Environmental Efficiency and the Optimal Size of Chinese Cities

• DOI: http://doi.org/10.1111/cwe.12200
• Published date: 01 May 2017
• Author: Bing Wang,Yanrui Wu,Jianxin Wu
• Date: 01 May 2017

©2017 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 60–86, Vol. 25, No. 3, 2017

60

*Jianxin Wu, Associate Professor, Institute of Resource, Environment and Sustainable Development, School

of Economics, Jinan University, China. Email: twujianxin@jnu.edu.cn; Yanrui Wu (corresponding author),

Professor, Business School, University of Western Australia, Australia. Email: yanrui.wu@uwa.edu.au; Bing

Wang, Professor, School of Economics, Jinan University, China. Email: twangb@jnu.edu.cn.

Environmental Efciency and the Optimal

Size of Chinese Cities

Jianxin Wu, Yanrui Wu, Bing Wang*

Abstract

The spatial distribution of population and economic activities has important impacts on

both economic growth and the environment. This paper uses a slack-based measure to

estimate the total factor environmental efciency (TFEE) of 286 Chinese prefectural-

and-above cities for the period 2002–2013. In particular, the relationship between city

size and TFEE is investigated. The ndings also show an inverted U-shaped relationship

between TFEE and city size, which implies an optimal city size of 16.68 million residents

in China. According to this estimate, most Chinese cities may be undersized due to the

migration restrictions of the hukou registration system and, hence, suffer from great

environmental efciency losses. The estimated low average TFEE value of Chinese cities

also suggests the large potential for efciency improvement. Thus, government policies

should focus on relaxing migration restrictions and encouraging the development of

large cities.

Key words: China, city size, CO2 emissions, environmental efciency

JEL codes: C23, O44, Q54, R12

I. Introduction

China has experienced rapid economic growth and urbanization over the past three

decades. Urbanization is considered an important driver of economic growth and

structural transformation. In 2014, the Chinese Government relaxed the household

registration barriers in most cities. This action will further accelerate urbanization in

the future. However, China’s rapid urbanization has had significant environmental

consequences. Accompanying the rapid economic growth and urbanization, China’s

total energy consumption increased from 586 million tons of standard coal equivalent

©2017 Institute of World Economics and Politics, Chinese Academy of Social Sciences

Environmental Efciency and the Optimal Size of Chinese Cities 61

(TSCE) to 3750 million TSCE between 1980 and 2013 (NBS, 2014a). As the world’s

largest energy consumer and CO2 emitter, China faces intense international pressure

to reduce its carbon emissions. The Chinese Government has pledged to reduce CO2

emission intensity (emissions per unit of GDP) by 40–45 percent by 2020 relative to the

level of 2005.

City size is among the key factors that inuence urban productivity, energy use and

pollutant emissions. It is a stylized fact that rms and workers are more productive on

average in large cities because of agglomeration economies. However, overpopulation in

urban areas may lead to efciency losses. These two opposite forces point to a possibly

inverted U-shaped relationship between efficiency and city size, which implies the

existence of an optimal city size in terms of efciency performance. The relationship

between city size and efciency performance has attracted signicant attention in urban

studies (e.g. Au and Henderson, 2006; Zheng, 2007; Hitzschke, 2011; Camagni et al.,

2013). However, existing studies on this topic are predominantly based on the analysis

of either conventional labor productivity (LP) or total factor productivity (TFP). These

studies neglect to consider the energy consumption required for economic growth and,

hence, the resultant environmental externalities. This may distort the measurement

of efficiency in the cities and mislead policy-making. Furthermore, most studies are

theoretic analyses. There are few empirical analyses on the relationship between city size

and productive efciency. One of the reasons for the scarcity of such analyses is that most

countries do not collect GDP data at city level (Au and Henderson, 2006). Fortunately,

the Chinese Government has collected and published city-level economic data each year

over the past decade, and this data is appropriate for empirical research of this issue.

The purpose of the present paper is to investigate the connection between city

size and environmental efciency. Here environmental efciency refers to productive

efficiency, which accounts for environmental factors; namely, energy consumption

and CO2 emissions. Urbanization policy and development models have the potential to

inuence energy consumption and CO2 emissions. China’s urbanization policy has long

been overshadowed by the debate on the advantages of developing small cities or large

cities. According to Gaigné et al. (2012), large and compact cities have shorter average

commuting length, use less energy and produce less CO2 emissions. However, firms

and households in large and compact cities tend to change location more frequently

in response to higher population density. This type of relocation in the urban system

then generates more energy consumption and CO2 emissions. Larson and Yezer (2015)

argue that reductions in energy consumption because of multifamily dwellings in large

and denser cities may be offset by increases in energy consumption due to longer and

congested commuting trips. The net effects of these forces remain ambiguous. Thus,