Energy Economics 126 (2023) 107027

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Energy Economics
journal homepage: www.elsevier.com/locate/eneeco

Reduce production or increase efficiency? Hazardous air pollutants

regulation, energy use, and the synergistic effect on industrial enterprises'
carbon emission
Hao Xu a, Jingxuan Xu b, *, Jie Wang b, Xiang Hou b
a
School of Economics, Xiamen University, China
b
School of Economics, Beijing Technology and Business University, China

A R T I C L E I N F O A B S T R A C T

Keywords: Theoretically, the synergistic reduction strategy aimed at curbing both carbon and air pollutants emissions is
Hazardous air pollutants regulation more cost-effective than a singular emission abatement approach. Using a firm-level panel dataset, we employ
Carbon emissions the difference-in-differences (DID) method to estimate the impact of hazardous air pollutant regulation on carbon
Synergistic emission reduction
and air pollutants emissions in China. We found that the hazardous air pollutant regulation led to a decrease in
Energy efficiency
Source reduction
firm-level carbon emissions and sulfur dioxide (SO2) emissions of 5% and 10%, respectively. Mechanism analysis
shows that source reduction is the key for firms to achieve synergistic emission reductions. Furthermore, firms'
source reduction strategies lie in improving energy efficiency, rather than reducing output. Environmental policy
instruments should be based on a more synergistic approach.

1. Introduction
Global warming, caused by carbon emissions, is one of the most se­
vere threats to natural ecosystems and human survival (Ballantyne et al.,
2016; Dimitriou and Kassomenos, 2017). Similarly, hazardous air
pollution may lead to environmental deterioration, higher mortality,
and reduced labor productivity (Ramanathan and Feng, 2009; Ander­
son, 2009; Kan et al., 2012; Franklin et al., 2015; Fu et al., 2021). Several
countries have implemented a series of greenhouse gas and hazardous
air pollution regulations to reduce carbon and air pollutants emissions.
Some studies have focused on the impact of greenhouse-gas regulations
on carbon emissions (Gerlagh, 2011; Van der Ploeg and Withagen, 2012;
Smulders et al., 2012; Van der Werf and Di Maria, 2012; Calderón et al.,
2016; Gao et al., 2020; Ouyang et al., 2020; Hou et al., 2023) and
hazardous air pollutant regulations on air pollutants (Auffhammer et al.,
2009; Zhou et al., 2016; Calel and Dechezleprêtre, 2016; Wu et al., 2019;
Wang et al., 2022). However, there remains inadequate evidence
regarding whether the implementation of hazardous air pollutant reg­
ulations can simultaneously reduce both carbon and air pollutants
emissions. This study aims to address this gap and provides empirical
evidences.
Carbon and air pollutants emissions are highly correlated, owing to
their common origination in the extensive utilization of fossil fuels. This
feature provides a theoretical basis for the synergistic emission reduc­
tion. Environmental regulations will be more efficient if it reduces car­
bon and air pollutants emissions simultaneously. Mao et al. (2013)
found that synergistic emission reduction was more cost-effective than a
single-pollutant abatement strategy. Consequently, the pursuit of syn­
ergistic emission reduction assumes paramount importance in the
domain of environmental regulations.
Synergistic reduction of carbon and air pollutants emission is also
crucial for developing countries. It is noteworthy that air pollutants
emissions in the industrial sectors of major developed countries peaked
in the 1970s–1980s (Smith et al., 2005; Fenger, 2009), whereas China
lagged owing to the rapid progress of industrialization. From 2006 to
2015, the China's air pollutants emissions experienced a notable average
annual growth rate of 20.7%, with the total amount remaining sub­
stantial despite a declining trajectory from 2016 to 2020.1 Less than a
decade ago, China's air pollutants emissions reached their peak, whereas
major developed countries had already reached their peak emissions
long before. Thus, developed countries might primarily focus on curbing
carbon emissions, whereas developing countries, exemplified by China,

* Corresponding author.
E-mail address: xujingxuan@btbu.edu.cn (J. Xu).
1
According to the China Statistical Yearbook, in 2020, China's SO2 emissions was 3.1822 million tons, nitrogen oxide emissions 11.8165 million tons, and
particulate matter emissions 6.1335 million tons. For the China Statistical Yearbook, check http://www.stats.gov.cn/tjsj/ndsj/.

https://doi.org/10.1016/j.eneco.2023.107027
Received 30 June 2022; Received in revised form 28 August 2023; Accepted 4 September 2023
Available online 14 September 2023
0140-9883/© 2023 Elsevier B.V. All rights reserved.
H. Xu et al.
face the dual imperative of mitigating both carbon and air pollutants
emissions.
Existing empirical literature has studied the relationship between
hazardous air pollutant regulation and synergistic emission reduction.
Zhang et al. (2021) found that the “Air Pollution Prevention and Control
Action Plan” reduced per-capita carbon emissions. They used city-level
data to conduct their empirical research. Du and Li (2020) found that
environmental regulations reduce carbon and air pollutants emissions.
They used a fixed effect model to estimate the effects of environmental
regulations. Brunel and Johnson (2019) used data of greenhouse gas
emissions in the United States to study the relationship between local
pollution regulations and greenhouse gas emissions. The results showed
that local pollution regulations had no significant impact on greenhouse
gas emissions. Additionally, some studies have focused on the syner­
gistic emission reduction of specific industries. These studies show that
structural reductions and market-based regulations are more effective
(Gu et al., 2018; Zhao et al., 2015; Du et al., 2021).
However, these empirical studies have several limitations. First,
understanding the mechanism of synergistic emission reduction is
important for the formulation of environmental policies. However, the
existing literature lacks an analysis of this mechanism. Second, some
studies only consider specific industries as the object of analysis, and the
sample selection is not representative (Gu et al., 2018; Zhao et al., 2015;
Du et al., 2021). Third, some studies inadequately addressed the endo­
geneity issue within the econometric model, resulting in unreliable
empirical findings (Zhao et al., 2015; Du and Li, 2020).
The extant theoretical literature has analyzed the intricate mecha­
nisms underlying synergistic emission reduction. Synergistic emissions
reduction can be achieved by changing the energy mix (Nam et al.,
2013; Bollen and Brink, 2014). In addition, Zhang et al. (2015) and Peng
et al. (2017) found that implementing more advanced technologies for
energy efficiency can achieve synergistic emissions reduction. Li and Xu
(2020) found that upgrading the industry structure by reducing the
proportion of energy-intensive sectors could achieve synergistic emis­
sion reduction. Qian et al. (2021) found that energy intensity
improvement, scale structure adjustment (phasing out small firms and
developing large ones), and electrification can achieve synergistic
emission reduction. In contrast to these literatures, we provide empirical
evidences concerning the mechanisms of synergistic emissions
reduction.
In this paper, we estimate the impact of a nationwide hazardous air
pollutants regulation on synergistic emission reduction. This study used
three firm-level datasets: China's Enterprise Environmental Statistics
Database (CESD), China's Industrial Enterprise Database (CIED)2 and
China's Patent Database (CPD). These provide rich and detailed infor­
mation on firm-level pollution emissions, energy use, production, and
technological innovation. In January 2003, the Chinese government
formulated the air pollution control to meet standards (APCMS) policy,
which required 113 key cities to reduce hazardous air pollutants and
meet the national ambient air quality secondary standards within a
specified time limit. We use the DID method to estimate the impact of
the APCMS policy on carbon and SO2 emissions. The empirical results
show that the APCMS policy significantly reduced carbon emissions
(measured at 5%) and SO2 emissions (measured at 10%). Therefore, this
policy has a synergistic emissions reduction effect.
We analyze the mechanism of synergistic emission reduction. The
results show that firms achieve this through a source reduction rather
than an end-pipe reduction strategy. On the one hand, we choose
pollutant abatement equipment as a proxy variable for the end-pipe
reduction strategy. The estimated coefficients of the APCMS policy on
firms' desulfurization and waste gas treatment facilities are − 0.052 and
0.01, respectively, and are insignificant, indicating that firms have not
2
China's Industrial Enterprise Database (CIED) is also called the Annual
Survey of Industrial Firms (ASIF).
2
Energy Economics 126 (2023) 107027
adopted an end-pipe reduction strategy. On the other hand, the APCMS
policy has significantly improved energy efficiency (measured at 0.18)
but has no significant impact on firms' output. Thus, firms' source
reduction strategies lie in improving energy efficiency, rather than
reducing output. Further analysis reveals that the APCMS policy
significantly increased the number of patent applications by 0.202 and
the number of green patent applications by 0.011, indicating that
technological innovation may be an important reason for improving
energy efficiency.
To test whether the APCMS policy has a spatial spillover effect, we
use the DID model with spatial spillover effect (Clarke, 2017; Lu et al.,
2019; Butts, 2021). The empirical findings demonstrate the coexistence
of spatial spillover effects and synergistic emission reduction effects.
Employing the DID model with spatial spillover effects, our findings
reveal that the APCMS policy significantly reduced carbon emissions
(approximately 4%) and SO2 emissions (approximately 9.6%) of regu­
lated cities, while the adjacent unregulated regions experienced a sig­
nificant increase in carbon emissions, SO2 emissions, and output by
3.5%, 5.5%, and 4%, respectively. Furthermore, we analyze the impact
of the APCMS policy on firms with different property rights. The
empirical results indicate that this policy significantly reduced carbon
emissions of private firms (approximately 10.1%) while showing no
significant effects on carbon emissions of state-owned enterprises (SOEs)
and foreign-invested firms. In addition, we find that this policy signifi­
cantly reduced carbon emissions in high-energy-efficiency regions
(approximately 13.3%) while manifesting no significant impacts on
carbon emissions of low-energy-efficiency regions.
This study contributes to the existing literature on hazardous air
pollutant regulation and synergistic emission reduction in two ways.
First, it provides rigorous and comprehensive empirical evidence on the
impact of hazardous air pollutant regulations on synergistic emission
reduction. Compared with previous studies, our research uses richer,
more detailed, and more representative firm-level data and provides a
mechanistic analysis to achieve synergistic emissions reduction. More­
over, it focuses on the endogeneity problem and spatial spillover effects
of the APCMS policy. Therefore, our empirical results are more accurate
and credible.
Second, developing countries need to reduce carbon and air pollut­
ants emissions urgently. China is the largest developing country in the
world. Our research focuses on the APCMS policy, which was a
nationwide pollution prevention and control policy implemented in
China at the beginning of this century. This paper indicates that this
policy reduced carbon and air pollutants emissions. Developing coun­
tries can achieve synergistic emissions reductions through top-down
environmental regulations. Our research provides a reference for
developing countries to formulate relevant environmental policies.
The remainder of this paper is organized as follows. Section 2 de­
scribes the background and main content of the APCMS policy. Section 3
analyzes the influence mechanism of hazardous air pollutant regulation
on synergistic effects. Section 4 describes the data source, main variables
and empirical strategy. Section 5 presents empirical results, mechanism
analyses, robustness checks, and heterogeneity analyses. Finally, Section
6 provides conclusions and policy implications.
2. The APCMS policy in China
2.1. Background of the APCMS
The APCMS, the policy of interest in this study, is hazardous air
pollutants regulation, primarily targeting SO2, total suspended particu­
lates (TSP), and PM10. The central government has selected 113 key
cities based on their economic conditions and pollution emissions.
Subsequently, the central government imparts environmental mandates
pertaining to air pollutant emissions to the key cities, requiring key cities
to meet air quality standards within a time limit.
In November 1998, the Chinese government selected 47 cities as the
H. Xu et al. Energy Economics 126 (2023) 107027

