How do firms respond to the tighter COD discharge standards? Evidence from the pulp and paper industry in China

ABSTRACT

The chemical oxygen demand (COD) emissions from the pulp and paper industry in China have declined continuously since the tighter COD discharge standards were implemented in 2008. Using firm-level data from 2003 to 2013, we investigate how China’s pulp and paper firms would respond to the tighter COD discharge standards with a difference-in-differences design. We find that the tighter COD discharge standards have significant causal effects to induce the pulp and paper firms to reduce their COD emissions primarily through adopting cleaner production. However, the effectiveness of the tighter COD discharge standards depends on monitoring and enforcement activities as well as other regulations accompanying with the tighter COD discharge standards, all of which have become strengthened since China’s 11th Five-Year-Plan (FYP, 2006–2010). While strengthened environmental regulations since the 11th FYP are from the top leadership of the Chinese government in order to deal with the increasing environmental degradation, the underlying driving force of the strengthened environmental regulations is from the household demand for better environmental quality as income increases. This study enriches literature not only on firms’ responses to environmental regulations in developing countries but also on environmental regulations and technology adoption as well as environmental enforcement and compliance.

KEYWORDS:

• Discharge standard
• environmental regulation
• pulp and paper industry
• water pollution

JEL CLASSIFICATION:

• C54
• L51
• Q53
• Q58

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ In 2001, the national standard code of GWPB2–1999 was replaced by the national standard code of GB3544–2001 without any changes in discharge limits for water pollutants.

² COD_cr means measuring COD with the dichromate method.

³ The discharge standard of AOX was only a recommend standard for newly-built production lines after July 1992.

⁴ Based on the environmental quality standards for surface water (GB3838–2002), the surface water bodies are divided into five classes according to the utilization purposes and protection objectives, with Class I mainly used for national nature reserves and Class V mainly used for agriculture and landscape. The pulp and paper firms are prohibited to build new discharge outlets near the surface water bodies classified as Class I and Class II.

⁵ However, the COD_cr discharge limits in the standard GWPB2–1999 become stricter for the pulp and paper firms under the third level standard in the standard GB3544–92. For example, the COD_cr discharge limit for unbleached non-wood mills built after July 1992 under the third level standard in the standard GB3544–92 is 1000 mg/L, but this limit is significantly reduced to 400 mg/L in the standard GWPB2–1999.

⁶ Since the city-level fixed effects have already been absorbed in the firm-level fixed effects, we use the interaction of city and year fixed effects (i.e. the city-year fixed effects) to control for time-variant city-level unobserved heterogeneity that may affect China’s pulp and paper firms.

⁷ Since we could not separate the combined pulp-papermaking firms by the fibrous types from their CIC codes, we use the threshold of 150 mg/L for the combined pulp-papermaking firms. In addition, we could not identify firms as paper making firms through the CIC codes.

⁸ We thank one anonymous referee for guiding us to explore this further robustness check.

⁹ We change the nominal gross industrial output to the real industrial output in 1998 price using the Producer Price Index (PPI) for China’s pulp and paper industry from multiple years of China Price Statistical Yearbook.

¹⁰ We also change the nominal capital stock to the real capital stock in 1998 price using the capital stock price indices of investment in fixed assets for different provinces from the 2014 China Price Statistical Yearbook.

¹¹ The State Environmental Protection Agency was reorganized and renamed as the Ministry of Ecology and Environment in 2018.

¹² Although a slight increase trend is observed for the COD removal ratio after 2008, these effects are not significant at the 1% level. One possible explanation is that some firms in the control group also need to increase their COD removal ratios when facing stricter COD regulations starting from the 11th FYP, leading to no significant difference between the treatment group and the control group in the post-treatment period.

¹³ If we want to compare effects of monitoring and enforcement actives on compliance behaviours between the treatment group and the control group, we could specify a similar DID model as Equation (1)(1) ${\mathrm{y}}_{\mathit{ict}}=\mathit{\delta }\mathrm{Trea}{\mathrm{t}}_i\times \mathrm{Pos}{\mathrm{t}}_t+\mathit{\beta }{\mathrm{X}}_{\mathit{ict}}+{\mathit{\gamma }}_i+{\mathit{\tau }}_t+{\mathit{\eta }}_{\mathit{ct}}+{\mathit{\epsilon }}_{\mathit{ict}},$(1) by adding several interaction terms of the monitoring and enforcement variables with the $\mathrm{Trea}{\mathrm{t}}_i\times \mathrm{Pos}{\mathrm{t}}_t$. However, since the main difference between the treatment group and the control group is that they have different probabilities to be affected by the tighter COD discharge standards instead of the monitoring and enforcement actives, we do not specify a DID model in here but only focus on our treatment sample in the post-treatment period.

¹⁴ The COD reduction target for the province is used to substitute for the reduction targets for all cities within this province since we could not obtain the COD reduction targets at the city level.

¹⁵ We control only the year fixed effects in Equation (2)(2) $\mathit{meeting}\mathit{standard}{s}_{\mathit{ict}}={\mathit{\beta }}_0+{\mathit{\beta }}_1\mathrm{targe}{\mathrm{t}}_c+{\mathit{\beta }}_2\mathrm{station}+\mathit{\beta }{\mathrm{X}}_{\mathit{ict}}+\mathrm{yea}{\mathrm{r}}_t+{\mathit{\epsilon }}_{\mathit{ict}},$(2) because of constraints on our main interested variables for monitoring and enforcement activities. For example, if we control the firm fixed effects, the effects of the variable of distance will be absorbed in the firm fixed effects because the variable of distance does not vary for the same firm.

Additional information

Funding

Zibin Zhang wishes to acknowledge financial supports provided by the National Social Science Fund of China (Grant Number: 17BJY070), the Fundamental Research Funds for the Central Universities, and the Hengyi Private Economy Research Foundation of Zhejiang University