Environmental Regulation and Granting of Land-Use Rights

This study examines the effect of unfunded national environmental regulations on local governments’ land value capture. Exploiting the substantial variation in the regulatory intensity of China's Air Pollution Prevention and Control Action Plan implemented in 2013, we find that environmental regulation increases the growth of land granting fees for prefectural governments. Environmental regulation reduces the local general public budget revenue by shrinking the tax base while increasing the local general public budget expenditure. The post-2013 increase in the net income from land granting could fille more than half of the general public budget gap. Environmental regulation also boosts real estate market development and urbanization through its effect on land granting. We discuss local responses to the unfunded environmental regulation over an extended historical period and conclude that the granting of land use rights significantly enhances the flexibility of legal local government revenue, thereby improving China's fiscal system.