The environmental and economic consequences of environmental centralization: Evidence from China's environmental vertical management reform

Environmental decentralization enhances local autonomy accountability and initiatives. However, some evidence suggests that it might foster a race to the bottom in environmental protection, exacerbating cross-border pollution. Consequently, certain areas in China initiated the vertical management reform of environmental protection agencies (VMR), characterized by centralization, in 1992. The relatively exogenous shock on firms helps to identify the causal effect of VMR on pollution and production. Using the combined data of ASIF and ESR from 1998 to 2013, along with collected policy details at the county-level, we utilize the staggered DID design. Our findings demonstrate that VMR significantly reduces approximately 22.94% of COD emissions from industrial firms. This reduction is achieved through passive approaches such as reducing production, decreasing the entry of firms, and increasing the rate of firms shutting down. Additionally, a proactive approach of increasing the wastewater treatment capacity of individual facilities contributes to this reduction. The impact of VMR is significant in polluting industries, large-scale firms, and firms located at administrative boundaries, mainly driven by local officials with strong promotion incentives. The paper underscores the advantages of environmental centralization, particularly the role of VMR in addressing environmental pollution, especially in the context of transboundary issues. However, due to information asymmetry within centralization, its implementation incurs high economic costs, necessitating more precise and sophisticated regulation.