollution. We found evidence that the policy had reduced pollution-intensive activity in the NKEFZs. Meanwhile, implementation of the policy had been selective. First, the downstream NKEFZs with higher opportunity costs had lower efforts to reduce industrial pollution. Because performance-based payment mechanisms neglect opportunity costs, financial stress weakens the efforts to reduce pollution. Secondly, the NKEFZs policy suppresses air-polluting industries but not water-polluting industries. Local governments may reduce only the target pollutant (chemical oxygen demand) while ignoring non-target pollutants. There may be moral hazards under information asymmetry in pollution reduction.

Keywords:

• ecological fiscal transfers
• performance-based payments
• opportunity costs
• moral hazards
• China

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Moral hazard is the condition under which the principal cannot be sure if the agent has put forth maximal effort under asymmetry information (Hogg and Huberman, 2002).

Additional information

Funding

This work was supported by the National Social Science Foundation of China (17VZL002); China talent project/The transformation and development of China's economy based on the perspective of innovation-driven; the National Natural Science Foundation of China (41901141) and Korea Foundation for Advanced Studies/“Chey Institute for Advanced Studies” International Scholar Exchange Fellowship for the academic year of 2018-1019.