How does industrial agglomeration affect firms' energy consumption? Empirical evidence from China

Industrial agglomeration is the main engine of economic growth and also the major source of CO2 emission that can have an effect on the social well-being of people in the built environment. This paper investigates the impact of industrial agglomeration on firms' energy consumption intensity, using Chinese industrial firm data and Chinese industrial firm pollution emission data from 1998 to 2012. We found evidence that industrial agglomeration could effectively cut down firms' coal consumption intensity and thus reduce the CO2 emission, which shows the positive environmental externality of industrial agglomeration. This finding is robust after carefully dealing with the potential endogeneity issues, while by taking advantage of the rich variations of our dataset, we also found heterogeneous effects across firm ownership, industry and region. In mechanism analysis, we document that specialized agglomeration plays an important role in reducing firms' energy consumption intensity, and the decline in firms' energy consumption intensity is mainly caused by the reduction in coal consumption.