Navigating Sustainability Through Environmental Regulations: Assessing the Effects of Command-and-Control and Market-Incentive Policies on Carbon Emissions in China

Environmental regulations of various types are pivotal in shaping resource allocation and subsequently influencing the efficiency of carbon reduction initiatives. Taking China as an example, this study rigorously examines the effectiveness of command-and-control regulations alongside market-based incentives in mitigating carbon emissions, focusing on the mechanisms at play and the heterogeneous effects that emerge across diverse geographical and market contexts. Employing a quasi-natural experimental framework with a difference-in-differences (DID) model, the empirical analysis leverages data samples spanning from 2006 to 2019 in China. The findings indicate that regulatory frameworks effectively reduce carbon emissions with coefficients −0.110 and −0.160, and market-incentive regulations exhibit a more substantial impact (−0.160). Significantly, energy consumption intensity emerges as a mediator that establishes a causal pathway linking reduced energy use to decreased carbon emissions specifically within the context of market-incentive regulations. Conversely, command-and-control regulations may inadvertently lead to increased electricity consumption with coefficient 0.2044, suggesting a potential trade-off regarding their long-term efficacy. Furthermore, this research unveils a negative mediating effect associated with industrial structure upgrading, denoted by 6.2355 and 1.4874, indicative of a “masking effect” where regulatory pressures prompt superficial enhancements that fail to genuinely mitigate carbon emissions. The empirical findings also underscore regional disparities influenced by differing levels of economic development and degrees of marketization. This study enriches the existing literature on environmental regulation and carbon emissions reduction, providing valuable theoretical insights and practical implications for policymakers committed to promoting sustainability practices and achieving improved environmental outcomes in developing countries around the world.