Confronted with the rising costs of environmental degradation associated with rapid economic growth, the top Chinese- leaders have gradually recognized that the conventional path of encouraging economic growth at the expense of the environment had to be changed. In order to avoid the situation that its rampant environmental pollution problem will only worsen before it gets better, China's environmental regulatory agency is trying to change the incentive structure and establish an institution for fundamentally ensuring local officials to be more environmentally responsible for their decision making. (c) 2007 Elsevier Ltd. All rights reserved.