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1 Introduction
One of the side effects of the economic growth is environment deterioration. Environmental pollution is a by-product of production or consumption processes. The recent China's rapid economic growth and increasing foreign investment raised a question of environmental degradation. The rapid economic growth and increase in the purchasing power of people reflect in consumption patterns. A market expansion occurs due to economic prosperity. While China is experiencing upward trend in industrialization, consumption of local people is changing due to increase in their economic wealth.
Energy consumption is a major concern to support the economic growth and as well as the domestic demand. China has an abundance of energy and the most common form of energy is coal. Most of the sulfur dioxide (SO2 ) released into air is from coal and SO2 is one of the main sources of pollution in the air. In China, coal is the primary source to meet its national energy needs and this leads to atmospheric pollutant called SO2 . In 2001, coal constituted about 64 per cent of China's energy consumption ([6] Day, 2005). The Chinese Government tries to control pollution through the environmental regulations, which are mainly based on taxation. If the companies' pollution levels are above the standards, they pay taxes. Monitoring polluters and inspections of reported pollution are crucial for enforcing the environmental regulations ([33] Dasgupta et al. , 2002; [26] Wang and Jin, 2007; [20] Lin, 2008). However, there are variations in the enforcement of environmental regulations. While the firms located in high-income level regions are more likely to be imposed stricter environmental regulations and more inspections, the firms located in less developed regions face flexibility in enforcing the environmental regulations. ([25] Wang and Wheeler, 2003). Further, firms with different ownership structures are subject to different treatments by official authorities. For example, state-owned enterprises, as the backbone of the national economy, have priorities and have more governmental protections. This gives them less incentives to reduce pollution and pay less charges ([24] Wang and Jin, 2002).
Pollution is closely linked to economic growth. Trade liberalization and foreign direct investments (FDIs) are important engines for economic growth. Direction of the trade between the countries can be influenced by the environmental regulations. Pollution havens...