This article is compiled based on the presentation delivered at the forum China’s Urbanization Pathways Under the Dual Carbon Goals: Cutting-Edge Reflections, one of the series of forums marking the 15th Anniversary of the PKU-Lincoln Center on November 5, 2022, and has been reviewed by Professor Lu Ming.

Lu Ming, Distinguished Professor at the Antai College of Economics and Management, Shanghai Jiao Tong University; Changjiang Distinguished Scholar of the Ministry of Education; Executive Dean of the China Institute of Development Studies; Research Fellow of the China Institute of Urban Governance; Research Fellow of the Shanghai Institute of International Finance and Economics. His main research fields include China’s economy, urban-rural and regional economic development, and labor economics.

Set against the backdrop of China’s dual carbon targets and economic transition research, this presentation explores win-win pathways that reconcile economic growth with emission reduction. Cutting carbon emissions does not mean suppressing productivity or eliminating emissions entirely. The dual carbon goals must be assessed from a nationwide perspective. Unimpeded domestic economic circulation can deliver multiple dividends including industrial structure upgrading, economic expansion and falling energy consumption per unit output, enabling China’s economy to achieve decarbonization amid agglomeration.

In September 2020, China formally announced its targets to peak carbon emissions by 2030 and achieve carbon neutrality by 2060. Nonetheless, widespread misunderstandings persist regarding the relationship between emission reduction and economic growth. To meet emission intensity targets per unit GDP, many local governments resort to administrative instruments such as emission quotas and fines; some even curb industrial expansion to cut emissions. A prevalent stereotype links environmental pollution and urban malaise to large-city population agglomeration, assuming dense urban populations inevitably generate higher pollution and energy use.

In reality, development and decarbonization are not contradictory. Greater agglomeration of population and economic activity reduces industrial pollution emission intensity per unit GDP. Population concentration generates scale economies in sewage treatment, boosting abatement efficiency and lowering per capita pollutant discharge. Larger cities also undergo structural shifts from manufacturing to service sectors, which carry lighter environmental footprints, delivering lower emission intensity per unit GDP alongside economic growth (Lu & Feng, 2014). Additional research demonstrates a weak correlation between city population size and major pollutant discharge indicators (Zheng & Lu, 2018, see Figure 1).

Figure 1 Correlation Between Major Pollutant Discharge Volume and City Population Size (Source: Zheng Yilin & Lu Ming, 2018)

How should China balance growth and decarbonization? General Secretary Xi Jinping emphasized: "Cutting emissions does not mean curbing productivity or eliminating emissions altogether. We must pursue an eco-first, green and low-carbon development path, advance green transformation in the course of economic development, and deliver greater development through green transition." Identifying viable pathways to realize carbon reduction targets while sustaining economic expansion is a core priority for in-depth research today.

To secure win-win growth and decarbonization, policymakers must properly coordinate local and national interests. At the 2022 National Two Sessions, General Secretary Xi Jinping noted: "We must adopt a long-term, comprehensive, integrated national accounting framework. The dual carbon targets are assessed nationwide. Decisions on where emissions should fall, which regions achieve net-zero, which retain certain emission levels, and which even expand energy-related emissions to safeguard energy security must all be weighed from a national lens."

From environmental economics, firm production efficiency and energy utilization efficiency exhibit strong positive correlation. Concentrating production factors in high-productivity regions lifts aggregate output efficiency while improving energy performance. Natural endowments, institutions and policy biases create cross-regional productivity gaps; segmented factor and product markets hinder balanced per capita GDP development across regions and exacerbate tensions between growth and emission reduction.

Under China’s transitional institutional and policy framework, barriers to unimpeded domestic circulation of factors and goods distort industrial composition, inhibit scale economies and block cross-regional resource reallocation. Where regions with scale advantages in output and emission abatement cannot realize resource reallocation gains, both economic growth and emission intensity performance suffer. Conversely, removing barriers to cross-regional factor allocation enables simultaneous economic agglomeration and decarbonization under smooth domestic circulation (Zhong, Xi & Lu, 2022, see Figure 2).

