Environmental policies of local governments: A panel data analysis of SO2 abatement

This paper constructs a theoretic model to study the behaviors of China local governments in environmental policy-making process. In our model, local governments make environmental policies under promotion incentives, while polluting firms produce according to such policies. The model predicts a Ushaped relationship between the GDP ratio of local secondary industry and the strictness of local environmental policies, which we use the 2003-2011 "China City Statistical Yearbook" panel data to test. The regression results confirm the theory prediction and find that the turning point is around 55%. That is, when the GDP ratio of secondary industry is below (or above) 55%, the strictness of local environmental policies monotonically decrease (or increase) in the GDP ratio of the second industry in the local economy. We also compare the regression results with different indicators of environmental policy and find heterogeneous effects, which implies that it is extremely crucial to use the right policy indicator when we study the environmental problem in China.