Reconciling Industry and Environment: Optimal Regulation Intensity for Industries*

Shen Neng ( 沈能 )
School of Business, Soochow University, Suzhou, China

 
Abstract: Constrained by the dual mission of supporting industrial growth and reducing emissions, China’s traditional emission reduction-oriented environmental policies unavoidably face a dilemma. Taking environmental efficiency as the exclusive indicator for the relationship between environmental performance and industrial development, the author calculated the environmental efficiency of China’s industries under different pollutant disposability assumptions, while also considering environmental pollution. In addition, based on the assumption of industry heterogeneity, the author examined the non-linear relationship between China’s environmental regulation and environmental efficiency and calculated the optimal regulation environment for industries. According to this study, when impact of undesirable outputs (pollutant emissions) is considered, environmental regulation and environmental efficiency are positively correlated, which to some degree validates the Porter Hypothesis. At present, environmental regulation has significant positive effects on clean production industries but shows a lag effect on pollution-intensive industries. The degree of environmental regulation and environmental efficiency show an “ inverted U”-shaped relation and display three thresholds. It should be noted, however, that the relationship between regulation and efficiency may vary across industries. These findings have clear policy implications: China should adjust its traditional emission reduction-oriented environmental polices by targeting environmental efficiency. At the same time, rather than continually increasing the level of environmental regulation, the government should establish standards for individual industries that emphasize flexibility.
Key words: environmental regulation, environmental efficiency, heterogeneity

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