1. Introduction
Water environment management remains an important global public policy issue. With the acceleration of industrialization, China’s water quality has been deteriorated to one of the world’s worst. In recent years, the Chinese government has taken more stringent water environmental regulations to change this situation. This paper aims to explore the effect of China’s water management practice and offer some possible experience to other countries using the Yangtze River Economic Zone as a study area.
As the largest industrial base in China, the Yangtze River Economic Zone accounts for 43% of the total wastewater discharge and more than half of the total Chemical Oxygen Demand (COD) discharge [
1]. Meanwhile, as a most popular densely area in the world, the Yangtze River provides water for 500 million people. Thus, the water safety problem is very important in this area.
Figure 1 shows the mainstream and tributaries of the Yangtze River Economic Belt. Although China has kept reforming its environmental regulation regime from a government-oriented setting to a market-oriented setting, its current environmental regulation regime still remains one fold, dominated by non-market instruments, mainly including two types, command–control instrument and government environmental investment instrument. In contrast, the typical market-oriented environmental policies of pollution discharge fees and environmental protection tax are quite rare and immature. Until 2003, pollutant discharge fees have been collected nationally, and the mean sewage collection standards are only 0.7 RMB Yuan (0.1 USD) per Pollutant Equivalent discharge (per unit of pollution) according to the
Administrative Regulations on Levy and Use of Pollutant Discharge Fee [
2], which is only equivalent to half of the pollutant abatement cost [
3]. In 2018, the
Environmental Protection Tax Law took effect, under which the pollutant discharge fees are replaced by the environmental protection tax to address the issue of ineffective enforcement in levying pollution discharge fees. The tax rate for water pollutants is between 1.4 and 14 RMB Yuan (about US
$0.202–US
$2.202) and varies across provinces. In sharp contrast, government-oriented environmental instruments have played a dominant role in the past decades. Various kinds of command–control instruments, such as discharge standards, environmental-related laws, national automatic water quality monitoring stations (see
Figure 1), regulations and policies of local government and central government have been published and enforced year after year to prevent water pollution. In addition, vast government financial funds have been allocated in establishing pollution treatment equipment, such as building sewage pollution treatment plants, building new or upgrading sewage pipe network systems, building new facilities for pollution control of livestock and poultry farms. In 2017, government environmental investment reached 953.9 billion RMB Yuan (136.27 billion USD) with an average growth rate of 12.68% from 2006 to 2017 [
4].Thus, an interesting question has been posed: can China’s government-oriented environmental regulation reduce water pollution?
The effect of environmental regulation on water pollution reduction has been widely debated in previous literature [
3,
5,
6,
7,
8,
9,
10,
11,
12]. Most of the studies focus on developed countries. Sigman, List, and Keisere evaluated the effect of the Clean Water Act (CWA) in the United States [
12,
13,
14,
15,
16]. The consensus has been reached that the CWA has substantially reduced the water pollution concentrations in the U.S., but giving different explanations. Sigman and List hold that, as a decentralized water environment policy reform, the CWA is effective for water quality improvement for the following three reasons: first, it has improved the management efficiency through transforming a centralized standard setting to a decentralized one; second, it is easier for state governments to obtain more information than the federal government and can respond quickly to emergencies; third, state governments can implement specific policies based on their own social economic situation. Therefore, it is more likely to achieve Pareto optimality under a decentralized environmental setting [
12,
13,
14,
15,
16]. However, Sigman also pointed out that a decentralized environmental policy like CWA might bring out “a race to the bottom” in environmental protection, states having a free ride or being unable to realize economies of scale in water pollution control. According to his study, the externalities brought out by the CWA at the downstream area reached
$17 million [
14].Using water pollution data from 240,000 monitoring sites of all U.S. rivers, Keiser and Shapiro found that the CWA’s grants to municipal wastewater treatment plants contribute most to clean river water in U.S. [
12].Unlike the CWA,-a decentralization regulation, the Water Framework Directive (WFD) in the EU has been considered as a centralization regulation. Deng et al. appraised the regulatory, administrative, monitoring, and public participation of the WFD and proposed what China can learn from it when moving towards institutional integration [
17].
