Business Cycles and Pollution Emission Intensity —Mechanism Analysis and Policy Response
LI Jianjun, FENG Kexin, DENG Guichuan, PENG Yuchao
School of Finance, Central University of Finance and Economics; International School of Business and Finance, Sun Yat-Sen University; Advanced Institute of Finance, Sun Yat-Sen University
Summary:
In the face of environmental issues and limited resources, how to coordinate the relationship between development and emission reduction, while alleviating business cycle fluctuations and encouraging enterprises to take the initiative in emission reduction, is of great significance for achieving a “win-win” situation between the economy and environment. To answer this question, it is necessary to first clarify the relationship between business cycles and corporate emission reduction behavior and environmental performance. Thus, this paper focuses on pollution emission intensity, aiming to explore the dynamic processes, internal mechanisms, and policy responses of different corporate reduction behaviors in different business cycles in China, to facilitate green and high-quality enterprise development. Based on the pollution data of Chinese industrial enterprises from 1998 to 2013, we observe the countercyclical characteristics of pollution emission intensity. To explain this finding, this paper constructs a two-sector DSGE model with environmental constraints to analyze the relationship between business cycles and pollution emission intensity. In the model, both high-emission and low-emission projects are established. Low-emission projects introduce cleaner production equipment into the production function, so their pollution emission intensity is lower than in high-emission projects, resulting in lower environmental negative externalities. The model also includes enterprise heterogeneity with respect to management ability for cleaner production equipment, such that enterprises' choice of optimal project depends on their own ability to manage low-emission projects. Specifically, enterprises with high management skills are more likely to choose low-emission projects. To describe the externality of pollution emissions, this paper introduces pollutant-adjusted labor into the household utility function. This setting helps to elucidate the general equilibrium effects of pollution emissions on the macro-economy. Subsequently, through impulse response functions, this paper analyzes the key mechanism underlying the countercyclical characteristics of pollution emission intensity from both the enterprise and household sectors as well as policy response methods. The results show that when the economy is in a downturn, the return on investment falls more sharply for enterprises that invest in low-emission projects than for those that invest in high-emission projects, leading to a decrease in the number of enterprises investing in low-emission projects and a rise in pollution emission intensity. At the same time, as pollution emission intensity rises, it increases the negative externality of pollution emissions on labor, which lowers enterprise profits through decreased labor supply and increased labor costs, further hindering sustainable economic development. Policy analysis shows that when the economy is in a downturn, policies that target pollution emission intensity, such as emissions taxes, price subsidies for cleaner equipment, and credit restrictions on polluting enterprises, can effectively curb the rise in pollution emission intensity. Specifically, emissions tax policies and subsidy policies have positive effects on the environment through structural effects in the enterprise sector, helping to promote corporate low-emission transformation. The marginal contribution of this paper mainly lies in discovering a negative relationship between US manufacturing output and industry-specific pollution emission intensity documented in the existing literature. However, the relationship between China's business cycle and pollution emission intensity remains unknown. Based on empirical analysis, we find that pollution emission intensity is countercyclical. Moreover, we construct a model to attempt to explain this feature, providing preliminary empirical evidence and theoretical support for the relationship between business cycles and pollution emissions. This paper focuses on analyzing the short-term impacts of taxation, subsidies, and other environmental policies. Future research directions include studying long-term policy effects based on growth models from cost-benefit perspectives.
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