Building Better Cities: Evaluating the Effect of Circular Economy City Construction on Air Quality via a Quasi-Natural Experiment.

The resource utilization of a circular economy should reflect both economic and environmental values. Resource utility can be measured by GDP in the short term, while environmental value is challenging to measure; that is, the improvement in air quality is not effectively evaluated. In order to examine this initiative, using China's pilot cities of circular economy as a quasi-natural experiment, we construct a difference-in-difference (DID) strategy for estimation. The results demonstrate the following: (1) the pollutant emissions of pilot cities decline by 2.92 percentage points (p < 0.01) compared to unpiloted cities, (2) the policies on pilot cities more rapidly enhanced air quality for central cities and those with a low level of economic development, and (3) pilot cities significantly enhance air quality by decreasing energy consumption per unit of GDP. We provide the first empirical evidence of the effectiveness of circular economy pilot cities in improving air quality.

1. Introduction

Measures to mitigate climate change have often been presented dramatically as a “prohibition of the nice things of life.” However, a cutoff of such nice things only delivers an 8% reduction in air pollution [1], indicating that a completely different approach to tackling urban climate issues is required. The circular economy is recognized as having a great potential for mitigating global issues such as climate change, resource scarcity, air pollution, water contamination, and soil pollution [2].

Every week, the global population increases by 1.5 million people [3], and 3 million people enter the global middle class [4]; many people move from rural to urban areas. This rapid demographic shift has one inevitable consequence: worldwide, there is an increasing demand for essential goods, housing, and transportation [5]. All of these processes burden the Earth and contribute to air quality deterioration. The circular economy is a growing concept, the goal of which is leading to a more sustainable economy and contributing to recycling and reusing products, thereby making them “circular.” Circular economy is an advanced economic model in order to pursue greater economic benefits, less resource consumption, and lower environmental pollution, and it is an important way to improve urban environmental air quality. In order to achieve the goal of long-term and stable improvement of urban ambient air quality, we must build the city into a circular economy and a society.

There are many reasons why circular economy city construction plays a vital role in air quality improvement. First, reducing, reusing, and recycling eliminate PM2.5 by decreasing emissions from traditional waste management strategies: energy recovery and landfilling. Second, circular economy strategies help reduce fine particulate matter emissions by cutting the energy needed in industrial production to convert primary raw materials into products. However, at the theoretical level, the reasons for improving air quality through circular economy city construction are still unknown. It is worth noting that, in addition to cities, there are pilot firms or industrial parks in the pilot scheme. In this study, these pilot firms or industrial parks all belong to the scope of circular economy city construction.

Globally, while countries have adopted the construction of circular economic cities as an essential means to cope with climate change, there is no systematic review summarizing the results of the scientific literature on the extent to which circular economic city construction can contribute to air quality improvement. In recent literature, Nishijima and colleagues (2020) analyzed the impact of price increases on greenhouse gas (GHG) emissions in a circular economy and stated that a 30% price increase could reduce GHG emissions. Although this paper involves the relationship between the circular economy and air pollutant emissions, the research perspective does not focus on the circular economy itself.

In terms of policy, there is scarce literature examining the effect of China's circular economy pilot policies in cities. China's development of an urban circular economy began as early as 17 years ago. The National Development and Reform Commission (NDRC) successively offered the pilot circular economy city initiative twice in 2005 and 2007 in China. The NDRC appointed 178 circular economy pilot units, which included 58 cities. Although a few studies [6, 7] have focused on assessing the development level of circular economy cities, the research focus does not directly encapsulate the policy of pilot cities for the circular economy. Thus, the achievements of the research objectives for the cities appointed by the National Development and Reform Commission in 2005 and 2007 have been unknown. Furthermore, in terms of research methods, on the one hand, most literature has failed to quantify evaluation of the effects of the circular economy on the prevention of air pollution. On the other hand, a few studies have used the method of establishing an evaluation index system and case analysis to assess the effects of the policies of the circular economy pilot city on the reduction of PM2.5 emissions. However, the determination of the circular economy pilot cities is inherently potentially endogenous. Furthermore, circular economy pilot cities are not randomly selected, and the unobservable differences between the pilot city and the unpiloted city may impact air quality. Therefore, the result of regression analysis can be biased, which indicates that the circular economy pilot cities cannot determine the result of the direct regression.

