Do Political Connections Seek Green Rent? Only When Safe

ABSTRACT This study examines how and under what conditions political connections shape firms’ responses to environmental policies. Exploiting the staggered rollout of China's Low‐Carbon City Pilot (LCCP) policy, we find that firms connected to higher‐level governments engage in greater rent‐seeking under this weakly enforced policy. Although these firms receive more government resources, they do not outperform non‐connected firms in either environmental or financial outcomes. This effect is more pronounced when local governments have greater discretion in policy implementation and when firms operate in industries with greater environmental exposure. In contrast, strongly enforced regulations, such as central environmental inspections, mitigate the adverse effects of political connections, suggesting that connected firms engage in strategic rent‐seeking when regulatory oversight is weak. Our findings highlight the misalignment of incentives between firms and governments under certain environmental policies and underscore the importance of distinguishing policy design, enforcement intensity, and implementation discretion in understanding policy effectiveness.