Endogenous Enforcement and Effectiveness of China's Pollution Levy System

This paper investigates two aspects of China's pollution levy system that has been implemented for about 20 years in China. First, the determinants of differences in enforcement of the pollution levy across urban areas are analyzed. The results show that actual collections of the uniformly designed pollution levy are sensitive to differences in economic development and environmental quality, which suggests the existence of "endogenous enforcement." Secondly, the impact of pollution charges on industry's environmental performance in different areas is analyzed. Industry's response to the levy is decomposed into two components: pollution intensity of process production and degree of end-of-pipe abatement. The econometric analyses show that plants were responding strongly to the levy by either abating air pollution in the production process or treating water pollution at the end-of-pipe.