“Icing on the cake” or “fuel delivered in the snow”? Evidence from China on ecological compensation for air pollution control

Ecological compensation is a crucial measure to balance the interests of all stakeholders and mobilize local government's initiative in pollution control, while the relationship between ecological compensation and environmental quality standards may influence the policy effect. This study investigates the impact of China's first ecological compensation policy for air pollution control—Shandong Province's Ambient Air Quality Ecological Compensation (AAQEC) policy—on ambient air quality, and explores the appropriate relationship between ecological compensation and environmental quality standards. The theoretical model suggests that the lenient punishment for substandard environmental quality deviates the incentives of the AAQEC that targets multiple pollutants, thereby limiting its effectiveness in improving overall regional ambient air quality. Utilizing monthly air pollutant concentration data and employing a continuous difference-in-difference approach, the empirical results show that the AAQEC acts as a guaranteed measure to assist local governments in achieving environmental quality compliance. The AAQEC effectively reduces SO₂ and PM_2.5 concentrations through incentivizing environmental protection expenditures and green transformation of development mode, while the effect on controlling the key pollutant with severe exceedance is not observed—the concentration of PM₁₀ does not change significantly. The above plight is attributable to local government's strategic behaviors of selecting pollutants with higher marginal net benefit of pollutant abatement for priority treatment regardless of actual pollution conditions, resulting in the partial improvement in ambient air quality. These findings indicate that a flexible ecological compensation policy should be established with punishment imposed for substandard environmental quality, playing its role in enhancing local governments' environmental governance capacity and further improving overall ambient air quality based on compliance.