On 18 March 2017, Beijing closed its last coal-fired power plant out of air pollution concerns, whilst in the meantime, investment in coal-fired power plants is rising in central and western areas. Earlier in 2015, Fujian province closed 13,000 pig farms, with many of them expected to move inland. These examples illustrate the risk that urban, eastern and relatively wealthy provinces end up outsourcing pollution to inland and often upstream provinces.
In some cases, the main motivation to relocate is to escape tight environmental regulations for lesser ones…
There are multiple reasons behind these relocations, including resource endowment, growing local demand, labour wages and land costs. In some cases however, the main motivation to relocate is to escape from tight environmental regulations. Hence the so-called pollution haven conundrum: by enacting and enforcing tighter environmental regulations, the risk is that polluting industries simply leave the jurisdiction looking for more lenient places, making these very regulations less efficient, if not counter-productive.
…hence the so-called pollution haven conundrum
This pollution haven effect is often recognised at the international level, yet it can also happen within one country at the provincial level. This is particularly true in China where relative decentralisation allows provinces to wage the ‘war on pollution’ with varying strength.
Decentralisation creates conditions of a race-to-the-bottom
When it comes to environmental regulations, China is a fairly decentralised country. Provinces are given much leeway to implement centrally-led regulations. Local Environmental Protection Bureaus, responsible for regulations enforcement, are still very much relying on provincial governments for their staff and funding, despite recent efforts towards more vertical integration. Moreover, economic targets still significantly outweigh social and environmental targets.
Some provinces run a race-to-the-bottom to attract industries
This creates conditions for a race-to-the-bottom whereby some provinces leniently enforce environmental regulations or content themselves with the strict minimum in a bid to attract or preserve polluting (but tax-paying and job-providing) industries within their jurisdictions.
Evidence of pollution haven effect in China
Such competition across provinces has been highlighted in a recent study which found that the relocation of polluting plants in China mainly happens across provinces rather than abroad. Another study showed that policies on sulphur-dioxide reduction in targeted areas lead to more closures of polluting firms in targeted locations and more new polluting firms in non-targeted areas; a similar phenomenon has been observed in Guangdong provinces where hundreds of polluting industries relocated from the Pearl River Delta to upstream prefectures after air pollution measures were set in place. The growing compliance costs and additional resources required were key drivers of this transition.
Yet not all enterprises are affected equally, and not all political measures have the same effect on industries’ relocation.
An uneven playing field: compliance and enforcement asymmetries
Firms do not react in the same way to regulations depending on their size, resources to innovate, and ownership structure, creating so-called compliance asymmetries.
For instance, smaller firms are usually less well-equipped to interpret and implement new regulations; similarly, the unit cost of pollution abatement can be higher for small firms since fixed costs are spread over a lower output volume – see here for an instance of how small textile manufacturers could be hit by the ‘Water Ten’.
Besides, regulations may be enforced unequally across firms, resulting in enforcement asymmetries. There has been mixed evidence on this front, with some studies showing that large firms are more protected thanks to their political power (especially in the case of SOEs), whilst other research emphasises the higher exposure of large firms due to their visibility.
Not all firms are affected equally
However, it is widely considered that SOEs usually hold a strong bargaining position with local governments given their great political power. On top of that, SOEs often have easier access to finance and softer budget constraints.
Not all political measures are equally effective
What studies have also shown is that not all political measures are equal. For instance, direct subsidies can prove a double-edged sword: polluting firms receiving large amounts of subsidies may be discouraged from innovating and make them more reliant on government support.
Industrial parks can reduce risks; thus preventing relocation
Other approaches can yield longer-lasting benefits, such as the development of industrial parks. Simply put, by offering shared waste and wastewater treatment facilities, these parks can reduce compliance costs and regulatory risks for the firms they host (see the example of Tianjin Economic Development Area). They also enhance knowledge spillover and capacity building. Finally, earmarked subsidies toward pollution abatement technologies also prevent relocation of polluting firms whilst reducing pollutant discharges. Yet overall, fostering inter-provincial cooperation might be the best answer.
The key role of cooperation and transboundary initiatives
Over the past few years, various mechanisms have been set in place by central and local governments to organize provincial cooperation on pollution issues.
For instance, Zhejiang, Jiangsu and Shanghai have been holding joint annual meetings for a few years already in a bid to solve Taihu Lake’s pollution issues. The ‘Pan-Pearl River Delta’ (PPRD) is another cooperation mechanism initiated by 9 Provinces along the Pearl River. Up in the North, Beijing, Hebei and Tianjin have pledged a joint effort to fight air pollution; Hebei has already received substantial financial support from the two neighbour municipalities to reduce its air pollutant emissions.
Such eco-compensation mechanisms, which received formal recognition in the last revision of the Environmental Protection Law, are another way to incentivise cooperation across governments. Applied to watersheds, it means that downstream regions support upstream ones for their efforts to clean-up water (or are penalising them when they fail to do so).
These mechanisms will certainly help level the playing field across provinces, but companies need to get in the game too.
Relocating may be a short-sighted strategy
For corporates and large MNCs, it might prove short-sighted to constantly try to escape tight environmental regulations. The “war on pollution” is a national environmental ambition, with nation-wide targets, standards and monitoring systems. Seeking provinces with weaker supervision and enforcement can be a “relief” in the short term, but great regulatory risks loom ahead for these companies in the future as the demands for clean air and water extend to every single province – read here about the impacts of the Environmental Protection Law, two years after coming into effect.
Strict environmental regulations can induce higher efficiency & improve competitiveness
Moreover, some studies have argued that strict environmental regulations can induce higher efficiency and encourage innovations that will ultimately improve commercial competitiveness. It is often called the Porter hypothesis, named after the economist Michael Porter. The Porter hypothesis is often pitted against the Pollution haven hypothesis, although these two do not necessarily contradict each other. These have actually been shown to co-exist in China.
|Pollution haven hypothesis||Porter hypothesis|
|The uneven stringency of environmental regulations create incentives for companies to relocate in regions where regulations are less strict||Strict environmental regulations can induce higher efficiency and encourage innovations that help improve commercial competitiveness.|
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