The Unintended Externalities of an Environmental Regulation: Evidence from the NOx Budget Trading Program

53 Pages Posted: 13 Apr 2022 Last revised: 23 Aug 2022

See all articles by Tse-Chun Lin

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics

Zoey Yiyuan Zhou

The University of Hong Kong - Faculty of Business and Economics

Hong Zou

The University of Hong Kong - Faculty of Business and Economics

Date Written: March 15, 2022

Abstract

Exploiting NOx Budget Trading Program (NBP) implementation, we show that such a regional environmental regulation has unintended effects on the emission policies of manufacturing plants unregulated by the NBP via the pass-through of higher electricity prices. High energy-consuming manufacturers with tighter constraints or stronger incentives to maintain high earnings cut corners by reducing costly abatements to absorb the NBP-induced increase in energy input cost. The increased emissions worsen air quality within the 1-mile radius of manufacturing plants, which are mainly neighborhoods of underprivileged communities. While the NBP improves overall air quality, it also yields negative externalities along the supply chain.

Keywords: Emissions; Unintended Externalities; Supply Chain; Managerial Short-termism; NOx Budget Trading Program; Pass-through; Pollution Inequality.

JEL Classification: D63, G31, J15, L11, M14, Q52, Q56.

Suggested Citation

Lin, Tse-Chun and Zhou, Yiyuan and Zou, Hong, The Unintended Externalities of an Environmental Regulation: Evidence from the NOx Budget Trading Program (March 15, 2022). Available at SSRN: https://ssrn.com/abstract=4072211 or http://dx.doi.org/10.2139/ssrn.4072211

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Yiyuan Zhou (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

Hong Zou

The University of Hong Kong - Faculty of Business and Economics ( email )

China

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