Abstract: Improving environmental quality and realizing balanced income growth are two key points for China’s transition to a sustainable society. However, there exists complex coupling links among environmental pollution, pollutant reduction, and residential income in the context of China. The paper constructs city-level panel datasets of China from 2000 to 2018 to conduct an in-depth empirical analysis of income and inequality effects of air pollution and its control measures. The disposable income of urban and rural residents is employed for the first time together with its components of wage, operating, and property income. The instrument variables are used to obtain more rigorous casual effect including the number of days with air temperature inversion and environment-related sentences proportion in city’s report on the work of the government. The innovative combination of panel-data quantile regression with instrument variables is used to investigate the non-linear income effect on different quantiles of income, air pollution and environmental regulation, while avoiding endogenous problems. Empirical results show that air pollution in China significantly reduces income of both urban and rural residents. The effect on rural residents is more substantial than that on urbanites. The asymmetric shock exacerbates income inequality of urban and rural residents, and the similar situation holds for wage and operating income. In contrast, industrial pollutant abatement can increase income of residents. Although the incremental effect on rural residents is more substantial than that on urbanites, the industrial pollutant abatement cannot significantly alleviate urban-rural income gap. The non-linear analysis demonstrates that air pollution will exert greater shock on income of low-income groups. The heavier the air pollution is, the more income shock will happen for local residents. However, the incremental effect of industrial pollutant abatement presents a weakening trend when environmental regulation becomes more stringent. Based on the Chinese Household Income Project (CHIP) of 2013 dataset, empirical analysis confirms that health human capital is one of the key channels for air pollution to affect the multidimensional income of residents we use. The primary policy implication is that urban-rural integration deserves paying additional attention when air pollution control program is further implemented in China. The unbalanced income shock on heavily polluted areas and low-income groups should be addressed properly through adopting more pluralistic environmental regulations to facilitate a balanced income growth in China.

Key words: PM_2.5 pollution, air pollutant abatement, disposable income, income inequality, instrumental variable method