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ORIGINAL RESEARCH
Environmental Regulation, Cost Shifting,
and Firms’ Environmental Investment
Choice: Evidence from China
1
School of Economics and Management, Beijing University of Science and Technology, Beijing, China
Submission date: 2024-03-04
Final revision date: 2024-07-29
Acceptance date: 2024-08-23
Online publication date: 2024-10-28
Publication date: 2025-11-04
Corresponding author
Jingxian Zhang
School of Economics and Management, Beijing University of Science and Technology, China
School of Economics and Management, Beijing University of Science and Technology, China
Pol. J. Environ. Stud. 2025;34(6):6625-6636
KEYWORDS
TOPICS
ABSTRACT
As rational economic entities, firms may behave myopically if the cost of environmental investment
outweighs the benefits. Moreover, in emerging economies with imperfect institutional environments,
such as China, firms may shift the cost of environmental investment to customers, for example, by
increasing product prices. Therefore, it is crucial to examine firms' environmental investment decisions
and cost-shifting strategies under environmental regulation. This study examines the impact of
environmental regulation on firms' environmental investment choices and whether this impact varies
due to differences in cost-shifting ability. Using a sample of heavily polluting listed firms in China from
2012 to 2021, we find that when faced with environmental regulation, firms are more likely to choose
expense environmental investment rather than capital environmental investment. This phenomenon is
particularly pronounced for firms with stronger cost-shifting ability. Our further research shows that
firms with stronger cost-shifting ability can shift the costs of environmental investment to customers
by increasing product prices. This study suggests that in emerging markets such as China with an
unfavorable institutional environment, firms' environmental investment may only be aimed at meeting
regulatory requirements in the short term. It is possible that the costs of environmental investment are
borne by the firm’s customers.
CONFLICT OF INTEREST
The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.
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