Productivity in Polluting Industries
In 2003, the Chinese government installed several hundred state-controlled water monitoring stations, set targets for the stations to meet, and used the water quality readings to help determine the promotion of local government officials. Because water monitoring stations can only capture emissions from upstream, local officials had the incentive to enforce tighter regulations on polluters immediately upstream of stations, while shirking on their responsibility to reduce pollution coming from their downstream counterparts.
EPIC-China’s Guojun He and EPIC Postdoctoral Scholar Shaoda Wang found that firms located immediately upstream of a station were 24 percent less productive and emitted 57 percent less pollution than their downstream counterparts. The productivity loss was mainly driven by upstream polluters investing more in abatement equipment to meet tighter regulations. The gap in productivity between upstream and downstream firms did not occur until 2003 when the new targets were announced. In addition, the regulation was concentrated within only a few kilometers upstream of each monitoring station, while farther upstream firms were essentially unaffected since their emissions dilute quickly over space and have little influence on water quality readings.
The unequal deployment of the regulations led to significant economic losses in China. A 10 percent reduction in pollution led to a 3 percent drop in productivity for China’s polluting industries. Taken together, China’s efforts to reduce water pollution led to a total loss in industrial output of more than 800 billion Chinese yuan over the eight years studied (2000-2007).
Further, the study found that the higher the political incentive to local officials and the more difficult it was for them to manipulate the monitor readings directly, the more significant the gap in productivity between upstream and downstream firms. This indicates a clear misalignment between the national policy goals and local bureaucratic incentives as local leaders prioritized water quality readings over actual water quality.