When good intentions meet bad outcomes: Evidence from China's cleaner production mandate

Environmental regulation's relationship with corporate carbon performance remains contested across different policy instruments. We examine the contested relationship between environmental regulation and corporate carbon performance by analyzing the effects of mandatory cleaner production rules. Using a staggered difference-in-differences design on 9682 firm-year observations from Chinese manufacturers (2000−2010), we find that regulated firms significantly underperform their non-regulated peers in carbon efficiency. We trace this surprising outcome to two mechanisms: compliance costs that burden firms and crowd out investments in efficiency, and pollution transfer effects that deter market entry, thereby stifling the competitive pressure to innovate. The concentration of negative effects in specific firm types is not incidental but diagnostic. It indicates that the regulatory costs overwhelm the capacities of non-pollution-intensive and state-owned firms, thereby undermining the policy's very goal. Our findings thus call for conditional policy designs, where regulatory stringency is calibrated to a firm's pollution intensity and ownership structure to avoid these adverse outcomes.