Does China’s Low-Carbon City Pilot Facilitate Firm Productivity? An Analysis of Industrial Firms

Abstract

This study analyzed the impact of China’s Low-carbon City Pilot (LCCP) on firm productivity using firm-level financial data from the Chinese State Administration of Tax and patent data from the State Intellectual Property Office of the People’s Republic of China from 2007 to 2016, with the aim of clarifying the impact and mechanism of carbon regulation on firms’ productivity from the perspective of a developing country. By employing a staggered difference-in-differences model, we solved the analytical difficulties caused by the low-carbon pilot batch. Our findings revealed that the LCCP has a positive effect on firm productivity, with a 3% increase in total factor productivity (TFP). We concluded that environmental regulations can increase firms’ productivity. We also identified the mechanism, determining that the LCCP can increase firms’ research and development expenditure and the number of patents, advancing technological development. We also demonstrated that the dispersion of TFP across LCCPs has decreased, showing that low-productivity firms exit the market and the exit mechanism is improved, while resources are allocated more efficiently and market distortions are mitigated. This study contributes to the literature on climate policies on firms’ productivity and provides policymakers with valuable insights for balancing environmental regulations and firm productivity.