Heterogeneity analysis.

China’s economy experienced great growth, which also induces large carbon emission. Facing the target of “Carbon peak, Carbon neutrality” in China, it is vital to improve the carbon emission efficiency. Employing the spatial Difference-in-Differences model, this paper investigates the impact of environmental regulation on carbon emission efficiency with a quasi-natural experiment of Pollution Levy Standards Adjustment in China. Our empirical results show that the environmental regulation can significantly improve the carbon emission efficiency. moreover, two impact channels are explored: green innovation and industrial upgrading. More specifically, the green innovation increases with environmental regulation, and the increased green innovation improves carbon emission efficiency. The industry upgrading increases with environmental regulation, and the increased industry upgrading improves carbon emission efficiency. Finally, in terms of city heterogeneity, we find that the impact of environmental regulation will be more pronounced for larger cities and resource-based cities. Our findings suggest that the environmental regulation must be enhanced for both smaller cities and non-resource-based cities. Moreover, to promote the green innovation of firms, since green innovation is risky and costly, governments should provide more subsidies or grants on corporate green technologies, thus firms will be motivated to invest in green technologies to reduce carbon emission.