A Study On The Impact Of Command-and-control Environmental Regulation On Firms’ Behaviors

As an important policy tool for pollution prevention and environmental protection,environmental regulation has always attracted much attention for its mechanism of action and implementation effects.Command-and-control environmental regulation,as an important element of environmental policy,has been the main tool in environmental regulation practice in China.Its policy effects mainly work through influencing the behavioral decisions of corporate agents.Therefore,the assessment of the impact of micro-level firms’behavior is very important in environmental policy research.However,existing research has not yet reached a consensus on the theoretical understanding of the micro-level policy effects of command-and-control environmental regulation.In practice,most command-and-control environmental policies face limitations such as“one-size-fits-all”,which makes the current research underestimate the policy efficiency of this type of regulations.As a policy innovation in command-and-control environmental regulation,the daily penalty policy（DPP）provides a dual deterrent of“high cost of violation pressure”and“stringent review and enforcement pressure”for persistent environmental violations and refusal to correct.This has improved the blind spot of the previous environmental penalties,thus better reflecting the nature of command-and-control environmental policy.However,the impact of DPP has not been well discussed in terms of economics.In this regard,this dissertation examines the mechanism of the effect of DPP on the behavior of firms,in order to provide a reference for better understanding and further improvement of the policy.This dissertation is based on the cost-benefit analysis framework of environmental regulation and further incorporates Porter’s hypothesis in the subsequent analysis of the mechanism.As DPP has the characteristics of“high cost of violation”and“high enforcement pressure”,the stronger deterrent effect changes the cost of environmental violations faced by the regulated firms and affects the constraints on their pollution abatement behavior,forcing them to respond effectively to this policy in the face of high costs.The investment required to rectify pollution may squeeze out productive investment,exerting compliance cost effect,and thus changing firms’production decisions.Changes in the scale of firm production and differences in pollution control approaches such as front-end prevention,end-of-pipe treatment and innovation can further affect firms’labor hiring behavior.Given that the high cumulative cost of DPP effectively deters firms from refusing to correct and breaking the law.The incentive to innovate,which satisfies the Porter hypothesis,is a cost-effective decision for regulated firms in the long run.The compensating effect of innovation can in turn affect firms’export behavior and economic performance.To verify the content of the above theoretical analysis,this dissertation further adopts a normative econometric approach to conduct corresponding empirical tests,based on data from the Chinese Industrial Firm Database,the Chinese Industrial Firm Pollution Database and the Customs Database.To examine the impact and mechanism of action of DPP on emission reduction behavior,labor demand behavior,export behavior and economic performance of firms.The main findings are as follows.First,DPP can effectively reduce the pollution emission of firms.Using matched data from the Chinese Industrial Firm Database and the Chinese Industrial Firm Pollution Database from 2003-2012,this dissertation studies the impact and mechanism of DPP on firms’sulphur dioxide（SO₂）emissions through time-varying difference in differences（DID）method,treating DPP as a quasi-natural experiment.A series of robustness tests support the finding that there is a significant emission reduction effect of DPP on firms.Further mechanism tests have revealed that DPP can reduce SO₂ emissions by optimizing the energy use structure of firms at the front end,increasing pollution control equipment at the end and innovating products and production processes.Heterogeneity analysis shows that DPP has a greater effect on emissions reduction for large,foreign-owned,export-oriented and mature and declining firms.These findings suggest that stringent command-and-control environmental regulations can also be effective in motivating firms to rectify pollution,confirming the effectiveness of DPP in pollution control at the micro-firm level.This dissertation extends the examination of the impact of DPP on corporate carbon emissions,which also confirms the existence of a significant carbon reduction effect of DPP,refuting the possibility of green paradox.This further validates the effectiveness of DPP in environmental regulations.Second,DPP can significantly increase firms’labor demand.The potential impact of environmental regulation on employment is particularly prominent in the policy debate.Based on a database of Chinese Industrial Firm Database from 2003 to 2012,this dissertation identifies the effect of DPP on firms’labor demand using time-varying DID model.The results find that DPP significantly boosts firms’labor demand,realizing both environmental and employment dividends.DPP significantly affects the labor demand of foreign-owned,export-oriented,large-scale,technology-intensive,mature and declining firms,as well as those located in the east.The positive employment effects are mainly through the production and substitution effects.From the production effect perspective,DPP increases the total output and scale of production,which increases labor demand.In terms of substitution effects,two different types of abatement activities can have different impacts on labor demand,either by optimizing the production process and installing efficient boilers thereby reducing the amount of SO₂ produced in the production process,which will reduce part of the labor demand in the production process,or by increasing the number of flue gas desulfurization facility and product innovation,which can increase the number of installation,maintenance and operation staff required for the corresponding equipment,thereby increasing the labor demand.This provides the basis for an empirical analysis of the possible social and livelihood impacts of the implementation of DPP and how to stimulate the employment effect of firms.Third,DPP can significantly improve firms’exports.This dissertation identifies the effects and mechanisms of DPP on the export level of firms using matched data from Chinese Industrial Firms Database and Customs Database from 2003-2012 using time-varying DID method.We find that DPP has a significant positive effect on firms’exports,which is in line with of Porter’s hypothesis theory.State-owned,large-scale,technology-intensive,and growth-phase firms have increased their exports relatively more under the impact of DPP.The mechanism test shows that DPP can enhance firms’exports through increasing firms’innovation capacity,improving firms’labor productivity and increasing firms’total factor productivity.This provides an in-depth understanding of the mechanism of DPP in boosting firms’exports in terms of both innovation compensation effect and productivity enhancement.Fourth,DPP can significantly improve the total factor productivity（TFP）of firms.This dissertation further verifies whether DPP can achieve a win-win situation for both economic efficiency and environmental protection.Based on a database of Chinese Industrial Firm Database from 2003 to 2012,the impact and mechanism of stringent command-and-control environmental regulation by DPP on TFP of firms is investigated by time-varying DID method.The study shows that DPP significantly enhances firms’TFP,and a series of robustness tests support the findings.The mechanism analysis shows that DPP can offset the impact of the compliance cost effect by bringing into play the compensation effect of firm innovation,squeezing out highly polluting and inefficient firms,regrouping resources within the industry,and achieving an increase in firms’TFP.This provides empirical evidence for the strong Porter hypothesis.In addition,the productivity gains of low-polluting firms,export-oriented firms and large-scale firms are more influenced by DPP.This dissertation systematically evaluates the policy effects of DPP and verifies the effectiveness of stringent command-and-control environmental regulations such as the high deterrent DPP in pollution control,which is conducive to achieving both environmental and employment dividends and win-win for“environmental protection”and“economic benefits”.It is important to understand and improve the DPP,to bring into play the Porter effect of command-and-control environmental regulations,and to establish a modern environmental governance system in China that is“government-led,with the participation of the public and the market”.