With the continuous deterioration of the environment, environment protection and pollution reduction have received worldwide recognition. For China, pollution reduction not only contributes to the construction of ecological civilization, but also helps promote the green transformation of the economy. Besides environmental regulation, support and guidance from the financial sector are also very important for pollution reduction. From 2007 to 2013, 12 provinces or municipalities in China gradually doubled the SO2 levy standards from the original 0.63 yuan/kg to 1.26 yuan/kg. Using 2004-2013 China'sEnvironmental Statistios Dataset (CESD) and the sequential adjustments of levy standards as a quasi-natural experiment, this paper applies the difference-in-differences method to examine how the adjustments of levy standards and firms' financing constraints affect firm behaviors and pollution control. Empirical results show that the increase in pollution charge reduces pollution emission by 9.14% while also significantly lowering outputs by 4.43%. The results remain robust in a series of tests. Heterogeneity analysis indicates that large enterprises and state-owned enterprises have carried out effective pollution control, achieving significant reduction in pollution emission intensity without significant drop in outputs. Small and medium-sized enterprises (SMEs) and private enterprises, however, have reduced outputs, and their effect of pollution control needs to be improved. Using credit loan and interest expenditure data, this paper makes further analysis from the perspective of environmental financing. Results show that environmental financing constraints lead to heterogeneous pollution control effects. While implementing the policy, SMEs face substantial environmental financing constraints, which significantly restrains their pollution treatment, aggravates the output adjustment, and ultimately weakens pollution reduction. Controlling for confounding factors (e.g. enterprise size and enterprise pollution emission intensity) that affect enterprise' incentives to reduce pollution does not change the findings. Enterprises have two options to reduce emission: output reduction and pollution treatment. Pollution treatment usually involves installing pollution disposal equipment, updating production process, and the R&D of green technology which require substantial environmental investment. However, green investments are usually long-term and highly risky with low early return. Relying on internal financing for green investments exerts large pressure on enterprises' cash flows and operational risks. Therefore, when stringent environmental regulations are implemented, there is rising financing demand. If the financial sector ignores this demand, enterprises facing rising emission costs and tight external environmental financing constraints will choose to sacrifice their outputs. This choice not only brings negative economic consequence, but also deviates from the goal of green transformation of production. The innovation and contribution of this paper are as follows. First, this paper points out that financing constraints affect the outcome of enterprise emission reduction, which enriches the literature on environmental regulation and enterprise pollution reduction, and provides policy enlightenment for the promotion of pollution reduction and the development of green finance. Second, the findings facilitate our understanding of the relationship between environmental regulation and Porter Hypothesis. The literature has long been focusing on whether environmental regulation can stimulate enterprises' green R&D innovation and efficiency improvement. This paper shows that appropriate financial support helps enterprises promote environmental investment. Third, this paper cleans and processes the data of CESD which has not been widely used in academic literature, providing useful experience for applying CESD. This paper has the following policy suggestions. First, in promoting pollution reduction, we should not only strictly implement environmental regulations, but also pay attention to financial support from the financial sector, so as to improve the pollution treatment capacity of enterprises. Second, to boost environmental investment, the financial sector not only needs to complement the internal weaknesses of China's financial system through ways such as channel funding and reducing borrowing cost for SMEs, but also needs to promote the development of green finance. In providing financial support for enterprise pollution control, uniform environmental risk aversion to polluters is undesirable and enterprises' “green washing” behaviors should be prevented. This requires the financial sector to enhance green finance operations and effectively identify the opportunities and risks in green investment.
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