On the basis of preceding, reconsideration, and reevaluation of circular economy city pollution, prevention and control effects appear necessary. First, most existing literature on circular economy development models contains elements of the circular agricultural economy, the circular industrial economy, and waste recycling in the service industry [8-11]. However, cities are essential for developing a circular economy [12]. Furthermore, with the adoption of the 2030 Sustainable Development Goals by the United Nations and the adoption of a new agreement on global climate change at the Paris Conference, countries around the world are attaching greater importance to developing a circular economy [13, 14]. However, the impact of implementing a pilot circular economy policy on urban air quality has not been formally examined and understood empirically. Therefore, we aim to close this gap by investigating how China's pilot policies on a national circular economy affect air quality and provide a frame of reference for countries worldwide to transform economic development mode.

On the basis of the existing literature, the following questions are proposed: Does the implementation of the circular economy pilot policies improve air quality in cities? Are there temporal and spatial differences in their impacts? What is the mechanism affecting air quality? We propose a novel analytical model to investigate these questions using a national annual panel dataset of 115 prefecture-level cities. This work has a guiding significance for the regions of China to further underline the vital role of the circular economy in reducing air pollution.

2. Policy Background and Research Hypotheses

2.1. Policy Background

From the late 1990s to 2003, China introduced the circular economy concept from developed countries. Subsequently, Shanghai, Guiyang, the province of Liaoning, and the province of Jiangsu, launched pilot projects on the circular economy. Since then, there has been a boom in national research on the circular economy. In 2005, according to the “Several Opinions of the State Council on Accelerating the Development of Circular Economy” issued by the State Council, the Chinese government issued the “Notice on Organizing and Carrying out Circular Economy Pilots (First Batch)” and launched the first batch of national pilots in three provinces and seven cities [15]. In 2007, in cooperation with the relevant departments, the National Development and Reform Commission issued the “Notice on Organizing and Carrying out Circular Economy Demonstration Pilots (Second Batch).” The second batch of the national pilot projects was launched, including 1 province and 12 cities [16]. Subsequently, a series of laws related to the circular economy was promulgated and implemented, and the development of the circular economy in China entered a legalized track.

2.2. Research Hypotheses

The circular economy city pilot policy focuses on the fundamental transformation of the pattern of economic growth, intending to reduce the consumption of resources, decrease waste discharge, and improve resource productivity. The goal of circular economy pilot policies in cities is to organize economic activities under the principle of “reducing, reusing, and recycling” and plan and build a city of economic efficiency, social harmony, and a virtuous ecological cycle. According to Grossman and Krueger [17]; Brock and Taylor [18]; Auffhammer et al. [19]; and other related literature, the impact of haze and other environmental pollutants mainly includes three aspects: the scale effect, the structure effect, and the technology effect. Therefore, this paper argues that the pilot policies on the circular economy can affect air quality through optimizing industrial structures (the structure effect), reducing energy consumption per unit of GDP (the scale effect), and promoting technological progress (the technology effect).

Firstly, the pilot policy on circular economy cities enhances air quality by optimizing the structure effect. The structure effect refers to the pollution density of production activities, which directly affects environmental quality. The more concentrated the production activities are, the more intensive the pollution becomes, which directly influences environmental quality. In other words, in transforming the industrial structure from primary industry to secondary industry and then to tertiary industry, environmental quality is first reduced and then improved [20].