A few empirical papers evaluate the effect of water environmental regulation in developing countries. In India, Greenstone and Hanna prove that the decentralized water environment setting, the National River Conservation Plan, is almost completely ineffective because of a lack of environmental protection funds, a weak environmental institutional background, and difficulty in regional or department cooperation [
9]. Although Brazil’s decentralized water management reform has somewhat reduced water pollution, it has also brought out a serious problem of free riding [
17,
18].
With China accelerating its water environment regulation reform, the research on the effect of various water environment management policies in China is also booming. The water environment regulations, such as water pollution reduction mandates implemented by the central government in the “Eleventh Five-Year Plan”, the “Twelfth Five-Year Plan”, and the River Chief Policy (RCP), a local government water quality management reform policy, have been discussed in many studies. Using the triple difference-in-difference method (DDD) and industry-level data along 24 major rivers in China from 1998 to 2008, Cai et al. study how the water pollution reduction mandates in 2001 triggered free riding among counties. The results reveal that the environmental regulation stringency is more lenient in downstream counties than in other counties, which causes the water polluting activities in downstream counties of a province to be 20% higher than in other counties [
11]. Chen et al. also accumulate evidence that spatially differentiated water pollution regulation stringency will transfer pollution activities from the down reaches of the Yangtze River where regulations are more stringent to the middle and the upper reaches where regulations are less stringent [
1].Using weekly or annual water pollution national monitoring data, some literature studies evaluate the policy effect of the RCP. No consensus has been reached on whether the RCP is effective on water pollution reduction [
19,
20,
21]. The effect of the RCP depends on pollutants measured, river basin, and even the water pollution data used. When using provincial and national monitoring data, the contradictory results will be obtained [
21]. In addition, the effect of the RCP depends on the length of time. After the implementation, a rapid and obvious effect can be seen on point-source water pollution, but the effect of the RCP levels off after several years of implementation [
20].
This study is closely related to the literature on different types of environment regulations on water quality improvement. Using A-share market industrial listed company data, Wang et al. evaluate the effect of legislative environmental regulation and economic regulation on listed companies’ investment choice. Results show that there exists heterogeneity effect of different types of environmental regulation. Economic environmental regulation weakens the short-termism of corporation investment, and the legislative environmental regulation strengthens the short-termism of corporation investment [
22]. This study stresses the transparency of environmental regulations, and the combination of different types of environmental regulation can enhance the effectiveness of the environmental regulation setting. Using the provincial data of China from 1997 to 2013, Shen explores the impact of the command and control regulation and the market environmental regulation on China’s industrial environmental efficiency, and found that the environmental regulations mainly improve the optimization of industrial environmental efficiency through technical effect and structural effect [
23]. Although there is a trend of increasing stringency of environmental regulations, local governments respond differently to different types of environmental instruments in attracting Foreign Direct Investment (FDI), taking the “race-to-the-bottom” strategy for command and control environmental instruments and “race-to-the-top” strategy for autonomous environmental regulations [
24]. The above literature studies divide environmental regulations into different types and explore their heterogeneous effects on company investment, industrial green development, and FDI attraction, but fail to focus on the impact of water pollution.
The existing literature can be improved from the following aspects. First, existing literature studies often uses province-level, city-level data or water quality data from monitoring stations to measure pollution outcomes. However, the province or city-level water pollution data cannot reflect industry-specific pollution activity. In addition, point observations of water quality at monitoring sites cannot reflect firms’ pollution activity, which also include water pollutant from living sewage or agriculture activity. Second, most recent studies only investigate the effect of environmental regulation on water pollution reduction from an empirical perspective; few discuss the theoretical framework. Third, most studies focus on environmental regulation implemented in the U.S., the E.U., India, or Brazil, where the institutional background is quite different from China. Some literature explores the effect of different types of water environmental regulations in China, but most of them focus on the market-oriented environmental instruments. However, market-oriented environmental instruments have not played an important role in China; the mainstream environmental instruments still remain as government-oriented environmental instruments.
