Does the regional environmental supervision policy halt pollution? Evidence from the exit of high-pollution enterprises in China

Abstract

A global challenge of industrial pollution promotes many countries to establish environmental vertical management institutions to mitigate its effects. Understanding the relationship between this institution and polluters exiting for policymaking is essential but under-researched. Therefore, this paper utilizes the staggered Difference-in-Differences method to evaluate the effect of environmental vertical supervision on high-pollution enterprise exit through the Regional Environmental Supervision (RES) policy. The main findings are as follows: 1) The RES policy raises the probability of high-pollution enterprise exit by 17 % by the mechanism of cost and investment effects. 2) The RES policy has more significant impacts on high-pollution enterprises that are size small, non-state-owned, and located in capital cities. 3) Cities with strict local enforcement experience stronger policy effects while polluting enterprises tend to relocate to areas with weaker law enforcement. 4) The RES policy has population and industry effects. The population effect suggests the more significant policy effect on the exit/entry of high-polluting enterprises with large populations; the industry effect shows the more significant policy effect on enterprise exit associated with water-pollution, manufacturing, and upstream industries. This paper highlights the critical impact of vertical supervision in environmental governance and provides valuable policy implications for developing countries.