Does target-based performance evaluation system reduce pollution emissions? Firm-level evidence from China

Abstract

This paper sheds light on the effectiveness of a concrete target-based performance evaluation system (TPES) for localities in enhancing local environmental enforcement in China. We conduct a difference-in-differences (DID) specification and exploit unique firm-level data to investigate the effects of the TPES on SO₂ emission reduction through the Two control Zones (TCZ) policy. The results suggest that the TPES significantly reduces SO₂ emissions of firms located at the TCZ cities, both in extensive and intensive margins. We also find that the treatment effects vary largely across enterprise sizes, ownership types, and local economic development. Our findings further verify how the long-standing distortions in the decentralized implementation of nationwide environmental regulations in China are remedied with a proper performance evaluation system.

JEL Classification:

• C9
• G18
• J23
• Q51

Keywords:

• performance evaluation system
• environmental enforcement
• DID model
• China

Acknowledgment

This paper benefitted from a great deal of helpful feedback, particularly from Frans de Vries, Yun-chien Chang, Mark P. Taylor, and Haitao Yin. Jin Guan gratefully acknowledges Gang Xie, Jiaqi Jiang and Hongyu Nian for their suggestive comments on this paper.

Disclosure statement

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

Notes

1 In China, firms in five major SO₂ emission intensive industries, including Production and Supply of Electric Power & Heat Power industry, Non-metallic Mineral Products; Pressing of Ferrous Metals, Raw Chemical Materials and Chemical Products, Smelting and Pressing of Non-ferrous Metals, Processing of Petroleum, Coking, and Pressing of Nuclear Fuel, have always accounted for more than 80% of industrial SO₂ emissions, and produced more than one-third of the national output value over the years.

2 Environmental decentralization refers to a combination of the central design and local enforcement of environmental regulations, under which most fundamental environmental enforcement decision making and responsibilities have been allocated to local and regional governments though the central government maintains its political authority over environmental planning.

3 APPCL (1995) stipulates that the areas where acid rain has been produced or may be produced, or other areas where SO₂ pollution is serious, can be classified as acid rain control zones or SO₂ pollution control zones, in terms of natural conditions of those regions, such as meteorology, topography and soil, etc.

4 The Two Control Zones (TCZ) include 175 out of 363 cities at the prefecture-level, and the name list of cities remains unchanged, which is available at the website: http://www.gov.cn/zhengce/content/2010-11/22/content_5181.htm.

5 Please see the “Decision on Implementing the Scientific Outlook on Development and Strengthening Environmental Protection” for details, which is available at the website: http://www.gov.cn/zwgk/2005-12/13/content_125680.htm.

6 China is a vast country and environmental enforcement varies substantially across regions. Some regions may experience extra decreases in sulfur emissions due to faster economic growth than others. To address these concerns, we control a set of regional time trends in the DID model.

Additional information

Funding

This paper is supported by the National Social Science Foundation of China [grant number No.20&ZD136]; Fundamental Research Funds for the Central Universities [grant number No.2021110834].