Environmental policies with financing constraints in China

We study how borrowing constraints and environmental policies jointly exert their effects on the pollution emission level of China's enterprises using a New Keynesian approach. We consider three environmental policy alternatives: the emission tax policy, the intensity target policy, and the emission cap policy. We consider shocks to the borrowing constraints, the different policies, and the monetary policy and plot the impulse-response of environmental and economic variables following the above shocks. We also do comparative statics using two scenarios of borrowing constraints. We find significant effects of borrowing constraints on the efficacy of environmental and monetary policies, pointing out the importance of weighing in the borrowing constraints when analyzing environmental protection from an economic angle in China.