Wang and Wheeler test the conventional critique of the levy system using new province level data for 1987-93. Their results suggest that the water pollution levy system is neither arbitrary nor ineffective. Across provinces and over time, variations in the effective levy rate are well explained by proxies for local valuation of environmental damage and community capacity to enforce local norms. During 1987-93, rapid development in many provinces led to sharp increases in the effective rate. Although supervised by the central government, China's pollution levy system is implemented by the provincial and local governments.
Critics are correct when they assert that there is significant variation in implementation.
The data reveal striking differences, both across provinces and through time. In general, real effective provincial levies increased during the sample period. Their results also suggest that the emissions intensity of Chinese industry was highly responsive to those increases, because marginal abatement costs were often lower than levy rates. From 1987 to 1993, provincial pollution intensities fell at a median rate of 50 percent, and total discharges at a median rate of 22 percent. Inspection of these provincial differences suggests that variations in the effective levy rate are far from random.