Compared with government-oriented transfer payments, horizontal eco-compensation policy (HECP) incentivizes local governments to engage in environmental governance through market-based transfer payments, thereby achieving incentive compatibility. However, existing research has paid relatively little attention to the impact of HECP on enterprises’ environmental governance. Using data from Chinese industrial enterprises from 2008 to 2014, we employ a difference-in-differences (DID) approach to examine the impact of the horizontal eco-compensation agreement in the Xin’an River Basin on enterprise pollution emissions. We find that HECP significantly reduces enterprise pollution emissions. Heterogeneity analysis reveals that this impact is more pronounced in non-state-owned enterprises, older enterprises, and enterprises with lower financing constraints or closer regulatory proximity. Mechanism analysis suggests that HECP reduces pollution emissions primarily by limiting the entry of polluting enterprises and improving energy efficiency. Several robustness tests further confirm the reliability of our results. This paper provides a new policy perspective for promoting pollution reduction in enterprises and offers empirical evidence and policy guidance for both developing and developed countries in designing market-based environmental regulations to address cross-jurisdictional environmental challenges.
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