Assessing the impact of tradable discharge permit on pollution reduction and innovation: micro-evidence from Chinese industrial enterprises

The impact of a tradable discharge permit system on pollution reduction, pollution intensity, and innovation depends on market perfection. To verify this assumption, this study matches China’s Industrial Enterprise Database with the Industrial Enterprise Pollution Emissions Database and applies the difference-in-difference-in-difference estimator for empirical analysis. The results show that implementing a tradable discharge permit policy can promote pollution reduction and pollution intensity reduction for pilot regions with a high degree of marketization. However, the implementation of a tradable discharge permit policy did not have a significant impact on innovation. This indicates that the Porter hypothesis was not valid during the sample period from 2000 to 2012 in China. Enterprises tend to achieve pollution abatement through end-of-pipe control or reduced output rather than through technological innovation. Moreover, high institutional transaction costs lead to a weak incentive effect of the tradable discharge permit system on promoting enterprise innovation. Furthermore, greater market power is conducive to corporate innovation in regions with a high degree of marketization. The results of a heterogeneity analysis show that the impact of a tradable discharge permit system differs by enterprise ownership and region. The findings have clear policy implications: the Chinese government should consider applying the hybrid approach by combining a tradable discharge permit system with a given emission standard and foster competition.