How the Chinese System of Charges and Subsidies Affects Pollution Control Efforts by China's Top Industrial Polluters

China's unique combination of emissions charges and pollution abatement subsidies has given China's most heavily polluting industrial firms incentive to invest in pollution abatement.There have been extensive theoretical studies of firms' responses to environmental regulations and enforcement but few empirical analyses of firms expenditures on pollution abatement in response to different regulations and enforcement strategies.Wang and Chen empirically analyze the pollution abatement efforts of Chinese industrial firms under a system combining pollution charges and abatement subsidies.Using data on China's top industrial polluters and on regional development in China, they find that the combination of charges and subsidies used in China has provided effective incentives for the most heavily polluting industrial firms to abate pollution.Chinese industries operate under a unique pollution control system, a market-based instrument combining emissions charges and abatement subsidies. This combination of charges and subsidies has given firms incentive to invest in wastewater treatment facilities. The pollution levy, although low, has significantly improved investments in abatement.Wang and Chen found that the more pollution a firm generates, the more likely it is to invest in pollution abatement.This study was only of top polluters, which are closely monitored by environmental agencies, so the results may not be valid for other sources of industrial pollution.This paper - a product of Infrastructure and Environment, Development Research Group - is part of a larger effort in the group to identify appropriate policies for environmental regulation in developing countries. Hua Wang may be contacted at hwang1@worldbank.org