We (re)evaluate the general-equilibrium effects of (environmental) policies from the perspectives of input-output networks and firm dynamics and heterogeneity. Using China’s carbon emission trading system (ETS) as an example, we find that ETS leads to more patent applications, especially the ones associated with low-carbon technologies in the targeted sectors. The effects are muted at the firm level due to selection effects, whereby only larger firms are significantly and positively affected. Meanwhile, larger firms occupy a small share in number but a large share of aggregate outcomes, contributing to the discrepancy between the effects of ETS at the individual firm and aggregate sector levels. The effects also diffuse in input-output networks, leading to more patents in upstream/downstream sectors. We build and estimate the first firm dynamics model with input-output linkages and regulatory policies in the literature and conduct policy experiments. ETS’s effects are amplified given input-output networks.

Using plant-level pollution data from Environmental Survey and Reporting Database in China, we analyze how the government's 2007 environmental policy aiming to curb pollution from two-high industries (i.e., high-polluting and high energy-consuming) affect real firm pollution activities across the supply chain. We employ the Differences-in-Differences approach and find that following the 2007 environmental policy, firms in two-high industries that are mostly in the upstream of the supply chain indeed reduce emissions of air and water pollutions significantly (e.g., sulfur dioxide (SO2), chemical oxygen demand (COD), and wastewater). Such reductions are mainly due to higher pollution removal and the increased investments in treatment facilities that are funded by subsidized bank loans such as the China Development Bank (CDB). By contrast, following the 2007 policy, firms in the downstream of two-high industries increase their production levels without any increases in their pollution treatment facilities and capabilities, which leads to increased pollution levels such as SO2 emissions and coal consumption. Furthermore, such adverse spillover effects in downstream industries can be alleviated by CDB loans, which help finance the investments in pollution treatments for these downstream firms. Our findings about direct and unintended spillover effects of the environmental policy suggest that policymakers should carefully consider all potential impacts across the supply chain when designing the package of environmental policies to mitigate unintended adverse consequences.

We conducted an assessment of the impact of Property Rights on the toxic emissions of Chinese industrial firms. Specifically, we focused on the 2007 enactment of the Property Law in China and utilized difference-in-difference estimations to analyze firms’ pollutant emissions. Our findings reveal compelling evidence that firms with low net fixed assets considerably reduce their chemical oxygen demand (COD) emissions after the implementation of the Property Law. Moreover, the effect is more prominent in firms that face stronger financial constraints and are situated in areas with high external pressure on environmental protection or robust government monitoring. We concluded that the Property Law's influence on firms’ toxic emissions is through improving credit conditions and technology upgrades. Overall, our results indicate that a well-established Property Law has a significant impact on industrial firms' environmental policies.