Assessment of China's pollution levy system: an equilibrium pollution approach

There is considerable concern about the effectiveness of China's pollution control policies. Despite government intervention, measures of pollution continue to rise. However, this does not mean that policies have necessarily been ineffective. What matters for the effectiveness of policy is not the overall level of pollution but whether the extent of pollution is improving relative to what it otherwise would have been without a policy intervention. This paper assesses the effectiveness of China's pollution levy system on water pollution, air pollution, and solid wastes using econometric techniques to estimate the effectiveness of government intervention. The paper first sets out a theoretical equilibrium model of pollution and then uses this to derive equations for the demand and supply of pollutants. This theoretical framework is then used to develop an econometrically estimated model. We find that it is possible to estimate a well-defined demand function for pollution (a reduction in environmental quality) but are unable to estimate the supply of environmental goods, suggesting that government regulation rather than consumer preferences are determining the rate of environmental degradation in China. We also find that the pollution levy system has been effective in reducing pollution relative to what it otherwise would have been in China.