The effects of environmental policies in China on GDP, output, and profits

Critics of environmental policies often claim that such policies decrease productivity and profits. The effects of environmental policies on productivity, GDP, output, and profits is in part an empirical question, however, and may vary by firm, industry, sector, and type of policy. This paper examines the effects of environmental policies in China on GDP, industrial output, and new energy sector profits using province-level panel data over the period 2002 to 2013. Our econometric method employs instruments to address the potential endogeneity of the policies. We find that policies involving financial incentives or monetary awards have the potential of increasing the output and/or profits in some energy-related industries or sectors, but potentially at the cost of GDP in non-energy industries or sectors. In contrast, command and control policies and non-monetary awards appear to decrease GDP, output, and/or profits.