Economic policy uncertainty and industrial pollution: The role of environmental supervision by local governments

This paper explores the effect of economic policy uncertainty (EPU) on industrial pollution using China's real-time pollution data and a novel news-based EPU index constructed by Davis, Liu, and Sheng (2019). Empirical results suggest that EPU can significantly promote sulfur dioxide (SO2) readings in cities experiencing higher ex-ante fiscal pressure, and this effect is more profound during the daytime. Given that SO2 is the main contributor to industrial pollution, and local governments have less incentive to monitor illegal pollutant discharges during the nighttime period, our findings indicate that rising EPU will harm the environment by motivating local authorities to reduce environmental supervision and thus increase industrial pollution. We also find that promoting regional innovation and strengthening external environmental regulations can mitigate the pollution effect of economic policy uncertainty.