Corporate Concentration and Air Pollution Governance in China

Abstract: Overall air quality in China has improved for six consecutive years (Krotkov et al 2015). A little-studied aspect of pollution control in China is that the source of air pollution is dominated by heavy industry and that improvements have varied by sector. In my dissertation, I assess how corporate governance and competition policy can be a useful tool for improving environmental compliance. Through case studies using both large N statistical analysis and in-depth interviews, I provide an empirical story that substantiates that as energy sectors have become more competitive, the government is able to impose stricter air quality standards and to enforce them more effectively. Monopolies avoid regulation through their control of information and of market supply of an essential commodity. By contrast, if the government breaks the monopoly, suppliers compete not just to sell product but on compliance in order to gain permits and other government-issued advantages. 

Chapter 1 delineates the theoretical contribution of the dissertation. Much environmental literature on China has focused either on the relationships among levels of government or on civil society involvement. I posit that despite the weakness of civil society and the complexity of center-local relations, progress is being made, and that to understand it we need to look more carefully at the relationship between government and major polluters. I demonstrate that we need to consider the full possibilities of capture theory as outlined in the Stigler-Peltzman model to understand changes in Chinese environmental regulation. As Stigler famously showed, firms can use regulation for competitive advantage, advocating for regulation that helps them and hurts their competitors. In the Chinese case, firms use adherence to and advocacy for regulation to gain favor from the Chinese government—and the permits and market access that come with it.

Chapter 2 outlines the history of China’s major fossil fuel consuming sectors: power and oil refining. The independent variable throughout this dissertation is the degree of concentration of the relevant industry. The chapter thus describes the changes in structure of the two sectors under study. The history of each begins with monopoly as a dedicated ministry, which is then corporatized in the 1990s. But then the two sectors diverge, with the power sector broken up in 2002 and competition introduced to the oil and gas sector only very recently. Moreover, in the power sector, I also find subnational variation that provides a useful mechanism for cross-provincial comparison.

Chapter 3 uses qualitative methods to examine power sector standards. The sector expanded from one company to five in 2002; by 2008 the market share of the top 5 had dropped to 45%. This change in concentration corresponded to the major changes in regulatory standards. Using in-depth interviews with regulators, company officials, and plant managers, I find that increased competition provided regulators with leverage.

Chapter 4 uses large N quantitative analysis to consider variation in the power sector at the provincial level. While standards are national, enforcement falls to local and provincial bureaucracies. The Chinese sector is essentially divided into regional power grids, creating the opportunity to consider each province’s industrial concentration and power-sector related emissions independently. I calculate standard measures of industry concentration from a dataset of more than 13,000 power plant units in China to derive a level of power sector concentration for each province-year and measure its influence on power sector specific emissions. I find the more competitive the industry in a province, the greater the emissions reductions.

Chapter 5 uses qualitative methods to consider standards in the Chinese oil and gas industry. The key standard in question was a new fuel quality requirement for heavy vehicles that the Chinese government had slated to go into effect in 2010, but which was repeatedly delayed. The standard took effect in 2015, only after the Chinese government allowed new competition into the industry. Through interviews with key players, I find that small firms behaved strategically in demonstrating they could meet higher emissions standards as a way to gain import permits.

Overall, I find that it is critical to consider the political relationships between major polluters and government if we are to understand pollution regulation. I also find that we need to consider not just firm-level characteristics, but the structure of industries to understand how players behave. Even in an autocratic state with state-owned enterprise dominated sectors, my results indicate that companies compete with each other and that competition can be used by government to promote regulatory aims. Some companies will use regulatory compliance to gain a competitive edge, which creates an opportunity for government regulators.