Fossil Fuels, Trade Liberalization, and the Environment: Evidence From China

ABSTRACT This paper examines the environmental impact of trade liberalization on firms through two types of import tariff reductions. We find that lowering import tariffs on intermediate goods reduces both sulfur dioxide (SO 2 ) emissions and emission intensity among Chinese firms. To explore the underlying mechanisms, we incorporate firms' pollution behavior into a procurement model and describe how the reduction in input tariffs decreases pollution by encouraging firms to switch from coal to crude oil in their production processes. Based on our model, we conduct an empirical analysis using detailed micro‐level data on firm pollution in China from 1998 to 2005. We find that the reduction in input tariffs led more firms, especially those previously heavily reliant on coal, to switch to oil, resulting in a decrease in firm‐level pollution. Additionally, we explore and rule out other potential channels that could influence firms' pollution intensity, including the pollution haven effect, entry–exit effect, and abatement investment effect. Overall, the findings of this paper provide new evidence on the environmental impact of trade liberalization in developing countries while also elucidating the underlying mechanisms of the “technique effect.”