Emission leakage and the effectiveness of regional environmental regulation in China

This paper examines the emission leakage by the regional environmental regulation applied in Beijing and its surrounding area. Using the unique firm-level daily emission data, we develop a novel model to estimate the size of immediate leakage through the price mechanism. Our empirics find that leakage offsets about 60% of the total amount of emission reduction in the regulated region and the aggregate emission reduction is less than two percent. We also use the iron and steel industry as an example to show how the prices of input and output factors respond to the regulation.