Over the last two decades, China has sustained a rapid economic growth at about 8-10%, part of which is attributed to the positive total factor productivity (TFP) growth. However, this extraordinary economic performance has been accompanied by severe environmental pollution and associated health damage.
Without considering this non-marketable residue such as environmental pollution, the conventional TFP method would be biased in interpreting the true technology progress, especially since it ignores the efficiency improvement in terms of pollution abatement technology and environmental friendly managements. This bias may direct our attention to a less efficient use of environmental friendly abatement technologies or send wrong signals to the government policy makers. To address this issue, this paper applies a modified welfare-based green TFP approach by treating the environmental damages as non-desirable (negative) residual output. Thus, environmental efficiency can be taken into account to interpret the true technology progress from the social point of view. Based on a national time-series input-output table, historical capital and labor input data for China and sectoral level air pollution emission data from 1991 to 2000, the empirical results suggests that with increasingly stringent environmental regulation, many pollution intensive sectors such as electricity, primary metal and chemical industry, improved the environmental efficiency in the late 90s. However, due to the weak environmental regulations, construction and transportation, and sectors primarily composed of small private or TVIEs firms still experienced deteriorating environmental degradation.
