Is environmental regulation effective in China? Evidence from city-level panel data

Abstract As the pressure of environmental deterioration mounted in recent years, Chinese government has formulated a series of environmental policies and regulations with the intention of improving environmental quality. However, the effectiveness of these environmental regulations have not been carefully examined yet. This study for the first time investigates the effects of environmental regulations on the environmental performance. Using the city-level panel data of 283 Chinese cities for the period 2003–2010 and four indicators for environmental quality (the industrial waste water discharged, industrial SO2 emissions and industrial Soot emissions), this study employs the first-difference GMM method that could deal with potential endogeneity and allow dynamics to conduct the empirical estimations. Overall, the estimation results indicate that current environmental control measures and regulations have not achieved the desired goal of controlling and reducing pollution. Moreover, the direct impact of FDI on China's environment is negative, suggesting that there is evidence for the “Pollution Heaven” hypothesis. The coefficients of the interactive term of environmental regulation and foreign direct investment are estimated to be negative, which indicates that the environmental regulation is effective only when FDI is controlled for. The estimation results are basically consistent for different Chinese regions.