How Does the Ecological and Environmental Damage Compensation System Affect Industrial Wastewater Discharge in China?

Scientific evidence shows that human population and economic activity are nearing or exceeding the limits of global environmental systems. In response, many countries, including China, have introduced regulations to mitigate this pressure. China’s Ecological and Environmental Damage Compensation System (EDCS), launched in 2015, emphasizes valuing ecological functions and flexible compensation. This study analyzes the EDCS’s impact on industrial wastewater discharge using prefecture-level data (2012–2021) and a time-varying difference-in-differences (DID) method. The results show that EDCS significantly reduces industrial wastewater discharge, particularly in small cities, lightly polluted areas, and Central China. However, increased public spending on science and technology and extended drainage infrastructure weaken this effect. Further analysis shows that the EDCS enhances centralized sewage treatment rates, contributing to better control of water pollution. This study highlights the system’s effectiveness in water pollution management and emphasizes the importance of internalizing the value of ecological functions in policy design. It urges policymakers to enhance the system’s implementation efficiency, introduce tax incentives to promote green investment, and leverage market mechanisms to ensure long-term environmental sustainability.