Specifically, the circular economy is essentially an ecological economy, which requires using ecological laws to guide the economic activities of human society and reconstruct the economic system according to the laws of energy transformation and material circulation in natural ecosystems. As far as the relationship between circular economy and industrial structure optimization is concerned, first of all, the principle of reduction in circular economy requires that the goal of improving resource utilization is to promote the development of modern service industries, high-tech industries, and environmental protection industries, thereby reducing pollution per the unit output value [21]. Then, the recycling principle of the circular economy will prolong the service life of products and promote the development of after-sales services such as repair, maintenance, and renovation [22]. Finally, the recycling principle of circular economy will strengthen the recycling of various wastes [23], comprehensively exploit resources, and promote the development of the packaging industry and other producer services. Taking the packaging industry as one of the productive service industries as an example, since it has that are primarily disposable, about 80% of the packaging in China changes into waste after one-time use. The circular economy aims to efficiently utilize and recycle resources, and most of the various products in the packaging industry can be recycled after being discarded. After treatment, they can be recycled into new products to achieve a win-win situation for economic and environmental benefits [24].

Moreover, the circular economy will stimulate the development of consumer service industries such as the horse racing industry [25]. Therefore, a circular economy promotes advanced industrial structure and optimizes and upgrades traditional service industry to a modern service industry, creating a modern service industry with minimal pollution emissions and achieving an advanced industrial structure conducive to improving air quality.

Nonetheless, the rapid development of China's economy cannot be separated from the support of heavy industry. The current development model of heavy industry in China produces high emissions of pollutants and exploits resources inefficiently. Furthermore, the industrial structure of relying on heavy industry to develop the economy has seriously affected the air quality of China's cities. The rationalization of the industrial structure is a dynamic process of synergizing and strengthening the coordination and correlation between industries. It reflects whether resources are being exploited rationally and indicates the coordination between industries. First, the circular economy requires the integrity and coordination of the industrial structure and environmental protection. Therefore, we posit the following:

Hypothesis 1 .

Circular economy cities improve air quality through (a) advanced industrial structure and (b) rational industrial structure.

Second, the construction of circular economy pilot cities can improve air quality by reducing electricity consumption per unit of GDP, that is, via the scale effect. The scale effect refers to the fact that economic development brings more significant economic activities and demand for resources and energy, resulting in higher emissions of pollutants and thus adverse effects on the environment. The atmospheric environment correlates closely with the emissions of pollutants and energy consumption. In fact, the rapid consumption of energy is one of the leading causes of urban atmospheric pollution [26]. Therefore, the circular economy development model of “reduction” and “low energy consumption” has become an inevitable and realistic choice. A circular economy leads to the lowest possible consumption of resources, reduces emissions, and provides the greatest possible economic and environmental benefits so that the material circulation process of the economic system and the natural ecosystem mutually promote and coordinate each other. Therefore, this paper proposes the following hypothesis:

Hypothesis 2 .

Circular economy cities reduce electricity consumption per unit of GDP.

Finally, the construction of circular economy cities can enhance air quality through the technology effect. The basic principle of and the driving force behind the development of a circular economy is to accelerate technological progress, an essential means to realize the coordinated development of the environment and the economy. Through its policy-oriented function, the circular economy can promote many potential and wide-ranging energy conservation and alternative technologies, zero-emission technologies, and technologies for pollution reduction. Meanwhile, the advancement of China's current modernization requires the development of energy and heavy industry, which leads to a series of energy consumption and pollution problems. The construction of resource-saving and environmentally friendly cities requires accelerated technological progress. According to an elaboration of classic growth theory, continuous technological progress is the key to achieving long-term economic growth, and the growth of total factor productivity is an essential manifestation of technological progress [27]. In neoclassical economic growth theory, technological progress is a broad concept, often equivalent to the improvement in total factor productivity. However, technological progress is different from the change in total factor productivity in economics and management, which is a narrow concept. This work uses the total factor productivity index calculated by data envelopment analysis (DEA) (Malmquist) to measure technological progress [28] and to investigate whether the construction of circular economy cities can improve air quality through technological progress. Therefore, on the basis of the above, we propose:

Hypothesis 3 .

