The impact of environmental monitoring and inspection on firms’ pollution reduction in China: Evidence from the Regression Discontinuity Design

Environmental monitoring and inspection by government agency is leading factor for firms’ environmental behavior and their environmental performance. China is always criticized for weak enforcement of environmental laws and policies. During its 11 five-year plan (2006-2010), the Chinese central government launched a state-monitored key firm program to enhance environmental monitoring and inspection on major polluting firms. This paper aims to assess the effectiveness of this program on polluting firms’ water pollution reduction in China. Since the key firm program targeted firms based on the 65% threshold of total pollutants discharge, a Regression Discontinuity Design is employed to identify the causal impact of the program. We explore the most detailed Chinese environmental statistics dataset of 40021 manufacturing firms using the non-parametric regression method. The finding is that the key firm program has a lagged but significant impact, which reduced the firm average COD discharge by about 230-460 ton (1.6%-2.2%). The deterrence effect occurred through the COD generation process other than the end-of-pipe treatment. Moreover, detailed analyses demonstrate that the key firm program had heterogeneous impacts in most heavily water polluting industries, whereas the chemical industry was insensitive, which deserves more investigation and policy focus.