The relationship between pollution abatement costs and environmental regulation: Evidence from the Chinese industrial sector

• DOI: http://doi.org/10.1111/rode.12655
• Published date: 01 May 2020
• Author: Masayuki Shimizu
• Date: 01 May 2020

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wileyonlinelibrary.com/journal/rode Rev Dev Econ. 2020;24:668–690.

© 2020 John Wiley & Sons Ltd

Received: 10 August 2017

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Revised: 22 December 2019

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Accepted: 14 January 2020

DOI: 10.1111/rode.12655

REGULAR ARTICLE

The relationship between pollution abatement costs

and environmental regulation: Evidence from the

Chinese industrial sector

MasayukiShimizu

Faculty of Global and Regional Studies,

University of the Ryukyus, Okinawa, Japan

Correspondence

Faculty of Global and Regional Studies,

University of the Ryukyus, 1 Senbaru,

Nishihara-cho, Nakagami-gun, Okinawa

903-0213, Japan.

Email: mshimizu@ll.u-ryukyu.ac.jp

Funding information

The Japan Society for the Promotion of

Science (JSPS), Grant/Award Number:

KAKENHI 17K03698 and KAKENHI

24530323

Abstract

Since the 2000s, China has been trying to strengthen emis-

sion controls in response to increasing pollution problems.

However, strict implementation of emission controls gen-

erates pollution abatement costs. Using regional data for

29 provinces in the Chinese industrial sector from 1995 to

2010, this study estimated the pollution abatement costs for

each province through the measurement of environmen-

tal efficiency, by applying a directional distance function

approach. Moreover, using panel data analysis, this study

clarified whether there is a nonlinear relationship between

pollution abatement costs and environmental regulations.

The empirical results are as follows. The study confirmed

that the burden of abatement costs tended not only to occur

in the central and western regions but also to increase in

the eastern region. Moreover, the nonlinear relationship is

inverted U-shaped; thus, pollution abatement costs increase,

as a negative effect of environmental regulations, until a

certain inflection point, after which they decrease.

KEYWORDS

China, directional distance function, environmental efficiency,

environmental regulation, pollution abatement costs

JEL CLASSIFICATION

C23; Q52; Q56

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669

SHIMIZU

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INTRODUCTION

In the 2000s, China accelerated its economic development and rapidly improved people’s living stan-

dards. Gross domestic product (GDP) expanded at an annual growth rate of more than 8%, and the

growth rate increased to 14.2% in 2007.1

However, alongside economic growth, China’s environmen-

tal issues have exacerbated since the 2000s. For instance, carbon dioxide (CO2) emissions increased

from 0.929 billion metric tons in 2000 to 2.807 billion metric tons in 2014, indicating that China’s

emission levels more than tripled during this period.2

In China, one of the main drivers of growth certainly is rapid industrialization; however, it has

also caused serious environmental problems, such as industrial pollution, which has inflicted direct

damage on people’s health through air pollution and has generated indirect influence on people’s

lives by global warming. A majority of people, except higher-income groups, are faced with declining

economic wealth and environmental quality due to environmental loss, and are suffering from the

negative impacts of environmental poverty (Liu, 2012).

However, since the 2000s, the Chinese government has been attempting to strengthen emission controls

in response to increasing pollution problems. Regarding air pollution, in its 11th five-year-plan period,

China imposed an obligation to reduce sulfur dioxide (SO2) emissions by 10% compared with the 2005

level (Ministry of Environmental Protection,2011). In the 12th five-year-plan period, the SO2 and nitrogen

oxide (NOx) emissions were reduced by 8% and 10%, respectively, compared with the 2010 level, while

China targeted reducing CO2 emissions per GDP unit by 17% (Ministry of Environmental Protection,2015).

In this regard, strict implementation of emission controls is likely to have a negative impact on economic

growth in China. This is because there is the potential for a decline in the production levels as a result of

diverting a proportion of production resources, such as environmental engineers and emission control equip-

ment. The decreases in production compared to the case without controls are regarded as pollution abatement

costs, which represent the opportunity costs of emission controls. Incurring such abatement costs indicates

environmental inefficiency, while the absence of abatement costs indicates environmental efficiency (Färe,

Grosskopf, Lovell, & Pasurka, 1989). The first purpose of this study is to measure the environmental effi-

ciency of each Chinese province and to grasp whether there are region-wise trends in the burden of abatement

costs in the Chinese industrial sector. Zha and Zhou (2009) measured the environmental efficiency in the

Chinese industrial sector, and although they used province-level data, they did not analyze pollution abate-

ment costs. In developing countries such as China, where economic growth is one of the priorities, the burden

of abatement costs has a potentially harmful effect on industrialization. Thus, the current study can provide

policymakers with useful guidelines for implementing appropriate environmental policies.

Meanwhile, the Chinese government has also intensified efforts to restrain emissions by strength-

ening environmental regulations. For example, the total investment in the treatment of environmental

pollution accounted for 1.53% of GDP in 2012 (National Bureau of Statistics,2016). Using prov-

ince-level panel data in the industrial sector, some research has confirmed that increased pollution

abatement efforts have been effective in helping to reduce air pollution. Shen (2006) showed that

abatement efforts have a reduction effect on air pollutant emissions per capita, such as dust fall and

SO2. Managi and Kaneko (2009) found that there is an inverted U-shaped relationship between waste

gas emissions per employee in the industrial sector and abatement efforts. Although Shimizu (2017)

observed the same results for sulfur oxide (SOx) emissions, the study indicated that abatement efforts

have a significant effect if they are considered with exhaust gas desulfurization.

Following the results of Managi and Kaneko (2009) and Shimizu (2017), to achieve emission re-

ductions, pollution abatement efforts must exceed a certain level; consequently, there is a possibility

that pollution abatement costs are increased by strict environmental regulations, but the costs could

then start to decrease with reductions in emissions. Using prefecture-level city panel data, Yuan,