first batch of key cities for air pollution control, which were first pro­ Table 1
posed in an official document of the Ministry of Environmental Protec­ Differences between regulated and unregulated cities.
tion.3 The first batch of key cities included municipalities directly under Variable Definition Regulated cities Unregulated
the central government, provincial capitals, open coastal cities, key cities
tourist cities, and special economic zone. By the year 2000, these cities Mean Std Mean Std Diff
must comply with the National Ambient Air Quality Standard (GB3095-
lnCO2 Logarithm of 8.628 2.103 8.513 2.045 − 0.115***
96). carbon
In December 2002, the Chinese government added 66 cities for air emission
pollution control as the second batch of key cities to further improve air lnSO2 Logarithm of 10.068 2.208 10.023 2.214 − 0.045***
quality.4Except Hainan Province, Qinghai Province, and Tibet Autono­ SO2 emission
Rgdp2 Proportion of 0.495 0.078 0.415 0.108 − 0.080***
mous Region, 66 key cities were distributed in all other provinces. The
secondary
first and second batches of key cities totaled 113 key cities. industry
In January 2003, the Chinese government proposed a new goal for Rgdp3 Proportion of 0.347 0.042 0.334 0.058 − 0.013***
113 key cities to meet air quality standards within the time limit.5 The tertiary
APCMS policy required the air quality of key cities to meet the national industry
lnpop Logarithm of 6.052 0.475 5.843 0.554 − 0.209***
ambient air quality secondary standards by 2005. Specifically, the population
average annual concentrations of SO2, TSP, and PM10 were 0.06, 0.2, lnrpergdp Logarithm of 0.549 0.235 0.431 0.251 − 0.118***
and 0.1 mg/m3. per capita
The official document mandated that key cities complete their air GDP
Fisself Fiscal self- 0.719 0.181 0.583 0.200 − 0.136***
quality compliance planning before the end of 2003, subject to assess­
supporting
ment by the Ministry of Environmental Protection. In addition, other capacity
measures were required: strengthening environmental monitoring and
Note: Regulated cities refer to the second batch of key cities under the APCMS
regularly releasing atmospheric quality information; strengthening the
policy. Unregulated cities refer to cities beyond the scope of the 113 key cities.
construction of the environmental legal system; promoting the use of
Std represents the standard deviation. Diff refers to the difference between mean
clean energy such as electricity and natural gas; promoting clean pro­ values of the regulated and unregulated cities.
duction; strengthening the supervision of motor vehicle pollution
emissions; and reducing the concentration of suspended particulates in
per capita GDP (lnrpergdp) and fiscal self-supporting capacity (Fisself)6
the urban atmospheric environment.
from the China City Statistical Yearbook. Carbon emissions, SO2 emis­
Owing to data availability and comparability, we focused on the
sions, population, and GDP per capita take the form of natural loga­
second batch of key cities. On the one hand, the CIED and CESD used in
rithms. The time coverage of the data was 1998–2002.
this paper have been counted since 1998, thus we can only access the
Since the 1990s, the APCMS policy is one of the environmental
second batch of key cities data on carbon and SO2 emissions before and
regulations adopted by the Chinese government to control air pollution.
after the implementation of the APCMS policy. On the other hand, the
In addition to this policy, the Chinese government has introduced other
second batch of key cities are easy to find a similar control group among
environmental regulations. For instance, the Two Control Zones policy,
samples. The first batch of key cities are the richest areas in China. Their
Pollutant Discharge Fees policy, and Environmental Information
economic and social conditions differ from those in other cities. In
Disclosure policy. Considering that other environmental regulations
contrast, the second batch of key cities are more ordinary.
may affect carbon and air pollutants emissions, we conducted a
robustness test to exclude the impact of policies in the same period.
2.2. The differences between regulated and unregulated cities
3. Theoretical analysis
Table 1 provides the means and standard deviations of the city-level
variables for the regulated and unregulated cities before the imple­ Source reduction and end-pipe reduction represent two pivotal
mentation of the APCMS policy. As shown in Table 1, 66 key cities had a methodologies for tackling environmental challenges. Carbon and air
higher level of economic development than other unregulated cities. pollutants emissions mainly generate from the combustion of fossil fuels,
Additionally, these cities experience more severe air pollution and car­ making them homologous. Therefore, source reduction in carbon and air
bon emissions. It is not necessary for the DID method to assume no pollutants emissions is highly consistent and collaborative. However,
significant difference between the regulated and unregulated cities, but the end-pipe reductions in carbon and air pollutants emissions are
only that they follow parallel trends. Section 5 reports the results of the inconsistent. Specifically, for air pollution control, end-pipe reduction
parallel trend tests. According to these results, the regulated and un­ includes dust removal, desulfurization, and denitrification. Carbon
regulated cities satisfy the parallel trends assumption. Furthermore, we sequestration and removal technologies such as carbon capture, utili­
use the propensity score matching with a difference-in-differences (PSM- zation and storage can be used to reduce carbon emissions. It is difficult
DID) method for robustness testing in Section 5.3.7. We find that the to coordinate end-pipe reductions in carbon and air pollutants emis­
empirical results are robust. sions. Theoretically, the key to synergetic emissions reduction is that
The carbon and SO2 emissions are from firm-level data averaged by firms implement a source reduction rather than an end-pipe reduction
city. We used information on the proportion of secondary industries strategy.
(Rgdp2), proportion of tertiary industries (Rgdp3), population (lnpop), However, firms may not necessarily choose source reduction strate­
gies. Profit-maximizing firms are inclined to assess and contrast the
marginal net benefits of source reduction and end-pipe reduction stra­
3
For the official document, check http://www.110.com/fagui/law_94153. tegies to make a choice between them. If the marginal net benefit of
html. source reduction surpasses that of end-pipe reduction strategies, the firm
4
For the official document, check https://www.mee.gov.cn/gkml/zj/w will opt for the former. Subsequently, we analyze the respective
j/200910/t20091022_172141.htm.
5
For the official document, check https://www.mee.gov.cn/gkml/zj/bgt/
200910/t20091022_173815.htm.
6
Fiscal self-supporting capacity refers to ratio of fiscal revenue to fiscal
expenditure.

