Does economic development help achieve the goals of environmental regulation? Evidence from partially linear functional-coefficient model

The goal of environmental regulations is to reduce pollutant emissions without substantial hamper to economy. However, the impacts of environmental regulations on economic activities and pollutant emissions have been under intense debates. In this paper, we attempt to empirically investigate the roles of economic development in the heterogeneous impacts of environmental regulations on green productivity in a panel of China's cities. To test the heterogeneous impacts, we use a partially linear functional-coefficient (PLFC) model which allows the effects of environmental regulation vary with economic development. This paper further constructs an alternative efficiency indicator to explore the orders of impacts on green productivity or solely reducing pollution. Based on the thresholds from PLFC, we divide the cities into 6 groups to discuss the priorities in environmental strategies. We find that economic development is the preconditions for environmental regulation to work. Only when the GDP per capita is higher than 42,142 RMB, can environmental regulations promote green productivity; while a higher GDP per capita over 51,586 RMB enables the goal of reducing pollution ahead of schedule. Our results demonstrate that environmental regulations in 9% of cities promote green productivity, and 40% could reduce pollution without hampering economic outputs.