Conference Agenda

This paper studies how carbon policies in Europe lead to inadvertent local environmental regulation adjustments in China. Using a novel dataset covering two decades of Chinese environmental penalties and a comprehensive measure of European sectoral carbon costs, we construct a shift-share measure of yearly city-sector-specific exposure to EU carbon price costs among Chinese firms for identification. We find that a one-standard-deviation increase in export-weighted carbon price exposure corresponds to a 2.30% to 3.97% rise in the amounts of environmental penalties and a 4.39% to 7.52% increase in the values of these penalties. We also observe an increase in the intensity of penalties, suggesting that emissions leakage is not simply absorbed by the importing cities but also triggers stricter environmental regulation in response to increased pollution pressure. Conversely, industries more reliant on imports from the EU see a decline in exports and experience fewer environmental penalties. Further evidence reveals that the increased enforcement is concentrated in tradable sectors rather than reflecting a city-wide policy shift. In addition, local regulators offset reduced environmental enforcement in sectors reliant on EU imports by imposing stricter penalties on non-tradable sectors.