3
H. Xu et al.
marginal costs and benefits of source reduction and end-pipe reduction
strategies.
3.1. Firms' end-pipe reduction strategy
An end-pipe reduction strategy involves the implementation of
effective pollution control measures at the end of the manufacturing
process. As an illustration, industrial plants may release air pollutants
through their chimneys. In response, factories can opt to install desul­
furization equipment on the chimneys to reduce SO2 emissions. If firms
procure pollution abatement equipment encompassing waste gas treat­
ment equipment, waste water treatment equipment, and desulfurization
equipment, firms' pollutant emissions may be reduced. This is a bene­
ficial aspect of the end-pipe reduction strategies.
However, end-pipe reduction strategies also have the potential to
augment the costs incurred by firms. Certain pollution abatement
equipment is considerably expensive, and the associated operation and
maintenance costs for such equipment are notably high, thus aug­
menting the production cost of firms. Moreover, pollution abatement
equipment may consume a large amount of energy, which increases the
carbon emissions of firms. Zhao et al. (2017) found that the end-pipe
facilities of coal-fired power plants increased carbon emissions owing
to increased electricity use and chemical reactions.
3.2. Firms' source reduction strategy
Firms' source reduction strategy pertains to firms' endeavours to
curtail carbon and air pollutants emissions during production and sup­
ply processes. For instance, firms employ low-carbon technologies,
materials, and methodologies to curtail the emission of greenhouse
gases such as CO2 and methane. In addition, using clean energy and
streamlining production processes to mitigate energy wastage are all
encompassed within the ambit of source reduction strategies. Firms'
source reduction strategy that this paper focuses on are output reduction
and green innovation.
Output reduction has both positive and negative effects on firms. On
the one hand, curbing output can lead to a reduction in emissions of
carbon and air pollutants, aligning with environmental regulatory
standards. On the other hand, reducing production may engender
diminished operational revenue and profitability.
Likewise, green innovation entails both costs and benefits for firms.
The marginal revenue of green innovation has two aspects. First, envi­
ronmental regulations increase firms' compliance costs. Green innova­
tion may produce an “innovative offset” effect, weakening or offsetting
the impact of compliance costs (Ambec et al., 2013; Wang et al., 2019).
Finally, without reducing output and profits, the firm meets the re­
quirements of the environmental regulations. This view is consistent
with Porter hypothesis. This hypothesis asserts that well-designed
environmental regulations stimulate firm innovation which, by
enhancing firm productivity, increases firms' private benefits (Porter
and Linde, 1995; Ambec and Barla, 2002). Second, green innovation
improves firm performance. For example, it may increase a firm's sales
growth rate and net profits (Ar, 2012; Zhang et al., 2019). On the other
hand, green innovation is poised to augment the operational costs of
firms. Specifically, innovation may entail significant investments,
encompassing research and development, market analysis, and the
acquisition of talent, among other factors. Furthermore, the outcomes of
innovation frequently manifest as uncertain. In the event of the failure of
innovation projects, resources have the potential to be squandered.
3.3. Firms' choice of strategies
Firms' end-pipe reduction strategy, output reduction, and green
innovation all hold the potential to curtail the air pollutants emissions.
However, firms' green innovation yields supplementary benefits, as it
possesses the capability to elevate the total factor productivity of firms
4
Energy Economics 126 (2023) 107027
and augment their profitability. Under the assumption of the rationality
of economic agents, firms strive to optimize their profits by meticulously
evaluating the marginal net benefits associated with various strategic
decisions. Among these three strategies, green innovation may possess
the highest marginal net benefits for firms, thus making it the prime
preference for firms.
Innovation is an important factor for improving energy efficiency
(Mandal, 2010; Zhang et al., 2016; Zhang et al., 2020; Sun et al., 2021).
Hence, source reduction entails the initial implementation of green
innovation, followed by the enhancement of energy efficiency, culmi­
nating in the reduction of carbon and air pollutants emissions. A firm's
source reduction strategy is key to achieving synergetic emission
reduction. Based on the above analysis, we propose the following
hypothesis:
Hypothesis. Firms opt for enhancing energy efficiency and fostering
green innovation rather than adopting end-pipe reduction strategy or
reducing output. In this context, firms can achieve synergistic emissions
reduction.
We have conducted a comprehensive empirical test of the afore­
mentioned hypotheses. Fig. 1 shows mechanisms of the synergistic
emission reduction.
4. Data and methodology
4.1. Data
We combined three firm-level panel datasets–CESD, CIED, and
CPD–from 1998 to 2010 to examine the impact of hazardous air pol­
lutants regulations on carbon and air pollutants emissions.
4.1.1. CESD
CESD data are reported quarterly by firms, and are collected and
monitored by environmental protection departments to ensure data
quality. There are three methods for ensuring the data quality. (1) By
conducting unannounced inspections and other monitoring activities,
the local environmental protection bureau ensures the quality of the
data reported by firms. (2) National and provincial environmental pro­
tection departments often review the statistical work of local environ­
mental protection bureaus through various methods, including random
inspections. If problems are found, the relevant staff conduct on-site
inspections. (3) Governments at higher levels directly conduct flight
inspections, cross-inspections, and on-site verifications of local firms.
Therefore, the data on pollutant emissions and energy use are robust and
reliable.
The CESD provides data on firms' energy consumption and pollutant
emissions. The indicators include SO2 emissions, energy input (coal and
oil), and pollution abatement equipment. Owing to the high data quality
of the CESD, many scholars have used this database for empirical
research (Liu et al., 2017; Zhang et al., 2018; Liu et al., 2021; Shi et al.,
2021).
4.1.2. CIED
Another important dataset, the CIED, provides information on the
production and finances of all state-owned and nonstate-owned firms
with annual business income greater than 5 million Chinese Yuan (CNY).
Based on the exchange rate between the US dollar and the Chinese yuan
in 2006, 5 million RMB is approximately tantamount to 627,211 US
dollars. Likewise, considering the exchange rate between the Euro and
the RMB in 2006, 5 million RMB is roughly equivalent to 4991 euros.
The CIED includes over 40 industries and 600 subindustries, accounting
for approximately 90% of China's total industrial output. More than 100
variables related to financial and economic indicators, such as industrial
added value, wages, and depreciation, were included in the CIED.
Following Brandt et al. (2012), we matched firms in the CIED over time
to form an unbalanced panel. Checking firm names avoids interpreting
H. Xu et al.
Fig. 1. Theoretical mechanisms of the synergistic emission reduction.
name changes as different companies. Following the literature (Cai and
Liu, 2009; Brandt et al., 2012; Yu, 2015), we excluded observations with
missing or unreliable data. For example, we deleted samples missing
important indicators like total assets, number of employees, total in­
dustrial output, operating profits, and total profits.
In the DID model, we add firm-level control variables to reduce the
endogeneity problems caused by possible omitted variables. The firm-
level control variables come from the CIED, including the asset-
liability ratio, firm age, capital intensity, ratio of sales, nature of prop­
erty rights, and whether it is an exporting firm.
4.1.3. CPD
To analyze the impact mechanism of carbon emissions, this study
uses CPD data from 1998 to 2010. CPD provides patent-related infor­
mation, such as patent name, patent number, application time, public
announcement number, public announcement date, international patent
classification number, and patent reference information. Based on the
background of this study, green patents can better reflect the output of
firms' green innovation activities. Green patents are an indicator in
existing research that measures green innovation (Aghion et al., 2016).
This study calculates the number of green patents of Chinese industrial
enterprises by referring to existing literature (Aghion et al., 2016;
Kesidou and Wu, 2020). Based on the green patent classification stan­
dard issued by the WIPO,7 this study uses the International Patent
Classification (IPC) classification number to classify patents as green or
non-green.
Based on CPD, it calculated the total number of patent and green
patent applications. If the APCMS policy significantly increases the total
number of patents application, it indicates that the APCMS policy
stimulates firm innovation.
4.1.4. China's city-level data
This study employed city-level data from the China City Statistical
Yearbook covering 1998–2010. Based on these data, we calculated the
7 8
For classification scope of green patent, check https://www.wipo.int
/classifications/ipc/green-inventory/home.
5
Energy Economics 126 (2023) 107027
GDP per capita, population, proportion of secondary industry, propor­
tion of tertiary industry, and fiscal self-supporting capacity. The socio­
economic status of cities may affect carbon and air pollutants emissions;
therefore, in Section 5.3.6, we add city-level variables to test whether
the empirical results are robust.
4.2. Variables
4.2.1. Carbon emissions of industrial enterprise
By adding all the carbon emissions generated by various energy
consumptions, we can calculate the total carbon emissions. Therefore,
this study uses CESD's fossil fuel consumption data to calculate the
carbon emissions of firms. Wu et al. (2016) and Zhou et al. (2023) also
used this method to measure carbon emissions. The carbon emission
calculation formula is as follows:
∑m 44
CO2i = Eij × NCVj × CCj × COFj × (1)
j=1 12
CO2i represents carbon emissions from industrial enterprises. Eij
represents the j type of energy used by firm i. NCVj × CCj × COFj × 44 is
12
the CO2 emissions factor. More specifically, NCVj is the net calorific
value of j energy consumption, expressed in System International (SI)
units or multiples of SI units (e.g., TJ/Mg). CCj is the carbon content per
unit of energy produced during the combustion of each energy source j
and is usually expressed in kg/GJ units. The carbon oxidation factor
(COFj) is the rate at which carbon is oxidized to carbon dioxide during
combustion. The IPCC8 assumes 100% oxidation, suggesting that the
carbon oxidation factor (COFj) is 1.
To obtain the net calorific value and carbon content of coal and fuel
oil, we referred to the IPCC guidelines. We calculated the CO2 emission
factor of coal by taking the average values of anthracite and other
bituminous coals. The parameter for fuel oil is provided in the IPCC
guidelines and is used to directly calculate their CO2 emission factors.
The estimated CO2 emission factors for coal and fuel oils were 2.533 and
Data Source:2006 IPCC Guidelines for National Greenhouse Gas
Inventories.
H. Xu et al. Energy Economics 126 (2023) 107027

3.126, respectively. 4.3. Methodology

Drawing upon data from the China Energy Statistical Yearbook, we
computed the energy consumption structure of the industrial sector in 4.3.1. Benchmark model setting
2005, which revealed that coal and oil consumption accounted for This paper constructs a DID model to test the impact of the APCMS on
approximately 90% of the total energy consumption, while electricity firms' carbon and air pollutants emissions.
consumption constituted about 8.7% of the overall energy usage.9 Thus,
Yitjp = β0 + β1 Treati × Postt + β2 Xitjp + αi + γt + ηpt + λjt + εitjp (2)
this study uses coal and oil to estimate firms' carbon emissions. Indus­
trial enterprises' electricity consumption also accounts for a certain
where i represents firms, t represents the year, j represents the industry
proportion of the total energy consumption, but CESD does not provide
code, and p represents the province. Yitjp is the carbon emissions, SO2,
firms' electricity consumption data. As a result, in Section 5.3.5, we
total industrial output value, and energy efficiency of the i firm in year t.
conducted a robustness check by excluding industries with high elec­
Selecting the firms' total industrial output value and energy efficiency as
tricity consumption from the analysis. Furthermore, we winsorize the
the explained variables, tests whether the hazardous air pollutant
upper and lower 1% of the firms' carbon emissions.
regulation reduces the firms' output or improves energy efficiency. We
CESD only provides data on firms' total coal consumption from 2001
could not obtain data before 1998 and deleted the first batch of key city
to 2010, and not 1998–2000; therefore, we add up the raw material coal
samples. Treati equals 1 if the firm is located in the second batch of key
and fuel coal consumption. The sum is a firm's total coal consumption
cities in the APCMS policy and 0 otherwise. Postt equals 1 for all years
from 1998 to 2000. To ensure the accuracy of this method, we add up
after 2003 and 0 otherwise. Treati × Postt is the interaction between
the consumption of raw material coal and fuel coal in the CESD from
Treati and Postt. The coefficient β1 measures the APCMS policy effects.
2001 to 2010 and compared it with the total coal consumption data of
Since carbon emissions, SO2 emissions, and total industrial output value
2001–2010. We found that 99.93% of the data were consistent.
are all logarithmic, the coefficient β1 suggests that the carbon emissions
(SO2, industrial output value) of regulated firms are lower(higher) than
4.2.2. Energy efficiency and industrial output
those of unregulated firms β1%.
Based on Lyubich et al. (2018), this study uses energy productivity to
Xitjp is used as the control variable. αi and γt represent firm fixed ef­
measure firms' energy efficiency. Energy productivity is the ratio of in­
fects and year fixed effects, respectively. This paper incorporates the
dustrial output value to energy input. Given the availability of data and
cross-product term (ηpt) of year fixed effects and province fixed effects in
energy consumption structure of China's industrial sector, this study
the model to control the macroeconomic influencing factors of different
selected coal and oil consumption as energy input. The energy input is
provinces. In addition, we add the cross-product(λjt) of year fixed effects
the sum of coal and oil multiplied by the corresponding standard coal
and industry fixed effects to control the unobservable factors in the in­
conversion coefficient.
dustry. The industry classification of industry fixed effects is based on
This paper selects the total industrial output value in the CIED as the
two-digit industry codes. Since the APCMS policy is implemented at the
explained variable to estimate the impact of the APCMS policy on firms'
prefecture-level city level and we refer to Brandt et al. (2017), standard
total output. In the robustness test, we use the industrial sales output
errors are clustered two-ways at the city-year and the firm level.
value as a proxy variable for total industrial output. Furthermore, the
total industrial output and industrial sales output values take the form of
4.3.2. DID with spatial spillover model
natural logarithms. We winsorize the upper and lower 1% of the firms'
As mentioned in Section 2, the APCMS policy mandates that regu­
energy efficiency and output.
lated cities reduce their air pollutant emissions to meet corresponding
air quality standards within a specified time limit. As local governments
4.2.3. Control variables
require firms to reduce pollutant emissions, they may transfer output
To reduce the endogeneity problem caused by possible omitted
and pollutants to neighboring unregulated cities. Consequently, unreg­
variables, this study uses the asset-liability ratio (Lev), age of the firm
ulated cities in close proximity to regulated cities may experience an
(Age), capital intensity (CI), ratio of sales (Rprofit), nature of property
increase in output and pollutant emissions, resulting in what is
rights (Own), and whether it is an exporting firm (EX). Specifically, the
commonly known as “pollution shelters”. This phenomenon is known as
asset-liability ratio is the ratio of a firm's total liabilities to total assets.
the spatial spillover effect. Some scholars have focused on pollution
Firm age is the number of years since the firm was established. Capital
transfer due to regional differences in environmental regulations. For
intensity is the ratio of the total fixed assets to the number of employees.
example, Cai et al. (2016a) found that environmental regulations are
The ratio of sales is the ratio of operating profits to sales revenue. We
more lenient downstream of rivers. More polluting activities were
used the natural logarithms of age and capital intensity. Own equals 1 if
transferred to this area. Chen et al. (2018) discovered that water
the firm is state-owned, and 0 otherwise. EX equals 1 if the firm's export
pollution regulations in China have shifted polluting activities to areas
value is greater than 0, while it equals 0 otherwise.
with more relaxed environmental regulations. Then whether there is a
Table 2 reports the results of descriptive statistics of firm-level var­
spatial spillover effect of the APCMS policy, we need further empirical
iables. Std refers to standard deviation and Obs refers to sample size. The
analysis.
data on firms' carbon emission, SO2 emission, and coal consumption
We use the methods proposed by Butts (2021), Clarke (2017), and Lu
come from the CESD. The data on firms' total industrial output, total
et al. (2019) to build a DID with a spatial spillover model. First, we
assets, total liabilities, firm age, fixed asset, number of employees, sales
obtained the geographical coordinates of Chinese industrial enterprises
revenue, sales profit, property right and export come from CIED. The
using Baidu Maps. Second, ArcGIS software was used to measure the
time coverage of data is 1998–2010.
distance between these geographic coordinates and the boundaries of
the 66 regulated cities. Third, we used this distance to construct a ring
indicator (e.g 0–20 km, 0–25 km, and 0–30 km from the nearest treated
unit) to estimate spatial spillover effects. Finally, the DID with the
spatial spillover model is as follow:

