The emission reduction effect of daily penalty policy on firms

Abstract

As one of the "four sharp teeth" of China's new environmental protection law, the daily penalty policy which is characterized by high deterrent effect and high violation cost plays an important role in restraining repeated violations of polluting firms. In order to further test the effectiveness of the daily penalty policy in pollution control and emission reduction, this study evaluates the policy through the time-varying difference-in-differences (DID) method using data from Chinese industrial firms from 2003 to 2012. The results show that the daily penalty policy significantly reduced industrial SO₂ emissions, which is supported by a series of robustness tests. Further mechanistic tests found that the daily penalty policy can reduce emissions by promoting the use of clean energy at the front-end prevention and increasing pollution control equipment and product innovation at end-governance. Heterogeneity analysis indicates that the daily penalty policy has a significant emission reduction effect on low energy consumption firms, large-scale firms and firms in clean industry. The SO₂ emission of foreign-funded firms is more reduced than that of state-owned and private firms. In addition, the level of emission reduction by exporting firms and firms in a mature recession are more affected by this policy. This study validates the effect of the daily penalty policy on emission reduction of firms. We found that the stringent command-and-control environmental regulations can also effectively encourage firms to control pollution and promote the transformation of firms toward long-term green development strategies and energy-saving and emission-reducing production patterns, and achieve a reasonable combination with market-based incentive environmental regulations. It provides new ideas and inspiration for implementation and improvement of the daily penalty policy and the strategic deployment of environmental governance in China.

Keywords: Daily penalty policy; Emission reduction effect; Environmental regulation; Time-varying DID.