The effects of environmental regulation on China's total factor productivity: An empirical study of carbon-intensive industries

In this paper, we first identify China's carbon-intensive industries (CIIs) by constructing a carbon intensive index taking both the scale and intensity of CO2 emission into account. Then the strong version of Porter Hypothesis (PH), i.e., the positive effect of environmental regulation on total factor productivity (TFP) of China's CIIs is tested. In order to overcome the endogenous issue of model specification, two-stage least squares (2SLS) method is employed. The results indicate that there is a significant inverted U-shape relationship between environmental regulation intensity and the TFP of China's CIIs, demonstrating the inexistence of strong PH effect in a long run, and the impact of environmental regulation on CIIs is changing gradually from innovation offsets to compliance costs. In addition, optimal environmental regulation intensities for different CIIs are also studied according to their locations on the inverted U-shaped curve: the Production and Supply of Electric Power and Heat Power Industry has exceeded the optimal environmental regulation intensity, while the remaining CIIs have not reached their inflection points. Therefore, specific policy proposals should be formulated according to the different stages of environmental regulation in various industries.