Asymmetric EnvironmentalRegulation: Mechanism and a YardstickPhenomenon

Yu Yazhuo1, Zhang Huilin2, and Zhang Pingdan*2

1 Business School, Renmin University of China, Beijing, China

2 School of Economics and Business Administration, Beijing Normal University, Beijing

Abstract: In discussing the policy effects of environmental regulation, we should focusnot only on whether environmental regulation helps improve the environmental andeconomic performance of firms, but also on how such improvement is materialized, i.e.whether the obsolete mode of production is reversed. After matching the database of China’sindustrial enterprises with that of pollution emissions from these industrial enterprises,this paper identifies the asymmetric scope of clean production standards to test the effect ofenvironmental regulation on the total factor productivity (TFP) of the industrial enterprises.Our empirical research finds that the implementation of clean production standards mayinduce TFP improvement. However, such improvement only occurs for polluters who cannotor who barely meet clean production standards and does little to improve the productionstandards of polluters with low pollution emission, reflecting the yardstick phenomenonof the asymmetric environmental regulation policy effect: While polluters are forced toimprove, clean enterprises that pollute less are more likely to take no action. Furtherresearch finds that such TFP improvement is materialized primarily by means of overall firmoptimization; the compensation effect is insignificant and does not reverse the backwardmode of production. Polluters cope with the implementation of clean production standardsby purchasing more equipment and expanding capacity, which adds to the tension betweenthe expansion of capacity and the abatement of pollution emission.

Keywords: Environmental regulation, clean production standards, TFP, asymmetry,

JEL Classification Code: G38, Q58, D78

DOI: 10.19602/j.chinaeconomist.2023.01.06