9
In 2021, the coal and oil consumption in China's industrial sector accounted
for approximately 82% of the total energy consumption, while electricity
consumption constituted about 12.6% of the overall energy consumption.
Indeed, up to this juncture, China's industrial enterprises lean heavily on coal
and oil as their energy sources.
Yitjp =β0 + β1 Treati × Postt + β2 (1 − Treati ) × Ringi × Postt + β3 Xitjp + αi
+ γt + ηpt + λjt + εitjp
(3)
Eq. (3) introduces an additional term, (1-Treati) × Ringi × Postt, into

6
H. Xu et al. Energy Economics 126 (2023) 107027

Table 2
Summary statistics.
Variable Definition Mean Std Minimum Maximum Obs

lnCO2 Logarithm of firms' carbon emission 8.735 2.071 3.945 14.305 225,627
lnSO2 Logarithm of firms' SO2 emission 10.102 2.131 1.792 15.297 225,627
Output Logarithm of total industrial output 10.748 1.459 5.948 15.402 225,627
Efficiency Energy efficiency 1.654 4.693 0.003 35.437 225,627
Lev Asset-liability ratio 0.824 1.144 0.032 9.672 225,627
Age Age of firm 2.453 0.908 0 4.060 225,627
CI Capital intensive 4.115 1.192 0.751 7.143 225,627
Rprofit Ratio of sales 0.011 0.134 − 0.708 0.354 225,627
Own State-owned enterprises 0.152 0.359 0 1 225,627
EX Export firms 0.216 0.412 0 1 225,627

Eq. (2), to evaluate the spatial spillover impacts of the APCMS policy.
∑
2010
Ringi is a binary variable that takes the value of 1 if industrial firms are in Yitjp = β0 + β1 Treati × γt + β2 Xitjp + αi + γt + ηpt + λjt + εitjp (t ∕
= 2002)
close proximity to any of the 66 regulated cities, and 0 otherwise. To t=1998
establish this proximity, a specific distance must be calculated. Clarke (4)
(2017) proposed a method for calculating the optimal distance. The
We take 2002 as the base year, and β1 represent a series of estimated
optimal distance was determined by minimizing the Root Mean Square
values from 1998 to 2010. The definitions of the other variables in Eq.
Error (RMSE). This minimum-RMSE technique is closely related to the
(4) are the same as those in Eq. (2).
bandwidth search in regression discontinuity design. According to this
method, the optimal distance was calculated to be 37 km based on SO2
5. Results and analysis
emissions. In other words, Ringi equals 1 if the distance between in­
dustrial enterprises and the boundaries of the 66 regulated cities is less
5.1. The main results of carbon emission and SO2
than or equal to 37 km; otherwise, it equals 0. The definitions of the
other variables are the same as in Eq. (2). The coefficient β2 measures the
First, we reported the average effect of the APCMS policy on firm-
spatial spillover effects of the APCMS policy. The policy has a spatial
level carbon emissions. Table 3 presents the results of DID analysis for
spillover effect if β2 is significantly greater than 0, and no spatial spill­
carbon emissions. Columns 1 and 2 show the results without spatial
over effects if β2 is not significantly different from 0.
spillover effects using Eq. (2). Columns 3 and 4 present the results of the
spatial spillover effects using Eq. (3). Columns 5 and 6 show the results
4.3.3. Dynamic effects model
of the deleted 0–37 km samples using Eq. (2).
To verify that the above DID model satisfies the parallel trend hy­
The results in Column 1 indicate that the estimated coefficient of
pothesis and tests the dynamic effects of the APCMS on firms' carbon
Treat×Post (− 0.054) is significantly negative. This coefficient implies
emissions, SO2 emissions, energy efficiency, output, patents, and
that, on average, firms in the treatment group decrease their carbon
pollution abatement equipment at different times, we built the following
emissions by 5% relative to the controls. To further alleviate the endo­
model (Greenstone and Hanna, 2014):
geneity problem, we control for firm-level characteristics, including the
asset-liability ratio (Lev), age of the firm (Age), capital intensity (CI),

Table 3
The impact of APCMS on carbon emissions.
(1) (2) (3) (4) (5) (6)

Without Spatial Spillover Effect With Spatial Spillover Effect Delete 0-37 km Sample

lnCO2 lnCO2 lnCO2 lnCO2 lnCO2 lnCO2

Treat×Post − 0.054*** − 0.054*** − 0.040** − 0.041** − 0.050** − 0.052**

(0.019) (0.018) (0.020) (0.019) (0.021) (0.021)
(1-Treat) × Ring×Post 0.037** 0.035**
(0.017) (0.017)
Lev − 0.003 − 0.003 − 0.005
(0.004) (0.004) (0.004)
Age 0.225*** 0.225*** 0.229***
(0.014) (0.014) (0.016)
CI 0.011*** 0.011*** 0.016***
(0.004) (0.004) (0.004)
Rprofit 0.384*** 0.384*** 0.378***
(0.023) (0.023) (0.025)
Own 0.034** 0.034** 0.025
(0.016) (0.016) (0.017)
Ex 0.080*** 0.080*** 0.080***
(0.010) (0.010) (0.010)
Firm FE Yes Yes Yes Yes Yes Yes
Year FE Yes Yes Yes Yes Yes Yes
Industry×Year Yes Yes Yes Yes Yes Yes
Province×Year Yes Yes Yes Yes Yes Yes
Obs 225,627 225,627 225,627 225,627 183,655 183,655
Adj.R2 0.898 0.899 0.898 0.899 0.898 0.899

Note: ***, **, and * represent the 1%, 5%, and 10% significance levels, respectively. The standard errors are reported in parentheses. Standard errors are clustered two-
ways at the city-year and the firm level.