Circular economy cities improve air quality through technological innovation.

3. Methodology

In this section, we describe the model, methods, and data used in the investigation.

3.1. Baseline Model

The question explored in this work is whether constructing a circular economy city can reduce the emissions of air pollutants and improve air quality. To this end, this study regards the policy on circular economy pilot cities as a quasi-natural experiment and thus recognizes and evaluates its effects through the DID approach, which can solve most of the endogenous problems encountered in the related literature [29]. The current research considers 32 cities in the first batch of the pilots in 2005 and 26 cities in the second batch of the pilots in 2007 to be the treatment group and uses the remaining 57 cities as the control group to compare the difference in the air quality of the pilot and unpiloted cities before and after implementing the policy, as shown in Figure 1. This work follows the practices of Gehrsitz [30]; Cheng et al. [31]; and Song et al. [32] and specifies the following measurement model:where i indicates the city, t denotes the year, Y is the air quality of a city, and Treat represents a dummy variable reflecting the status of a circular economy pilot city; the value of Treat is one if a city is a pilot, otherwise it equals zero. X′ is a control variable. This model also includes the city-fixed effect (δ), the year-fixed effect (μ), and an error term (ε). β is the coefficient on which this paper focuses most; it indicates the impact of the construction of the circular economy pilot cities on air quality. A significantly negative β value indicates that the pilot policy on circular economy cities is effective; on the contrary, a positive β value implies that the pilot policy on circular economy cities negligibly affects the improvement in air quality.

Figure 1

Pilot cities and unpiloted cities of circular economy in China. Note: the Heihe-Tengchong Line was proposed by Chinese geographer Hu [33] and is a demarcation line of population density extending from Heihe in Heilongjiang province to Tengchong in Yunnan province, from the northeast to the southwest of China. Its formation and development are closely related to natural conditions such as terrain, landform, climate, hydrology, and other factors correlated closely with social, economic, and human activities.

It is necessary to satisfy the parallel trend test to ensure the effectiveness of the DID method, which indicates that the trends of variation in air quality in the circular economy pilot cities (the treatment group) and in the unpiloted cities (the control group) are parallel. On the basis of the works of Jacobson et al. [34]; Moser and Voena [35]; Li et al. [36]; and Zhang [37]; this paper analyzes the parallel trend hypothesis. Since the pilot policy on the circular economy was launched in 2005 and 2007 separately, the status of a specific city in the control group or the experimental group varies. Therefore, it is more reasonable to use the event analysis method for testing rather than draw the average trend chart between the experimental and control groups. Thus, the following calculation model is developed:where i indicates the city, t denotes the year, Y is the air quality of a city; V is a virtual variable indicating that t0 is the first year when city i implements the policy on the circular economy, and k represents the kth year after starting the circular economy pilot. k < 0 implies the years before the pilot policy on the circular economy is launched, and k > 0 indicates the years after the pilot policy on the circular economy is launched. The current work examines the dynamic effects of the pilot policy on the circular economy city four years before and four years after the policy was launched. The remaining variables in (2) are defined the same as those presented in (1). This paper focuses on parameter β, which represents the impact of circular economy cities on air quality before and after the pilot policy was launched. From the assumption of the standard trend test, it can be inferred that when k < 0, parameter β does not significantly differ from zero, indicating that this paper fulfills the requirements of the assumption of the standard trend test.

Estimated results are affected by other unobservable urban characteristics that change with time when using the DID method to identify the hypothesis. Although this paper adds a series of control variables, including indicators at the characteristic city level and at the weather level, it is impossible to control for all characteristics, especially unobservable ones. Therefore, to eliminate the influence of legacy variables, this work conducts an indirect placebo test based on the random selection of the circular economy pilot cities. The following calculation model is developed:where Q represents all of the control variables and the fixed effects, and ω indicates the influence of the unobserved factors on the explained variables.

