Economic impact of more stringent environmental standard in China: Evidence from a regional policy experimentation in pulp and paper industry

Whether environmental regulation has negative impact on the economic performances of manufacturers in the real world cannot be concluded without reliable policy evaluations. The regional policy experimentation on raising the wastewater discharge standard in the pulp and paper industry in Shandong Province, China in the early 2000's has been considered a success and has provided lessons for the crafting and strengthening of water pollution regulation for the whole country at a later stage. There has been, however, long lack of rigorous study that comprehensively evaluates the environmental and economic consequences of the policy experiment. The question about whether cleaner water came at a substantial economic cost remained unanswered. This may hinder cumulative policy learning and development. In this article, we adopt plant-level economic and environmental statistics and a difference-in-differences design to examine the economic effect of the Shandong wastewater policy in the 2000's. Our results revealed that on average the environmental regulation enhanced the economic performances of pulp and paper plants. The regulation had positive effects on total output, total assets, and total profit, and it did not cause a statistically significant decline in employment.