The Impact of Environmental Policy on Household Income and Activity Choice: Evidence from Sandstorm Source Control Program in North China

This paper uses household data to assess the near-term impact of the program on incomes and activity choices of rural households in areas where the sandstorm control program (Beijing and Tianjin Sandstorm Source Control Program) was implemented. Central to our analysis is a unique panel survey conducted by the State Forestry Administration covering years from 1998 to 2003 in 17 counties in three Northern provinces Hebei, Shanxi, and Inner Mongolia (autonomous region). The essential feature of the program is an annual subsidy provided to participating farmers to cover costs associated with permanent retirement of farm land and the planting of saplings. We first look at the impact of program participation on household incomes and, not surprisingly, observe a positive relationship. Next we look at the impact of the program on the activity choice of farm households. We found evidence that 1) participating households are more likely to engage in off-farm wage employment than self-employment activities after retiring farmland, and 2) participating households are diversifying income away from farming to more non-agricultural activities. These findings may suggest that 1) farmland retirement payments may have helped farm households overcome credit constraints preventing them from starting their own businesses, and 2) the program may have contributed to re-shaping the structure of rural household production in a way that household labor supply is slowly moving from farming to non-agricultural sector such as self-employment and off-farm wage employment.