7
H. Xu et al.
ratio of sales (Rprofit), nature of property rights (Own), and whether it is
an exporting firm (EX). Column 2 shows that the estimated coefficient of
Treat×Post (− 0.054) is significantly negative. These results provide ev­
idence that the APCMS significantly reduces regulated firms' carbon
emissions. These point estimates suggest that carbon emissions declined
by 5% due to the APCMS policy.
The first concern is that a firm may transfer its production to an
adjacent unregulated city, resulting in a reduction in its carbon emis­
sions. To address this concern, Columns 3 and 4 of Table 3 show the
results for the specification corresponding to Eq. (3), which allows for
the direct estimation of the spatial spillover effect. The results in Column
3 indicate that the estimated coefficient of (1-Treat) × Ring×Post (0.037)
is significantly positive, and that of Treat×Post (− 0.040) is significantly
negative. These coefficients imply that the spatial spillover effect is
positive and significant, suggesting a slight upward bias of APCMS
policy effects in the estimations of Columns 1 and 2. This empirical
result indicates that firms in the treatment group decrease their carbon
emissions by 4% relative to the controls. The carbon emissions in
adjacent unregulated regions increase by 3.7%. These results mean that
both spatial spillover effects and carbon emission reduction exist
simultaneously. Considering the endogeneity problem, we control for
firm-level characteristics in Column 4. The results in Column 4 indicate
that the estimated coefficient of Treat×Post (− 0.041) is significantly
negative and the estimate for (1-Treat) × Ring×Post (0.035) is signifi­
cantly positive. These results provide evidence that the APCMS had
spatial spillover effects. When the spatial spillover effect is controlled
for, this policy is effective in reducing firm-level carbon emissions in
regulated cities.
Our estimated magnitude is comparable to those found in the liter­
atures. For example, Huang and Yi (2023) found that the low-carbon
pilot (LCP) and carbon emission trading (CET) policies reduced CO2
emissions by an average of 3.4% and 4.1%, respectively. Dong et al.
(2022) discovered that the CET policy significantly reduced carbon
emissions in pilot areas (measured at 4.1%). The magnitude of the
decrease in carbon emissions is similar to our empirical results.
A spatial spillover effect violates the stable unit treatment value
assumption (SUTVA) of the DID model. This may lead to an estimation
bias. To obtain a clean treatment effect, we deleted the samples with a
spatial spillover effect. Specifically, we deleted the 0–37 km sample (The
0-37 km means that the distance between industrial enterprises and the
boundaries of 66 regulated cities is less than or equal to 37 km) in
Columns 5 and 6. The result in Column 5 indicates that the estimated
coefficient of Treat×Post (− 0.050) is significantly negative. This coeffi­
cient implies that the APCMS policy reduced the carbon emissions of
regulated firms. Considering the endogeneity problem, we controlled for
firm-level characteristics in Column 6. As shown in Column 6, we found
little evidence that undermines the basic conclusion. After excluding the
spatial spillover effect, these results indicate that the APCMS policy
reduced carbon emissions.
Table 4 reports the average effect of the APCMS policy on firm-level
SO2 emissions. Columns 1 and 2 show results without spatial spillover
effects using Eq. (2). Columns 3 and 4 show results with spatial spillover
effects using Eq. (3). Columns 5 and 6 show results of deleted 0-37 km
samples using Eq. (2).
The results in Column 1 indicate that the estimated coefficient of
Treat×Post (− 0.118) is significantly negative. Column 2 adds firm-level
control variables on the basis of Column 1. The estimated coefficient of
Treat×Post (− 0.117) is significantly negative. These results show that
this policy reduces the SO2 emissions of regulated firms. Column 3
presents the estimates of spatial spillover effects of SO2 emissions. The
results in Column 3 indicate that the estimated coefficient of (1-Treat) ×
Ring×Post (0.058) is significantly positive, and the estimated coefficient
of Treat×Post (− 0.096) is significantly negative. Column 4 adds the firm-
level control variables on the basis of Column 3. The estimated coeffi­
cient of (1-Treat) × Ring×Post (0.055) is significantly positive and that of
Treat×Post (− 0.096) is significantly negative. These coefficients imply
8
Energy Economics 126 (2023) 107027
that the spatial spillover effect of SO2 emissions was significantly posi­
tive. Firms in the treatment group decrease their SO2 emissions by 9.6%
relative to the controls. The SO2 emissions in adjacent unregulated re­
gions increase by 5.5%. The result in Column 5 indicates that the esti­
mated coefficient of Treat×Post (− 0.107) is significantly negative.
Column 6 adds the firm-level control variables on the basis of Column 5.
The estimated coefficient of Treat×Post (− 0.107) is significantly nega­
tive. The results in Columns 5 and 6 show that excluding adjacent un­
regulated firms does not substantially affect the SO2 estimates.
The results in Tables 3 and 4 show that the APCMS reduced carbon
and SO2 emissions. This policy not only reduced air pollutants emissions,
but also carbon. Thus, the APCMS has achieved a synergistic emission
reduction.
Fig. 2 shows the parallel trend test for CO2 and SO2 emissions. The
estimated results were under the 95% confidence interval (CI). The
parallel trend test of CO2 and SO2 emissions deleted the sample of 0-37
km (The 0-37 km means that the distance between industrial enterprises
and the boundaries of 66 regulated cities is less than or equal to 37 km).
In the case of CO2, the estimated results were not significantly
different from 0 during 1998–2004, indicating no significant differences
between the treatment and control groups before the implementation of
the policy. Thus, the parallel trend hypothesis was supported. The
estimated coefficient β1 after the implementation of the policy is sig­
nificant until 2005 and afterward, indicating that the impact of the
APCMS policy on reducing carbon emissions lags behind two years.
For SO2, the estimated results were not significantly different from
0 during 1998–2004. Thus, the parallel trend hypothesis was supported.
The estimated coefficients after the implementation of the APCMS policy
were significant until 2004 and afterward, indicating that the impact of
the APCMS policy on reducing SO2 lagged by one years.
The APCMS policy imposed strict requirements for the air quality of
key cities, and SO2 emissions are one of the primary factors affecting air
quality. After the implementation of the APCMS policy, SO2 emissions in
the pilot areas were significantly lower than those in the non-pilot re­
gions, thus confirming the effectiveness of the APCMS policy.
5.2. Mechanism analysis
In this section, we further analyze the mechanism of reducing carbon
and SO2 emissions from the perspective of firms' source and end-pipe
reduction strategies. We estimate firms' source reduction strategies in
Sections 5.2.1, 5.2.2 and 5.2.3, followed by estimating the firms' end-
pipe reduction strategies in Section 5.2.4.
5.2.1. Total industrial output
Table 5 reports the average effect of the APCMS policy on firm
output. Columns 1 and 2 show results without spatial spillover effects
using Eq. (2). Columns 3 and 4 show results with spatial spillover effects
using Eq. (3). Columns 5 and 6 show results of deleted 0-37 km samples
using Eq. (2).
The results in Column 1 indicate that the estimated coefficient of
Treat×Post (0.002) is insignificant. Column 2 adds firm-level control
variables based on Column 1. The estimated coefficient of Treat×Post
(0.003) is also insignificant. These results show that this policy has little
impact on firm output. Column 3 estimates the spatial spillover effects of
firm output. The results in Column 3 indicate that the estimated coef­
ficient of (1-Treat) × Ring×Post (0.050) is significantly positive, and that
of Treat×Post (0.021) is insignificant. Column 4 adds the firm-level
control variables based on Column 3. The estimated coefficient of (1-
Treat) × Ring×Post (0.040) is significantly positive and that of Treat×­
Post (0.018) is insignificant. These coefficients imply that the spatial
spillover effect of firm output was significantly positive. The output of
adjacent unregulated regions increased significantly by 4%. Combining
the findings from columns 3 and 4 of both Tables 3 and 4, we find that
regulated firms export their carbon and air pollutants emissions to
adjacent regions. The results in Column 5 indicate that the estimated
H. Xu et al. Energy Economics 126 (2023) 107027

Table 4
The impact of APCMS on SO2.
(1) (2) (3) (4) (5) (6)

Without Spatial Spillover Effect With Spatial Spillover Effect Delete 0-37 km Sample

lnSO2 lnSO2 lnSO2 lnSO2 lnSO2 lnSO2

Treat×Post − 0.118*** − 0.117*** − 0.096*** − 0.096*** − 0.107*** − 0.107***

(0.031) (0.031) (0.032) (0.032) (0.034) (0.034)
(1-Treat) × Ring×Post 0.058** 0.055*
(0.029) (0.028)
Lev − 0.000 − 0.000 − 0.004
(0.006) (0.006) (0.006)
Age 0.312*** 0.312*** 0.304***
(0.022) (0.022) (0.023)
CI 0.006 0.006 0.011*
(0.006) (0.006) (0.006)
Rprofit 0.366*** 0.365*** 0.362***
(0.034) (0.034) (0.037)
Own 0.003 0.003 − 0.008
(0.025) (0.025) (0.027)
Ex 0.070*** 0.070*** 0.078***
(0.014) (0.014) (0.015)
Firm FE Yes Yes Yes Yes Yes Yes
Year FE Yes Yes Yes Yes Yes Yes
Industry×Year Yes Yes Yes Yes Yes Yes
Province×Year Yes Yes Yes Yes Yes Yes
Obs 225,627 225,627 225,627 225,627 183,655 183,655
Adj.R2 0.755 0.756 0.755 0.756 0.762 0.763

Note: ***, **, and * represent the 1%, 5%, and 10% significance levels, respectively. The standard errors are reported in parentheses. Standard errors are clustered two-
ways at the city-year and the firm level.

Fig. 2. Parallel trend test of CO2 and SO2.

coefficient of Treat×Post (0.028) is insignificant. Column 6 adds the
firm-level control variables based on Column 5. The estimated coeffi­
cient of Treat×Post (0.024) is also insignificant. The results in Columns 5
and 6 show that excluding adjacent unregulated firms does not sub­
stantially affect firm output estimates.
Fig. 3 shows the parallel trend test of output, energy efficiency, and
patents. The estimated results were under the 95% confidence interval
(CI). These parallel trend tests delete the sample of 0–37 km (The 0-37
km means that the distance between industrial enterprises and the
boundaries of the 66 regulated cities is less than or equal to 37 km).
For output, we find that the estimated results are not significantly
different from 0 during 1998–2010, and the estimated results change
slightly. This shows that the APCMS policy had little impact on the total
industrial output.
5.2.2. Energy efficiency
Table 6 reports the average effect of the APCMS policy on firms'
energy efficiency. Similarly, energy efficiency regression results are also
divided into three groups: without spatial spillover effect, with spatial
spillover effect and with deleted 0–37 km samples.
The results in Column 1 indicate that the estimated coefficient of
Treat×Post (0.171) is significantly positive. Column 2 adds the firm-level
control variables based on Column 1. The estimated coefficient of
Treat×Post (0.171) was also significantly positive. Based on these co­
efficients, we observe that the APCMS policy significantly improves the
energy efficiency of regulated firms. Column 3 estimates the spatial
spillover effect of energy efficiency. The results in Column 3 indicate
that the estimated coefficient of (1-Treat) × Ring×Post (0.025) is insig­
nificant, and that of Treat×Post (0.180) is significantly positive. Column
4 adds the firm-level control variables based on Column 3. The estimated
coefficient of (1-Treat) × Ring×Post (0.019) is insignificant and that of

9
H. Xu et al. Energy Economics 126 (2023) 107027

Table 5
The impact of APCMS on industrial output.
(1) (2) (3) (4) (5) (6)

Without Spatial Spillover Effect With Spatial Spillover Effect Delete 0-37 km Sample

Output Output Output Output Output Output

Treat×Post 0.002 0.003 0.021 0.018 0.028 0.024

(0.015) (0.014) (0.016) (0.015) (0.017) (0.016)
(1-Treat) × Ring×Post 0.050*** 0.040***
(0.014) (0.013)
Lev 0.074*** 0.074*** 0.079***
(0.012) (0.012) (0.012)
Age 0.307*** 0.307*** 0.309***
(0.012) (0.012) (0.013)
CI 0.055*** 0.055*** 0.058***
(0.005) (0.005) (0.005)
Rprofit 1.458*** 1.458*** 1.447***
(0.025) (0.025) (0.027)
Own 0.010 0.010 0.010
(0.013) (0.013) (0.014)
Ex 0.194*** 0.194*** 0.195***
(0.011) (0.011) (0.012)
Firm FE Yes Yes Yes Yes Yes Yes
Year FE Yes Yes Yes Yes Yes Yes
Industry×Year Yes Yes Yes Yes Yes Yes
Province×Year Yes Yes Yes Yes Yes Yes
Obs 225,627 225,627 225,627 225,627 183,655 183,655
Adj.R2 0.886 0.897 0.886 0.897 0.885 0.897

Note: ***, **, and * represent the 1%, 5%, and 10% significance levels, respectively. The standard errors are reported in parentheses. Standard errors are clustered two-
ways at the city-year and the firm level.

