The Income Distribution Effects of Environmental Regulation in China：The Case of Binding SO2 Reduction Targets

Abstract Faced with serious environmental pollution, strengthening the enforcement of environmental regulations has become a priority for governments, especially with sustainable development as a main goal. However, there is not enough empirical evidence about the income distribution effect of environmental regulations. This paper analyzes binding emissions target as a policy shock of environmental regulation to empirically understand its impact on wage growth and inequality based on household and firm level data from 2002 to 2007 in China. The results show that in more pollution-intensive cities, stricter environmental regulation inhibited wage growth, furthermore widening the income gap between skilled and un-skilled labor. These results were further proofed after taking ventilation coefficients as the instrument variable. Heterogeneous tests show that this negative impact is more serious for un-skilled labor in high-polluting industries and also more significant for those located in the central and eastern parts of China.