Carbon emissions and optimal scale of China's manufacturing agglomeration under heterogeneous environmental regulation

Abstract This article has studied the optimal scale of manufacturing agglomeration aiming at controlling industrial CO 2 emissions and the role of environmental regulation in China using the main function of panel cointegration and Full Modified Ordinary Least Square(FMOLS) based on the Dynamic Comprehensive Measure (DCM) of intensities of environmental regulation for 28 China's manufacturing subsectors and classification of the manufacturing subsectors according to their intensities of environmental regulations. The empirical results show that: (i) Higher intensity of environmental regulation can spur manufacturing subsectors get more agglomerative economies with less CO 2 emissions. (ii) The relationship between the agglomerative manufacturing subsectors with high and medium intensity of environmental regulation and CO 2 emissions shows inverted U-shaped changing trend. (iii) By contrast, the relationship between the agglomerative manufacturing subsectors with low intensity of environmental regulation and CO 2 emissions more likely presents U-shaped changing trend. (iv) High intensity of environmental regulation aiming at high polluting manufacturing subsectors can make them reach the inflection of CO 2 emissions under high scale of industrial agglomeration. Consequently, the government should take the policy with a general increase in the intensity of environment regulation, and use heterogeneous regulatory instruments according to different manufacturing subsectors so as to increase the emission reduction effect of manufacturing agglomeration.