The Impact of Exogenous Pollution on Green Innovation

Does environmental quality affect firms’ activities that might improve that quality? In this paper, we use China's public heating policy as a quasi-experiment to investigate the impact of exogenous pollution differences on green innovation behavior. We use a regression discontinuity model, and carry out a suite of robustness tests. We consistently find that firms located in cities with an exogenous source of heavy pollution tend to adopt green innovation at a lower rate while we find no difference in the rate at which they adopt non-green innovation. We find a strong causal effect: being north of the boundary, where pollution levels are higher, leads firms to adopt less green innovation. Firms located in the heating areas report roughly 1 less green innovation per billion RMB of assets, a substantial difference given the average number of green innovations per billion RMB of assets of northern firms is 0.641.