Fig. 3. Parallel trend test of output, energy efficiency and patent.

Treat×Post (0.179) is significantly positive. These coefficients imply that
the spatial spillover effect of energy efficiency is negligible. In theory,
the increase in output in adjacent unregulated regions could lead to
economies of scale effects, potentially enhancing energy efficiency.
Firms' energy efficiency may have a positive spatial spillover effect.
However, our empirical findings suggest that energy efficiency in
adjacent unregulated regions has not shown improvement.
The results in column 5 indicate that the estimated coefficient of
Treat×Post (0.192) is significantly positive. Column 6 adds the firm-level
control variables based on Column 5. The estimated coefficient of
Treat×Post (0.191) was also significantly positive. The results in col­
umns 5 and 6 show that excluding adjacent unregulated firms does not
substantially affect energy efficiency estimates.
According to Fig. 3, the estimated results for energy efficiency

10
H. Xu et al. Energy Economics 126 (2023) 107027

Table 6
The impact of APCMS on energy efficiency.
(1) (2) (3) (4) (5) (6)

Without Spatial Spillover Effect With Spatial Spillover Effect Delete 0-37 km Sample

Efficiency Efficiency Efficiency Efficiency Efficiency Efficiency

Treat×Post 0.171*** 0.171*** 0.180*** 0.179*** 0.192*** 0.191***

(0.061) (0.061) (0.065) (0.065) (0.070) (0.070)
(1-Treat) × Ring×Post 0.025 0.019
(0.060) (0.060)
Lev 0.066** 0.066** 0.084***
(0.028) (0.028) (0.028)
Age − 0.050 − 0.050 − 0.031
(0.048) (0.048) (0.053)
CI 0.071*** 0.071*** 0.060***
(0.017) (0.017) (0.019)
Rprofit 1.074*** 1.074*** 1.045***
(0.088) (0.088) (0.096)
Own − 0.049 − 0.050 − 0.011
(0.059) (0.059) (0.067)
Ex 0.173*** 0.173*** 0.201***
(0.043) (0.043) (0.047)
Firm FE Yes Yes Yes Yes Yes Yes
Year FE Yes Yes Yes Yes Yes Yes
Industry×Year Yes Yes Yes Yes Yes Yes
Province×Year Yes Yes Yes Yes Yes Yes
Obs 225,627 225,627 225,627 225,627 183,655 183,655
Adj.R2 0.675 0.675 0.675 0.675 0.671 0.672

Note: ***, **, and * represent the 1%, 5%, and 10% significance levels, respectively. The standard errors are reported in parentheses. Standard errors are clustered two-
ways at the city-year and the firm level.

5.2.3. Technological innovation

Table 7 We find that the APCMS policy improved energy efficiency. A
Result of technological innovation. possible reason for this is that environmental compliance pressure forces
(1) (2) (3) (4) firms to engage in green technological innovation. We merged the three
Patent applications Green patent applications databases –CIED (1998–2010), CESD (1998–2010), and CPD
(1998–2010) – to obtain a 12-year panel data set. We selected the
Treat×Post 0.203** 0.202** 0.011* 0.011*
(0.082) (0.082) (0.006) (0.006) number of patents and green patent applications as proxy variables for a
Control variables No Yes No Yes firm's technological innovation.
Firm FE Yes Yes Yes Yes Table 7 reports the average effect of the APCMS policy on firms'
Year FE Yes Yes Yes Yes technological innovation. Columns 1 and 2 report the results of the
Industry×Year Yes Yes Yes Yes
Province×Year Yes Yes Yes Yes
number of patent applications. Columns 3 and 4 report the results of the
Obs 183,655 183,655 178,020 178,020 number of green patent applications. The results in Columns 1–4 indi­
Adj.R2 0.451 0.452 0.266 0.266 cate that these estimated coefficients of Treat×Post are significantly
Note: ***, **, and * represent the 1%, 5%, and 10% significance levels, positive. The APCMS policy significantly increased the number of patent
respectively. The standard errors are reported in parentheses. Standard errors applications. This policy encouraged firms to innovate technologi­
are clustered two-ways at the city-year and the firm level. cally.10 Fig. 3 reports the parallel trend of the number of patent and
green patent applications. We deleted the 0-37 km sample in this test.
support the parallel trend hypothesis. The estimated coefficients have The estimated results are under the 95% confidence interval (CI). We
been significant since the second year (2004) after the policy, indicating found that the estimated results were not significantly different from
that the impact of the APCMS policy on firms' energy efficiency lags by 0 before implementing the APCMS policy. Thus, the parallel trend hy­
one year. This is probably because industrial enterprises improve their pothesis is supported.
energy efficiency through technological innovations. Technological There may be two reasons for the technological progress of firms.
innovation is characterized by significant investment and a long cycle; First, the APCMS policy provides firms with more market information
therefore, the APCMS policy effect may have a certain hysteresis (Bansal for technological upgrades, thereby reducing innovation uncertainty.
and Hunter, 2003; Anh, 2015). This viewpoint is verified in the Section Second, the APCMS policy imposes high compliance costs on firms and
5.2.3. Furthermore, from 2003 to 2007, the estimated coefficients reduces profits. Consequently, firms innovate to reduce compliance
increased, indicating that the APCMS gradually improved energy costs, increase productivity, and gain competitive advantages in the
efficiency. market.
The impact of the APCMS on energy efficiency decreased signifi­
cantly in 2008, perhaps as a result of the global financial crisis, which 5.2.4. End-pipe reduction strategy
severely impacted firms' operations. The Chinese government deregu­ To verify whether the firm implements an end-pipe reduction strat­
lated firms in 2008 to reduce their burden. As shown in Fig. 2, compared egy, we adopted the DID model for empirical analysis. Our analysis used
to the other years, carbon and SO2 emissions increased in 2008. This
increase serves as evidence of the Chinese government's relaxation of
regulations on pollutant discharge during the 2007–2008 financial 10
We conducted an investigation into the spatial spillover effects of techno­
crisis. logical innovation, and the empirical findings indicate the absence of any
spatial spillover effect. Considering the length of the article, this result was not
reported.

11
H. Xu et al. Energy Economics 126 (2023) 107027

the desulfurization and waste gas treatment facilities in the CESD as energy under the APCMS policy. Gas is a cleaner energy source than
explained variables. coal. Firms conceivably have the potential to substitute high-pollution
Table 8 reports the average effect of the APCMS policy on firms' energy sources (such as coal) with cleaner energy (such as gas). In the
pollution abatement equipment. Columns 1 and 2 report the results of next section, we delete all gas-using firm samples to determine any en­
the desulfurization equipment. Columns 3 and 4 report the results of the ergy structure adjustment or efficiency improvement.
waste gas treatment facilities. The results in Columns 1–4 indicate these
estimated coefficients on Treat×Post are insignificant. The APCMS pol­ 5.3.2. Delete samples of firms using gas or raw material coal
icy had no significant impact on pollutant abatement equipment. As a The Columns 1–3 of Table 10 report the regression results for the
result, the firm did not implement the end-pipe reduction strategy. deleted samples of firms that use gas. These results show that the APCMS
Fig. 4 shows the parallel trend results for pollution abatement policy significantly improved firms' energy efficiency and reduced car­
equipment. Similarly, we deleted the 0–37 km sample, and the estimated bon emissions. Regulated firms improve energy efficiency rather than
results were under the 95% confidence interval (CI). These results also replace highly-polluting energy with clean energy. One possible reason
indicate that they were not significantly different from 0 during for this is that few firms use gas as an energy source. The sample of firms
1998–2010. This implies that the APCMS policy had little impact on using gas represents a mere 1.4% of the total sample size.
pollution abatement equipment. The Columns 4–6 of Table 10 report the results for deleted samples of
Based on the empirical findings from Sections 5.1 and 5.2, it is firms using raw material coal. Raw material coal serves two primary
evident that the marginal net benefits derived from source reduction purposes. First, raw material coal is utilized as a raw material by certain
surpass those of end-pipe reduction strategies. Source reduction emerges firms, such as coal chemical firms, wherein coal serves as a key input.
as the pivotal mechanism for achieving synergistic emissions reduction. However, it is important to note that this application is limited to only a
Furthermore, both output reduction and green innovation fall within the fraction of firms. Second, coal is employed as a fuel source by various
ambit of source reduction strategies employed by firms. The marginal firms. If firms use coal as a raw material, it should not be included in the
net benefits of green innovation outweigh those of output reduction. As calculation of carbon emissions. However, we could not distinguish
a consequence, firms ultimately opt for green innovation and enhanced between the usage of raw material coal by firms. We deleted all firms
energy efficiency, as opposed to end-pipe reduction strategies and using raw material coal. These results are still robust.
output reduction. These findings substantiate the hypotheses posited in
the third section of this paper. 5.3.3. Exclude samples bordering regulated cities or environmental
regulations
In 5.1, 5.2.1, and 5.2.2, we used the distance between industrial
5.3. Robustness checks enterprises and the boundary of 66 regulated cities to estimate the
spatial spillover effect. In this section, we change the calculation method
5.3.1. Alternative variables for spatial spillover effects. We use the cities bordering the 66 regulated
In this section, we test the robustness of the model by changing the cities to estimate the spatial spillover effect. For example, we delete the
measurements of carbon emissions, energy efficiency, and total indus­ sample from Zhangjiakou City because it is non-regulated and adjacent
trial output. In Section 5.1, we use coal and oil consumption to measure to the regulated Baoding City. Columns 1–3 of Table 11 show that the
the carbon emissions of firms. In Column 1, we use coal, oil, and gas APCMS policy reduced carbon emissions and improved energy effi­
consumption to measure carbon emissions. In Column 2, we use the ciency when the city samples bordering the 66 regulated cities were
logarithm of the industrial sales output value as a replacement. In Col­ deleted.
umn 3, we calculate the firms' energy efficiency based on industrial sales In addition to the APCMS policy, the Chinese government has
output value. Moreover, we estimate the impact of the APCMS policy on implemented the “Two Control Zones” policy in 2000 and the “Regu­
the consumption of coal, oil and gas in Columns 4–6. lations on the Collection and Use of Pollutant Discharge Fees” of 2003
Table 9 reports the regression results of replacing the explained (referred to as the “Pollutant Discharge Fees” policy). The goal of the
variables. The results of Columns 1–3 show that the APCMS policy “Two Control Zones” policy is to reduce acid rain and SO2 in the pilot
reduced the carbon emissions, improved the energy efficiency, and had areas. The “Pollutant Discharge Fees” policy in 2003 is a reform of the
no significant impact on the output. Therefore, the conclusion is still charges for pollutant discharge by firms.
robust. To exclude the influence of other environmental regulations, this
The regression results in Columns 4–6 of Table 9 show that the study adds control variables. The “Two Control Zones” policy is repre­
APCMS policy reduced coal consumption and increased gas consump­ sented by the multiplication of two dummy variables (Fujii et al., 2013;
tion. One possible explanation is that firms are encouraged to use clean Tanaka, 2015; Cai et al., 2016b). Similarly, the “Pollutant Discharge
Fees” policy is represented by the intersection of two dummy variables
Table 8 (Wang et al., 2022).
Result of pollution abatement equipment. Columns 4–6 of Table 11 report the estimated effects after excluding
(1) (2) (3) (4) the “Pollutant Discharge Fees” policy and the “Two Control Zones”
policy. These results were consistent with the basic regression results.
Desulfurization Desulfurization Waste gas Waste gas
treatment treatment
5.3.4. Exclude the impact of energy regulation or financial crisis in the same
Treat×Post − 0.050 − 0.052 0.021 0.010
(0.044) (0.045) (0.202) (0.204)
period
Control No Yes No Yes In the “Eleventh Five-Year Plan”,11 China took the reduction of en­
variables ergy consumption per unit of GDP as a legally binding goal for the first
Firm FE Yes Yes Yes Yes time. Since then, the pursuit of low-carbon development has been in­
Year FE Yes Yes Yes Yes
tegrated into the governance of macroeconomic objectives. Considering
Industry×Year Yes Yes Yes Yes
Province×Year Yes Yes Yes Yes China has implemented the “energy saving and emission reduction”
Obs 91,470 91,470 166,060 166,060 policy after 2006, we deleted the samples after 2006.
Adj.R2 0.611 0.611 0.687 0.688 The 2008 Financial Crisis led to an economic downturn. According to
Note: ***, **, and * represent the 1%, 5%, and 10% significance levels,
respectively. The standard errors are reported in parentheses. Standard errors
11
are clustered two-ways at the city-year and the firm level. The time range of the Eleventh Five-Year Plan is from 2006 to 2010.