Figure 2 Economic and Environmental Effects of Unimpeded Domestic Economic Circulation

Our recent research adopts quantitative spatial general equilibrium analysis to structurally estimate the relationship between agglomeration and decarbonization, unpacking the environmental impacts of unblocked domestic circulation. It investigates how regional segmentation of factor and product markets suppresses China’s energy efficiency and economic potential, and how integrated circulation channels factors toward high-productivity, energy-efficient regions to generate simultaneous growth and efficiency gains.

Key innovations of the study: It incorporates cross-regional disparities in energy efficiency into a spatial general equilibrium framework to quantify how cross-regional resource allocation shapes energy performance, with a focus on reallocation effects and agglomeration economies — making a vital contribution to literature on the environmental consequences of resource allocation.

The paper also analyzes how spatial misallocation undermines growth and energy efficiency, integrating China’s stylized facts within a spatial general equilibrium model to deliver Chinese empirical evidence linking spatial resource allocation to environmental outcomes. It provides theoretical guidance and actionable policy recommendations to reconcile dual carbon targets with economic expansion (Zhong, Xi & Lu, 2022).

The study draws stylized facts from datasets including the China Statistical Yearbook, China Energy Statistical Yearbook and China City Statistical Yearbook:

Figure 3 Per Capita GDP and Energy Consumption per Unit GDP by Region Over Time

Figure 4 Regression Coefficients Tracking Changes in Energy Consumption per Unit GDP Over Time

We build a spatial general equilibrium model featuring heterogeneous regional production and energy efficiency. The theoretical framework includes n regions, each split into rural and urban subareas, plus a regional energy sector supplying production inputs. Goods are tradable across regions subject to iceberg trade costs shaped by geography, transport technology and institutional segmentation; trade frictions can be reduced via technological or institutional reforms. Cross-regional labor migration incurs mobility costs that reduce household utility despite free geographic movement.

Counterfactual analysis yields the following results: Reducing interregional labor mobility costs triggers substantial cross-border population flows, lifting non-agricultural employment share and real per capita GDP while sharply cutting energy intensity per unit GDP. If intersectoral migration costs within provinces fall to 60% of their 2010 levels, intra-provincial cross-sector migration rises by 20%, inter-provincial migration by 46%, non-farm employment share by 6%, real GDP by 8.6%, and energy intensity per real/nominal GDP falls by 2.1% and 2.2% respectively. Lower interregional trade costs raise non-agricultural employment and real per capita GDP while drastically cutting emission intensity. If trade costs decline by the same magnitude observed between 2000 and 2010, inter-provincial migration grows 33%, non-farm employment rises 2.7%, real GDP and aggregate social welfare expand by 34% and 22% respectively, and energy intensity per unit GDP drops by over 7.8%. All these effects amplify with scale economies generated by agglomeration.

The research concludes that segmented domestic circulation of factors and goods constitutes a major drag on China’s energy efficiency and full economic potential.

Given China’s transitional barriers to cross-regional factor reallocation and layered regional development policies, analyzing industrial structural transformation and environmental challenges through a spatial lens carries profound practical relevance. Cutting emissions does not mean suppressing productivity or eliminating emissions entirely; dual carbon targets must be evaluated from a nationwide perspective. Unimpeded domestic circulation delivers synergistic gains including industrial upgrading, economic expansion and falling energy intensity per unit output, enabling China’s economy to realize decarbonization through agglomeration.

As a large country balancing holistic and multi-dimensional development priorities, China must fully respect economic laws, further dismantle institutional barriers to cross-regional mobility of goods and production factors, and unlock the transformative power of scale economies and a unified national market for modern economic development.

Lu, M., & Feng, H. (2014). Agglomeration and Emission Reduction: Empirical Evidence from Chinese Provincial Panel Data. The World Economy, Issue 7, pp.86–114.Zheng, Y. L., & Lu, M. (2018). Are Large Cities Less Eco-Friendly? An Analysis Based on Scale and Peer Effects. Fudan Journal of the Humanities and Social Sciences, Issue 1, pp.133–143.Zhong, Y. J., Xi, X. C., & Lu, M. (2022). Decarbonization Through Agglomeration: The Environmental Effects of Unimpeded Domestic Economic Circulation. Working Paper.

Compiled by: He Shuqi