We also judge the robustness of the primary outcomes related to confounding effects derived from unobservable variables utilizing a matched sample of observations, i.e., propensity score matching (PSM). We employ the nearest neighbor matching algorithm with replacement and caliper. Our difference-in-difference analysis constructs a counterfactual outcome using a set of untreated cities: no circular economic policies are implemented during the observation window period. The intuition behind matching is that the more similar treated and untreated cities are in their observed characteristics, the less likely they will differ in unobserved ways, including bias-inducing factors. Matching methods aim to reduce endogeneity concerns by ensuring comparability between treated and untreated units [38].

In addition, the ideal situation of the DID model is that both the control group and the experimental group are randomly selected. However, the scope of pilot cities is not randomly selected since many factors such as the geographical location and economic and social development levels are taken into account when selecting pilot cities. Moreover, the differences between the cities have diverse impacts on the urban environment over time, so it is difficult to guarantee the accuracy of the results.

For this reason, we attempt to control the above influences and then investigate whether the conclusion still holds. Referring to the practices of Zhang [37] and Song et al. [32]; this work adds the cross-term of the benchmark variable and the linear trend of time to the regression as follows:where i represents a city, and O′ indicates the inherent characteristics of the city, such as the geographic location and the original socioeconomic characteristics. The proxy variables of these prerequisite factors identified in this paper are the capital cities, the cities piloted for the “two-control areas” in 1998, and the cities in special economic zones. trend represents a linear trend over time, so O′ × trend uses the linear trend to control the impact of the original differences between the cities on air quality, which reduces the deviation caused by the nonrandom selection of the pilot cities and the unpiloted cities.

The variation in air quality correlates closely with urban meteorological conditions, geographic location, and economic scale [32]. The similar differences between the cities may lead to various effects after their respective policies are implemented. Thus, this paper further examines spatial differences in the impact of the pilots on air quality from three specific aspects in this section. It should be noted that the heterogeneity analysis does not have causal interpretations but helps understand the channels through which circular economy pilot policies in cities affect air quality. First, according to the characteristics of the climatic zones, we define three subsample cities: the temperate monsoon climate, the temperate continental climate, and the subtropical monsoon climate. There are very few cities in other climatic zones which do not constitute a statistical condition, so we mainly analyze the cities in the three climatic zones mentioned above. Second, according to the geographical location, the cities are divided into the east, the middle (central), and the west. In addition, the subsample cities are divided according to the level of per capita GDP.

Furthermore, what is the specific transmission mechanism of circular economy city pilot policy to improve air quality? In other words, what are the key variables affected by the circular economy urban pilot policies to change air pollution levels? Referring to the practices of Gelbach [39] and Heckman et al.'s [40] method, we construct the following model:where Media represents the intermediary variable, and V′ denotes a set of control variables consistent with the benchmark regression. Model (5) is the regression equation between virtual variables and intermediary variables in the pilot cities of circular economy, and Model (6) is the regression equation between virtual variables and intermediary variables in the pilot cities of circular economy and PM2.5. In the basic regression, if β1, γ1, and γ2 are all significant, it can be predicted that Media plays a partial mediating role in improving air quality in the pilot cities of circular economy.

3.2. Data Description and Preliminary Statistical Description

The data on the explained variable for air quality originate from the world density map in the period from 1998 to 2016, jointly published by the Center for Socio-Economic Data and Application (SEDAC) of Columbia University's International Earth Science Information Network (CIESIN) and the United States Atmospheric Composition Group. The raster data cover the information on Earth pollution from 70° north latitude to 60° south latitude, with an observation accuracy of 0.5° × 0.5°. On the basis of the raster data and the methods of Li and Zhang [41]; this work uses ArcGIS to consider the average value of the city administrative unit and the concentration of PM2.5 emissions from the city and generates continuous and complete data on PM2.5 emissions from 2003 to 2016, along with the annual maximum index of PM2.5. The annual maximum pollution index was further tested for the robustness of the model.

