From air to water: Regulation-induced pollution substitution across media

Environmental regulations frequently target specific emission media. Such policies increase the relative cost of emissions in the regulated media, possibly triggering cross-media pollution substitution. This paper examines this phenomenon within the context of China’s Key Cities for Air Pollution Prevention and Control policy. Using a difference-in-differences strategy to exploit this quasi-exogenous regulatory shock, we find that while the policy reduced regulated sulfur dioxide emissions by 15.9% among regulated firms, it caused a simultaneous 11.0% increase in chemical oxygen demand emissions. These findings provide strong evidence of cross-media pollution substitution. Our mechanism analysis reveals that: 1) this substitution represents a unidirectional transfer of pollution from the targeted medium to the unregulated one, and 2) the adoption of in-process abatement technologies can mitigate this effect. These results illustrate the risks of regulation-induced pollution spillovers and highlight the necessity for integrated, cross-media regulatory frameworks.