Do exogenous shocks better leverage the benefits of technological change in the staged elimination of differential environmental regulations? Evidence from China's cement industry before and after the 2008 Great Sichuan Earthquake

Technological modernization is crucial for productivity and environmental management and has profound implications for China, where both overproduction and industrial pollution are serious issues. This study reports empirical results for existing cement plants in Sichuan Province in China, capturing changes in productivity and environmental performance between 2007 and 2010. During this time period, as the moratorium period of differential environmental regulations came to an end, certain existing plants modernized their production processes after the Great Sichuan Earthquake in 2008. Using primary data and the directional distant function approach, this study investigates the financial and environmental benefits of technological modernization by examining improvements in productivity and environmental performance. We find that the decision to modernize by changing the production process from conventional vertical shaft kilns (VSKs) to modern dry rotary kilns as part of a cleaner production strategy yields significant savings in pollution abatement costs without compromising production efficiency. We compare this modernization strategy to a reference strategy whereby firms continued to use VSK technology and invested in end-of-pipe technology to satisfy stricter environmental regulations. We find that the environmental benefits of technological modernization are approximately three times greater than the non-environmental financial benefits. When environmental benefits are considered, the payback period is significantly reduced, going from 8.97 years to 2.26 years.