Can heterogeneous environmental regulations improve industrial green total factor energy efficiency?

Whether heterogeneous environmental regulations in China can improve industrial green total factor energy efficiency (IGTFEE) is essential to sustainable industrial development nationwide. However, under China's fiscal decentralization system, the impact of heterogeneous environmental regulations on the IGTFEE and its underlying mechanism needs further exploration. This study incorporates capital misallocation and local government competition into the research framework and systematically investigates the mechanisms and effects of environmental regulations affecting the IGTFEE under China's fiscal decentralization system. Based on provincial panel data from 2007 to 2020, this study measured the IGTFEE using the Super-SBM model with undesirable outputs. Based on efficiency, this study uses a bidirectional fixed-effects model, an intermediary effect model, and a spatial Durbin model for empirical testing. The results show that the effect of command-and-control environmental regulation on the IGTFEE presents an inverted U shape, while the effect of market-incentive environmental regulation on the IGTFEE presents a U shape. Conversely, the effect of command-and-control environmental regulation on capital misallocation presents a U shape, while the effect of market-incentive environmental regulation on capital misallocation presents an inverted U shape. Capital misallocation is the mediating variable of heterogeneous environmental regulations affecting IGTFEE, but heterogeneous environmental regulations do not affect the IGTFEE through the same mechanisms. The spatial spillover effects of command-and-control and market-incentive environmental regulations on IGTFEE present a U shape. Local governments adopt a differentiation strategy for command-and-control environmental regulation and a simulation strategy for market-incentive environmental regulation. Environmental regulations have spillover effects on the IGTFEE under different competitive strategies, but only the imitation strategy, characterized by the race-to-the-top, can promote local and neighboring IGTFEE. Therefore, we propose the following recommendations: the central government should flexibly adjust the intensity of environmental regulations to maximize the capital allocation effect, set diversified performance assessment indicators to motivate local governments into the healthy competition and reform the modern fiscal system to correct distortions in the behavior of local governments.