Unsynchronised Legislation and Unintended Pollution: Estimating Regulation-Induced Substitution in China

The chronology of China’s legislation on controlling air pollution and water pollution is not equivalent, and firms may change their pollution inputs under environmental regulations. By examining a nationwide policy, China’s Key Cities for Air Pollution Control, which aims to mitigate air pollution emissions, we find that although firms in regulated cities do manage to reduce their level of air pollution, they do so by installing “end-of-pipe” abatement equipment, which consumes a large amount of water and eventually increases water pollution. Thus, the ratio of water to air emissions increases by up to 15%. As pollution transfers from the air to water, this regulation-induced pollution substitution hinders the improvement of the overall environmental quality. Our results suggest that when evaluating the effectiveness of environmental regulation, abatement methods, especially “end-of-pipe” equipment, should also be taken into account to consider the pollution substitution effect.