Environmental pollution has become a major health concern and has escalated to a major political issue in China. It has been identified that enforcement of environmental regulation is the weakest link in environmental protection. Local government is often the focus of study because of its legal obligation for enforcement under national environmental law, and for its significance in the complex and intriguing central–local relations in the Chinese government system. We propose an interpretative framework to explain the local environmental enforcement dilemma in China, based on an institutional approach. Local governments tend to underperform. We argue that the overall national institutional environment that defines central–local relations in both political and financial terms is key for explaining why local governments fail to meet their obligations. Local governments tend to promote economic growth and maximize tax revenue, by attracting external investment and protecting polluting businesses, at the expense of environmental quality. Inadequate disclosure of environmental data and occasionally intentionally distorting information obstruct public participation and supervision – a key factor for ensuring the accountability of local enforcement. The policy implications of this analysis are that central government, in its capacity as the rule‐maker, must take action to adjust the existing central–local relations with respect to the political promotion system and the tax‐sharing mechanism. In addition, more stringent procedures and standards must be made by central government regarding the disclosure of environmental data to enable effective public participation. Copyright © 2014 John Wiley & Sons, Ltd and ERP Environment