The Impact of China’s Central Environmental Protection Inspection on Steel Enterprises' Environmental Behaviors

• In Event: Regulating the Environment in China and the US: Complexity, Monitoring, and Frameworks

Abstract

The International Energy Agency recently reports that the iron and steel sector emits 2.6 gigatonnes of carbon dioxide annually, detrimental to the environment. However, local governments, as regulation agency, frequently prioritize economic development over environmental governance owing to information asymmetry and political tournament incentives (Cai et al., 2016). In response, the central government initiated Central Environmental Protection Inspection (CEPI) in 2016 (Jia & Chen, 2019). CEPI aims to address the shortcomings of traditional environmental governance systems by strengthening central government oversight, thereby enhancing the transparency and enforcement effectiveness of local environmental governance (Cheng & Yu, 2023), including the regulation of steel industries.

Despite its significance, empirical studies examining how CEPI influences steel enterprises' environmental practices remain limited, particularly concerning the mechanisms through which it operates. (Zheng & Na, 2020; Tan & Mao, 2021; Yuan et al., 2022).

Grounded in principal-agent theory and signaling theory, this study posits that CEPI exercises its institutional authority to signal the central government's environmental commitment to environmental protection, thereby compelling local governments to prioritize ecological conservation. Concurrently, by enhancing public participation, CEPI elevates governance transparency and generates pressure targeting both local administrations and industrial polluters. Within CEPI’s tripartite pressure framework—comprising centralized oversight intensity, localized regulatory enforcement, and sustained societal scrutiny—steel companies are institutionally compelled to transition from performative compliance to substantive environmental remediation.

Based on a unique nationwide firm-level dataset derived from “Environmental Protection Statistics of China's Iron and Steel Industry,” this study employs a quasi-experimental design. Adopting a staggered difference-in-difference approach, we apply the estimator developed by Callaway et al. (2021) to examine the impact of CEPI on steel enterprises' environmental behaviors from 2002 to 2018. Preliminary results indicate that enterprises' pollution discharge fees increased significantly following CEPI implementation, with this effect exhibiting persistence over time. However, CEPI shows no statistically significant influence on enterprises' environmental protection investments. This suggests that CEPI effectively strengthened environmental regulation enforcement by reducing information asymmetry among environmental governance stakeholders, yet it failed to stimulate enterprises' endogenous motivation for pollution control.

These findings deepen the understanding of CEPI's impact on environmental behaviors in the steel industry. Challenging extant studies that posit CEPI's emission reduction effects, this study reveals that CEPI's efficacy arises mainly from deterrence effects, which enhance the accuracy of emission disclosures.

Authors

• Haoqi Qian, Fudan University
  Non-Presenting Co-Author

• Yuhan Cao, Fudan University
  Presenting Author