Environmental regulation and industrial capacity utilization: An empirical study of China

China’s current economic development is faced with the two major problems of environmental pollution and production overcapacity. Environmental regulation is not only an effective means of controlling polluting emissions but is also an important factor which can affect industrial capacity utilization (ICU). For this work, 2004 to 2015 panel data from 30 provinces in China was employed to verify the evolution and spatial correlation of both environmental regulation intensity and industrial capacity utilization. The dynamic spatial panel model (DSPM) was then used to examine not only the impact of environmental regulation intensity on industrial capacity utilization but also the compliance cost effect and the innovation offset effect through which the environmental regulation intensity influences industrial capacity utilization. It was found that striking differences exist between provinces with respect to China’s environmental regulation intensities and industrial capacity utilization, with a fluctuating but rising trend emerging over time. In parallel with this, there is also a significant spatial correlation in industrial capacity utilization. The results from the DSPM show that increases in environmental regulation intensity can significantly improve industrial capacity utilization. Environmental regulations can also improve industrial capacity utilization through the innovation offset effect, although the compliance cost effect of environmental regulation not significant.