The Impact of Location-Based Tax Incentives and Carbon Emission Intensity: Evidence from China’s Western Development Strategy

Abstract

This study seeks to address the question of whether China’s Western Development Strategy (WDS) has affected the carbon emission intensity of the regions it covers. There remains a distinct lack of analysis based on the normative causal inference method regarding the impact of this economic development policy on carbon emissions. Our research contributes to the large body of international literature studying the effects of place-based policy and has implications for place-based policies regarding the impact of carbon emissions. It constructs a duopoly model to illustrate the relationship between lower prices of capital (caused by policies such as tax reduction) and carbon emissions. Using county-level data on both sides of the provincial boundary of the WDS from 1998 to 2007, and applying the difference-in-differences method, our results indicate that the WDS has significantly increased carbon emission intensity of the western counties. Our findings also indicate that while the WDS has had no significant positive effect on counties’ economic growth, no policy trap effect was found. There is also no evidence suggesting that the economic activities attributable to the WDS have brought any negative externalities of carbon emissions to the counties east of the western provincial border.