Research in brief: understanding the impact of environmental credit constraints (ECCs): insights from China
Governments worldwide are striving for sustainable development while grappling with the environmental consequences of rapid economic growth. China, like many other countries, has implemented various measures to curb environmental pollution. Among these, environmental credit constraints (ECCs) have emerged as one of the tools to influence firms' behavior regarding pollution reduction. Research by experts from IÉSEG, Nanjing University of Finance & Economics, Nanjing Normal University and Anhui University of Finance and Economic, has analyzed their implementation in China to look at their impact on reducing pollution.
03/15/2024
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ECCs are typically implemented as performance-based credit mechanisms designed to regulate and control pollution levels. They serve as a pivotal tool for policymakers, influencing firms’ behavior to achieve a reduction in harmful emissions. These constraints operate within the broader framework of an environmental credit system, encompassing practices such as blacklisting firms that violate environmental regulations.
Previous studies have shown that reinforcing such credit systems can improve lenders’ capacity to properly screen the environmental risks associated with the different production methods, helping offer better financing options to firms that use ecologically friendly technologies while simultaneously restricting credit options available to heavy polluters (Du et al., 2022). In addition, they can shape companies’ future behavior, improving their integrity and environmental self-control in addition to promoting the notion of clean production (Qiu et al., 2016).
Study of China’s blacklisting system
A recent study* has looked at China’s blacklisting system for environmental misdemeanors to analyze the pollution-reducing effects of such measures. This blacklisting system aims to prevent enterprises that commit offences from participating in policy procurement activities (including competitive bidding and sourcing), raise their environmental pollution liability insurance rates, limit the scope of business operations, and restrict their financing channels.
However, some of the environmental law-breaking firms continue to gain considerable advantages in administrative licensing, public procurement, financial support etc. An incentive framework designed to punish such delinquencies by restricting access to credit using ECCs is therefore designed to increase the costs of fraud.
Using a sample of 287 Chinese cities from 2008 to 2018, the researchers found that the practice of blacklisting firms that violate environmental regulation helped policymakers control pollution and thus promote more environmentally sustainable economic development.
ECCs and efficiency of regulation
They also showed that environmental credit systems helped improve the efficiency of regulation and strengthen the existing framework for penalizing rule-breaking behavior, whereby the government and society enforce environmental regulation jointly. They created strong incentives for enterprises in China to increase R&D investment, improve the energy and resource use efficiency, and reduce the level of socially undesirable outputs generated in production.
Importantly, they also found that ECCs are particularly effective in regions where companies have a high-level of dependence on credit and where there is a relatively high concentration of manufacturing companies. In addition, they also found that pollution-reducing effects were significant in regions with strict environmental regulation in place.
Helping policymakers control environmental pollution
According to Zhiyang Shen, Associate Professor at IÉSEG and one of the co-authors of the study, this work therefore provides evidence that the practice of blacklisting delinquent firms that violate environmental regulation can help policymakers effectively control pollution and thus promotes environmentally sustainable economic development. Environmental credit systems help improve the efficiency of regulation and strengthen the existing framework for penalizing rule-breaking behavior, whereby the government and society enforce environmental regulation jointly.
In terms of policy implications, the authors note several applications from this study. For example, they note that extending the framework to all heavy polluting industries should go a long way in helping policymakers promote more sustainable development paths.
They also underline the importance of strengthening law enforcement among the rule-breaking enterprises, improving information on disclosure protocols, and reinforcing the oversight of environmental protection (for example with environment agencies).
The study therefore underscores the potential of ECCs as a feasible policy tool for pollution reduction, offering additional incentives for firms to voluntarily cut emissions and offering opportunities for diversifying the strategies policymakers can use to mitigate adverse environmental impacts.
Fostering a clean and sustainable future
Moreover, the findings provide valuable insights for policymakers outside of China, offering a practical insights for the development and implementation of environmental credit systems. Notably, it underlines the need for tailored strategies at the regional level, considering variations in economic and regulatory environments.
Moving forward, the researchers note that further research and policy experimentation are warranted to refine and optimize the use of ECCS, and their role in fostering a cleaner and more sustainable future.
More information is available in their article: “Environmental credit constraints and pollution reduction: Evidence from China’s blacklisting system for environmental fraud” (Ecological Economics, 2023) Danyang Di (School of Finance, Nanjing University of Finance & Economics), Guoxiang Li (School of Business, Nanjing Normal University), Zhiyang Shen (IÉSEG School of Management,), Malin Song (Anhui University of Finance and Economics), Michael Vardanyan (IÉSEG School of Management & CNRS, UMR 9221 – LEM – Lille Economie Management).
