Enforcement of pollution levies in China

This paper investigates how industrial plants react to inspections conducted by environmental authorities under the pollution levy (taxation) regulation in China. Contrary to studies in the United States and Canada (Magat and Viscusi, 1990, Laplante and Rilstone, 1996), and previous studies in China (Dasgupta et al., 2001), we find that inspections increase plants' self-reported pollution by 3.45%. We provide a model to analyze plants' strategic reactions to the pollution levy regulation in China. The model concludes that under the specific regulation, plants' actual pollution might increase with inspections. Our study provides a key policy implication that inspections by environmental authorities in China are effective for verifying plants' self-reported pollution but not for reducing their pollution.