Therefore, compared with the existing research results, the contributions of this study appear in several ways: (1) using the comprehensive firm-level data from two sources, the Key National Monitoring Sources of Pollution Firms (KNMSPF)and the Annual Survey of Industrial Firms (ASIF), we thus can evaluate the effect of environmental regulations on manufacturing activity; (2) constructing a theoretical model by including two types of environmental instruments into the traditional Copeland–Taylor environment model to analyze the effect of different environmental instruments on firms’ water pollution abatement; (3) Considering China’s current one fold, mainly governmental-oriented environmental regulation setting, and the unavailability of the market-oriented environmental regulation data (the most commonly used measurements for market-oriented environmental regulation—pollution discharge fee or environmental protection tax only available at the provincial level), we mainly evaluate the effect of two types of governmental-oriented environmental regulations, i.e., government environmental investment policy and the command–control policy on firms’ water pollutant discharge.
The remainder of this paper is structured as follows.
Section 2 briefly presents the theoretical framework that helps to structure the subsequent analysis.
Section 3 lays out the data and empirical methodology.
Section 4 provides the main results and discusses heterogeneous effects of the different types of the environmental regulation on water pollution abatement.
Section 5 concludes the study and provides policy implications.
5. Conclusions and Implications
Within the improved framework of the Copeland–Taylor model, this study explored the effect of the two main types of China’s government-oriented environmental regulation on heavy-water-polluted firms’ discharge. According to the results, in the period of 2003–2013, the two types of water pollution index, COD and NH3, were reduced by 2.99% and 3.35%, respectively, with the increase of 1% of government environmental investment. However, the command–control policy shows little effect on firms’ water pollutant discharge abatement. Like other countries, government environmental investment is the main reason for water pollution reduction; the effect of the command–control policy is comparatively less obvious on a firm’s water pollutant emission. Our findings remain robust when using alternative measurements for environmental policies. The effects of the environmental regulations vary across sub-samples. The two types of government-oriented environmental instruments are both effective for the water pollution industry, but the extent of the effect of the command–control policy is very small. The government environmental investment policy has an obvious impact on SOEs, domestic joint ventures, and foreign-invested firms. The water pollution social externality caused by the above three types of firms has been burdened by government. However, the command–control policy is effective for domestic joint ventures and private firms. In other words, domestic joint ventures and private firms have been forced to be responsible for their own water pollution actions.
From the above analysis, this paper derives the following policy implications. (1) Under the current Chinese environmental regulation regime, it is up to the government, not the private firms, to remedy the pollution externalities caused by firms, under which the initiative of firms cannot be stimulated to apply advanced environmentally friendly technology and finally lead to the whole environment regulation being inefficient. According to the theoretical model, the command–control policy can force private firms to be responsible for their own pollution action. Therefore, the Chinese government should adhere to more command–control policies and improve its stringency, so that private firms have to bear the burden of their own pollution discharge. (2) Our study proves, more or less, that any kinds of environmental instruments can reduce the water pollutant discharge effectively. As some literature studies point out, the key point of China’s current environmental regime is relatively one fold, mainly government-oriented, and a good environmental regime should not be based on “which one is best?” but rather on “it should be a mix of instruments,” and that the best environmental regulation regime should be a mix of instruments [
39,
40]. Therefore, the urgent task for the Chinese government is to use more types of environmental regulation instruments, such as market-incentive policies and voluntary policies, to transform from a one fold, government-oriented environmental regime to a multi-fold, market-oriented environmental management regime. (3) Firms with different characteristics respond heterogeneously to the water quality regulations [
41]. To make differential water quality regulations for firms from different industries, with different sizes and ownership structures, can improve the efficiency of water environmental regulations. Especially, for domestic joint ventures and private firms, which account for 61.99% and 55.78% of the total COD and NH
3 emissions during the study period, respectively, they should be regulated by more stringent command–control policies (Calculated with the KNMSPF data by the author). In addition, some financial supports should be given to these kinds of firms to help them establish water pollutant treatment equipment. The market incentive policies also should be applied to stimulate them to apply environmentally friendly technology. Public supervision policies also can be used to put pressure on these firms.