12
H. Xu et al. Energy Economics 126 (2023) 107027

Fig. 4. Parallel trend test of pollution abatement equipment.

Table 9
Result of alternative variables.
(1) (2) (3) (4) (5) (6)

lnCO2 Output Energy efficiency lncoal lnoil lngas

Treat×Post − 0.052** 0.026 0.180*** − 0.118** − 0.004 0.072***

(0.021) (0.016) (0.064) (0.050) (0.065) (0.015)
Control variables Yes Yes Yes Yes Yes Yes
Firm FE Yes Yes Yes Yes Yes Yes
Year FE Yes Yes Yes Yes Yes Yes
Industry×Year Yes Yes Yes Yes Yes Yes
Province×Year Yes Yes Yes Yes Yes Yes
Obs 183,655 183,655 183,655 183,655 113,870 78,357
Adj.R2 0.899 0.894 0.672 0.858 0.804 0.712

Note: ***, **, and * represent the 1%, 5%, and 10% significance levels, respectively. The standard errors are reported in parentheses. Standard errors are clustered two-
ways at the city-year and the firm level.

Table 10
Result of delete samples of firms using gas or raw material coal.
(1) (2) (3) (4) (5) (6)

Delete firms using gas Delete firms using raw material coal

lnCO2 Output Energy efficiency lnCO2 Output Energy efficiency

Treat×Post − 0.045** 0.024 0.169** − 0.040* 0.022 0.172**

(0.021) (0.016) (0.068) (0.022) (0.018) (0.087)
Control variables Yes Yes Yes Yes Yes Yes
Firm FE Yes Yes Yes Yes Yes Yes
Year FE Yes Yes Yes Yes Yes Yes
Industry×Year Yes Yes Yes Yes Yes Yes
Province×Year Yes Yes Yes Yes Yes Yes
Obs 180,729 180,729 180,729 146,813 146,813 146,813
Adj.R2 0.899 0.894 0.672 0.885 0.894 0.679

Note: ***, **, and * represent the 1%, 5%, and 10% significance levels, respectively. The standard errors are reported in parentheses. Standard errors are clustered two-
ways at the city-year and the firm level.

the World Energy Outlook 2009 published by International Energy
Agency (IEA), the economic downturn led to a drop in energy use, CO2
emissions, and energy investment. To test whether the 2008 financial
crisis or the APCMS led to a reduction in carbon emissions, we deleted
the 2008 and 2009 samples. Table 12 results show that after excluding
the “energy saving and emission reduction” policy or 2008 Financial
Crisis, the result of this paper is still robust.
5.3.5. Delete the high electricity consumption industries
We use coal and oil consumption to calculate firms' carbon emis­
sions. China's industrial enterprises primarily rely on coal, oil, and
electricity for their energy consumption in China. However, the CESD
provides data on coal and oil consumption but does not include data on
electricity consumption. The China Energy Statistical Yearbook provides
data on total energy consumption and electricity consumption by in­
dustry. We converted the industry's electricity consumption into stan­
dard coal. Using this dataset, we identified industries that accounted for
more than 30% of total energy consumption from electricity. Then we
deleted these industries for a robustness test. Table 13 results show that
after deleting the high electricity consumption industries, the result of
this paper is still robust. Even in the absence of electricity data provided
by CESD, it will not lead to bias in the estimation results.

13
H. Xu et al. Energy Economics 126 (2023) 107027

Table 11
Result of delete samples bordering regulated cities or environmental regulations.
(1) (2) (3) (4) (5) (6)

Deletes the cities bordering the regulated cities Exclude Environmental Regulations

lnCO2 Output Energy efficiency lnCO2 Output Energy efficiency

Treat×Post − 0.058* 0.026 0.260** − 0.046** 0.030 0.190***

(0.030) (0.022) (0.103) (0.021) (0.025) (0.070)
Control variables Yes Yes Yes Yes Yes Yes
Pollutant Discharge Fees No No No Yes Yes Yes
Two Control Areas No No No Yes Yes Yes
Firm FE Yes Yes Yes Yes Yes Yes
Year FE Yes Yes Yes Yes Yes Yes
Industry×Year Yes Yes Yes Yes Yes Yes
Province×Year Yes Yes Yes Yes Yes Yes
Obs 129,466 129,466 129,466 183,655 183,655 183,655
Adj.R2 0.904 0.900 0.691 0.899 0.897 0.672

Note: ***, **, and * represent the 1%, 5%, and 10% significance levels, respectively. The standard errors are reported in parentheses. Standard errors are clustered two-
ways at the city-year and the firm level.

Table 12
Results of the impact of energy regulation or 2008 Financial Crisis.
(1) (2) (3) (4) (5) (6)

Delete Samples After 2006 Delete the sample in 2008 and 2009 (Financial crisis)

lnCO2 Output Energy Efficiency lnCO2 Output Energy Efficiency

Treat×Post − 0.044** 0.033 0.147** − 0.051*** 0.029 0.169***

(0.018) (0.021) (0.060) (0.020) (0.023) (0.065)
Control variables Yes Yes Yes Yes Yes Yes
Firm FE Yes Yes Yes Yes Yes Yes
Year FE Yes Yes Yes Yes Yes Yes
Industry×Year Yes Yes Yes Yes Yes Yes
Province×Year Yes Yes Yes Yes Yes Yes
Obs 109,363 109,363 109,363 143,429 143,429 143,429
Adj.R2 0.917 0.918 0.709 0.899 0.919 0.663

Note: ***, **, and * represent the 1%, 5%, and 10% significance levels, respectively. The standard errors are reported in parentheses. Standard errors are clustered two-
ways at the city-year and the firm level.

5.3.6. Controlling the characteristics of prefecture level cities

Table 14
The economic conditions of prefecture-level cities may affect their
Results of controlling the characteristics of prefecture level cities.
carbon emissions, energy efficiency and total output. Therefore, in this
section, we add the control variables of per capita GDP, population, (1) (2) (3)
proportion of secondary industries, proportion of tertiary industries, and lnCO2 Output Energy efficiency
fiscal self-supporting capacity of prefecture-level cities. Table 14 reports Treat×Post − 0.055*** 0.026 0.211***
the results of controlling for the characteristics of prefecture-level cities. (0.020) (0.016) (0.069)
These results are consistent with those presented in Tables 3, 4, and 5. Firm control variables Yes Yes Yes
Our regression model does not control the economic variables of prefecture cities control variables Yes Yes Yes
Obs 182,698 182,698 182,698
prefecture-level cities because the APCMS policy may affect the socio­
Adj.R2 0.899 0.897 0.672
economic situation of cities and block the impact mechanism of this
policy. Note: ***, **, and * represent the 1%, 5%, and 10% significance levels,
respectively. The standard errors are reported in parentheses. Standard errors
are clustered two-ways at the city-year and the firm level.

Table 13 5.3.7. PSM-DID

Result of delete the high electricity consumption industries. Propensity Score Matching (PSM) has been widely used in policy
(1) (2) (3) analyses in recent years. For example, Greenstone (2004) used PSM to
lnCO2 Output Energy Efficiency study the impact of the U.S. Clean Air Act on SO2 emissions. Ferris et al.
(2014) used PSM to study the impact of environmental regulations on
Treat×Post − 0.054** 0.025 0.153**
(0.022) (0.017) (0.068)
employment in the power industry. To overcome the observable omitted
Control variables Yes Yes Yes variable problem, this study uses the PSM-DID method for robustness
Firm FE Yes Yes Yes testing (Dehejia and Wahba, 2002).
Year FE Yes Yes Yes According to the relevant policies, the selection of the second batch
Industry×Year Yes Yes Yes
of key cities was based on the economic conditions and pollution
Province×Year Yes Yes Yes
Obs 157,577 157,577 157,577 emissions of prefecture-level cities in 2000. Subsequently, we calculate
Adj.R2 0.898 0.899 0.651 propensity scores and use a one-to-one nearest-neighbor matching
method. Finally, 60 cities were successfully matched. Table 15 reports
Note: ***, **, and * represent the 1%, 5%, and 10% significance levels,
respectively. The standard errors are reported in parentheses. Standard errors the regression results of PSM-DID. These results are consistent with
are clustered two-ways at the city-year and the firm level. those presented in Tables 3, 4, and 5.

14
H. Xu et al. Energy Economics 126 (2023) 107027

Table 15 political connections with the government. In China, some government

Results of PSM-DID. officials have previously held positions as executives in SOEs. Therefore,
(1) (2) (3) the environmental department has the weakest supervision over SOEs
(Deng and Li, 2020; Chen et al., 2022). The empirical results support the
lnCO2 Output Energy efficiency
latter view. This means that more political connection led to the
Treat×Post − 0.127*** 0.027 0.386*** insensitivity of SOEs to the APCMS policy. In China, SOEs bear social
(0.032) (0.024) (0.103)
Control variables Yes Yes Yes
responsibilities. Duanmu and Pittman (2019) believed that SOEs may
Firm FE Yes Yes Yes pay more attention to employment and not pursue efficiency. This may
Year FE Yes Yes Yes explain why these are insensitive to this policy. By contrast, private
Industry×Year Yes Yes Yes firms with weaker political connections are exposed to more stringent
Province×Year Yes Yes Yes
environmental regulations. These firms have greater incentives to
Obs 96,133 96,133 96,133
Adj.R2 0.907 0.901 0.672 improve their energy efficiency and reduce carbon emissions.

Note: ***, **, and * represent the 1%, 5%, and 10% significance levels,
5.4.2. Heterogeneity of region
respectively. The standard errors are reported in parentheses. Standard errors
Regional differences in energy efficiency may affect policy effects.
are clustered two-ways at the city-year and the firm level.
Therefore, we divide the sample into high and low-energy-efficiency
areas based on the median of their average energy efficiency before
Table 16 the APCMS policy. Specifically, we calculated the average energy effi­
Heterogeneity of property rights.
ciency of each prefecture-level city in 2002. If it exceeds the median,
(1) (2) (3) energy efficiency is high; otherwise, it is a low-energy-efficiency area.
State-owned Private Foreign Table 17 reports the results of regional heterogeneity. This demon­
Panel A: InCO2
strates that the APCMS policy effect is driven solely by the high-energy-
− 0.006 − 0.101*** 0.058 efficiency regions. There may be two reasons for regional heterogeneity.
Treat×Post (0.033) (0.026) (0.058) First, technological innovation is one of the influencing factors of energy
Control Variables Yes Yes Yes efficiency. Firm's innovation decision depends on the comparison of cost
Obs 43,025 115,149 21,596
and benefit. Generally speaking, the high-energy-efficiency region tends
Adj.R2 0.921 0.893 0.910
to have the high technological level. Specifically, these regions have
more scientific research institutes, innovative talents, and funds. Firms
Panel B: Energy efficiency
in these regions have lower innovation costs. Stimulated by environ­
0.169 0.173* − 0.114
Treat×Post (0.125) (0.098) (0.200) mental regulations, firms in these regions are easier to carry out green
Control Variables Yes Yes Yes innovation and improve energy efficiency. As a result, carbon emissions
Obs 43,025 115,149 21,596 in these cities decreased more. On the contrary, firms in low-energy-
Adj.R2 0.672 0.661 0.760
efficiency regions have higher innovation costs. Environmental regula­
tions may not provide enough incentives to these firms, so they are not
Panel C: Output sensitive to the APCMS policy. Second, the high-energy-efficiency region
0.001 0.019 0.091*
may have higher per capita income.12 Compared with economic devel­
Treat×Post (0.026) (0.022) (0.049)
Control Variable Yes Yes Yes opment, local governments may pay more attention to environmental
Obs 43,025 115,149 21,596 pollution, which leads to stricter environmental supervision.
Adj.R2 0.935 0.885 0.915

Note: ***, **, and * represent the 1%, 5%, and 10% significance levels,
respectively. The standard errors are reported in parentheses. Standard errors
are clustered two-ways at the city-year and the firm level.
5.4. Heterogeneity analysis
5.4.1. Heterogeneity of firm property rights
Table 16 shows the results of the grouping regression based on the
nature of property rights. For brevity, only the coefficients of the key
explanatory variables are reported in Table 16. Column 1 shows the
results for SOEs. Column 2 shows the results for private firms. Column 3
presents the results for foreign-invested firms.
The results in Table 16 show that the APCMS policy significantly
reduced the carbon emissions of private firms and improved their energy
efficiency. However, this policy had no significant impact on foreign-
invested and SOEs.
The energy efficiency of foreign-invested firms is relatively high
(Zhou et al., 2021). Thus, there is little room for a continued increase in
the energy efficiency of foreign-invested firms. We calculated the
average energy efficiency of the three types of firms before imple­
menting the APCMS. The average energy efficiencies of state-owned,
private, and foreign-invested firms were 1.04, 1.15, and 1.99, respec­
tively. There data confirm the findings of this study.
The situation of SOEs is more complex. On the one hand, SOEs may
comply with environmental regulations the most. This policy had the
greatest impact on the SOEs. On the other hand, SOEs have closer
6. Conclusions and policy implications
This study examined the impact of the APCMS policy on carbon and
air pollutants emissions. We used rich and detailed firm-level pollution,
energy use, production, and innovation data. The empirical research
results showed that the APCMS policy significantly reduced carbon and
air pollutants emissions and achieved a synergistic emission reduction.
The mechanism analysis showed that firms achieve simultaneous
reduction through their source reduction strategies. The source reduc­
tion of firms is mainly achieved by improving energy efficiency rather
than reducing output. Firms' carbon emissions, SO2 emissions, and
output all exhibit positive spatial spillover effects. This indicates that
regulated firms export their carbon and air pollutants emissions to
adjacent regions. After excluding the spatial spillover effect, the APCMS
policy still achieves synergistic emission reduction. Furthermore, a
heterogeneity analysis showed that private firms and regions with high
energy efficiency are more sensitive to the APCMS. Based on these
conclusions, this study proposes the following policy recommendations:
First, source reduction is the key to achieving synergistic emission
reduction. Energy efficiency improvements and green innovation are
essential channels for source reduction. Therefore, the government
should encourage firms to focus on green innovation and improve their
12
Prior to the enactment of the APCMS policy, the per capita GDP in high-
energy-efficiency regions was 12,700 CNY, whereas the per capita GDP in
low-energy-efficiency regions was 7356 CNY.

15
H. Xu et al. Energy Economics 126 (2023) 107027

Table 17 of production factors towards high-efficiency firms and regions.

Regional heterogeneity.
(1) (2) Funding
High-energy-efficiency Low-energy-efficiency
This research was funded by the Project of Cultivation for young top-
Panel A: InCO2 motch Talents of Beijing Municipal Institutions (Grant number
Treat×Post − 0.129*** 0.025
(0.025) (0.033)
BPHR202203057), the Innovation Centre for Digital Business and Cap­
Control Variable Yes Yes ital Development of Beijing Technology and Business University (Grant
Obs 116,707 64,037 number SZSK202221), the National Natural Science Foundation of
Adj.R2 0.899 0.900 China (Grant number 71903008) and the National Social Science Fund
of China (Grant number 22BJY230).
Panel B: Energy efficiency
Treat×Post 0.270*** 0.117 Declaration of interest
(0.101) (0.095)
Control Variable Yes Yes
Obs 116,707 64,037 The authors declare no conflict interest.
Adj.R2 0.688 0.616
CRediT authorship contribution statement
Panel C: Output
Treat×Post 0.015 0.043 Hao Xu: Conceptualization, Methodology, Software, Data curation,
(0.021) (0.027) Writing – original draft, Writing – review & editing. Jingxuan Xu:
Control Variable 0.015 0.043
Conceptualization, Methodology, Writing – original draft, Writing –
Obs 116,707 64,037
Adj.R2 0.896 0.900 review & editing. Jie Wang: Conceptualization, Methodology, Writing –
original draft, Writing – review & editing. Xiang Hou: Conceptualiza­
Note: ***, **, and * represent the 1%, 5%, and 10% significance levels,
tion, Methodology, Writing – review & editing.
respectively. The standard errors are reported in parentheses. Standard errors
are clustered two-ways at the city-year and the firm level.
Acknowledgements

energy efficiency. For example, the government could institute prefer­

ential tax policies on green innovation and provide fiscal subsidies for
green R&D activities.
Second, China has implemented a series of environmental and en­
ergy regulations, such as the two control zones policy, pollutant
discharge fee policy, top 1000 energy savings program, carbon emis­
sions trading scheme, and low-carbon city pilot policy. Regrettably,
these energy and environmental regulations do not explicitly prioritize
energy efficiency as a policy objective. Specifically, the top 1000 energy
savings program solely necessitates these selected 1000 firms to
decrease their energy consumption within a specified time limit, without
mandating them to enhance their energy efficiency.
In accordance with our empirical findings, the enhancement of en­
ergy efficiency emerges as a pivotal factor contributing to synergistic
emission reduction. The policy's objective is not solely centered on
reducing carbon emission, air pollutants emissions and overall energy
consumption but also emphasizes a heightened focus on improving en­
ergy efficiency. Analogous to air quality standards, environmental de­
partments should require firms to improve their energy efficiency within
a specified time limit.
Third, it is necessary to improve the pertinence and applicability of
environmental regulations. Our heterogeneity analysis demonstrated
that SOEs are insensitive to environmental regulations. In light of lenient
environmental supervision of SOEs, the government should reinforce
environmental supervision of SOEs.
Fourth, command-and-control and market-based environmental
regulations should synergistically collaborate with one another. The
APCMS policy of interest in this paper is a command-and-control envi­
ronmental regulation. This policy has no significant impact on firms'
carbon emissions, energy efficiency, and output in low-energy-efficiency
regions. Regional energy efficiency is determined as the mean value of
the energy efficiency across all firms within the region, which means
that firms with low energy efficiency are also not sensitive to this policy.
Command-and-control environmental regulations have demonstrated
negligible influence on low-efficiency firms, and they have not resulted
in a reduction in the output of these firms. If the output or number of
low-efficient firms is reduced, the overall energy efficiency will increase.
Market-based environmental regulations could potentially lead to the
exit of low-efficient firms from the market, facilitating the reallocation
This research was supported by the Project of Cultivation for young
top-motch Talents of Beijing Municipal Institutions (Grant number
BPHR202203057), the Innovation Centre for Digital Business and Cap­
ital Development of Beijing Technology and Business University (Grant
number SZSK202221), the National Natural Science Foundation of
China (Grant number 71903008) and the National Social Science Fund
of China (Grant number 22BJY230). Besides, we thank the anonymous
reviewers for their valuable comments that have important significances
to our research.
Appendix A. Supplementary data
Supplementary data to this article can be found online at https://doi.
org/10.1016/j.eneco.2023.107027.
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