The core explanatory variable is the circular economy pilot city. The value equals one if the city implements the circular economy pilot in the current year and later, otherwise it equals zero. Since the pilot policy on circular economy cities was implemented in two batches separately, in 2005 and 2007, the lists of the two pilots overlap. Thus, this work uses the method of Zhang [37] regarding both provinces and cities under its jurisdiction as the pilots.

The climate data were obtained from the 2345 Weather Network and the National Climate Data Center, including the average wind speed (m/s), the number of sunshine hours (h), and average air pressure (hPa).

This paper selects the indicators of city-level energy consumption per unit of GDP, advanced industrial structure, rationalized production structure, and technical progress to analyze the specific impact mechanism. Among them, the structure effect is represented by an index of advanced industrial structure and rationalized production structure, the scale effect is represented by an index of energy consumption per unit GDP, and the technology effect is represented by an index of technical progress. The primary data originate from the statistical yearbooks of various provinces and cities, the China Energy Statistical Yearbook, and statistical bulletins. The current study employs a tertiary industry to account for the proportion of GDP to measure the degree of advanced industrial structure. The formula for calculating energy consumption per unit of GDP is defined aswhere i, t, and j denote the city, year, and industry, respectively; Energy represents the total energy consumption in period t of region i (metric tons of standard coal); GDP indicates domestic (regional) GDP in period t of region i (100 million yuan).

Moreover, this work draws on the Theil index to measure the degree of the rationalization of industrial structure in each city [42]. The index has the prominent properties of considering the structural deviations of the output value and the employment of the different industries and the various economic statuses of each industry. The specific calculation formula is given bywhere θ represents the proportion of the nth industry in region i to regional GDP in period t, and ω′ indicates the proportion of employees in the nth industry in region i to total employed persons in period t. The Theil index reflects the output value structure and personnel employment structure of three primary industries in China. A zero value indicates that the industrial structure is at an equilibrium level; otherwise, the industrial structure deviates from the equilibrium, and the mean industrial structure is unreasonable.

This paper refers to the method of Shao and Xu [27] to develop a total factor productivity index by using GDP as the output indicator (y) and by employing the labor force (L), energy consumption (S), and capital stock (K) as the inputs. The total factor productivity index is utilized to measure technological progress and is expressed inwhere x ∈ R+ and y ∈ R+, respectively, represent an (N × 1)-dimensional input vector and a (K × 1)-dimensional output vector in period t. Production technology in period t is defined by the set of the production possibilities given in (1), and D(x, y)=inf{∅>0 : (x, y/∅) ∈ T} denotes the output distance function; inf indicates the maximum lower bound of the set; subscript o denotes the use of an analysis model based on the output perspective.

The data on the control variables are obtained from official statistics such as the Statistical Yearbook of China's Urban Construction and City Statistical Yearbooks. The control variables include industrial sulfur dioxide emissions, emissions of industrial smoke and dust, the treatment rate of domestic sewage, the rate of the comprehensive utilization of industrial solid waste, the rate of the harmless treatment of the domestic garbage, the rate of the innocuous treatment of domestic garbage, the industrial wastewater discharge, the green coverage in the built-up areas, the actual foreign investment, the total industrial output value of the enterprises above the designated size (10,000 Yuan), the number of the registered unemployed in the urban areas at the end of the year, the population density, the number of public automobiles and electric vehicles per 10,000 people, and the proportion of the secondary industry in GDP. Table 1 tabulates the statistical description of the above variables.

Table 1

The descriptive statistics for the model variables.

Variables	Obs.	Pilot city		Unpiloted city
		Mean	Std. dev.	Mean	Std. dev.
Air quality
PM2.5 (μg/ m3)	1610	64.06	23.22	51.01	20.47
Climate data
Average wind speed (m/s)	1610	2.23	0.59	1.93	0.92
Sunshine hours (h)	1610	5.75	1.26	4.94	1.37
Average air pressure (hPa)	1610	4.99	0.02	4.99	0.03
City characteristic data
The proportion of the secondary industry in GDP	1608	52.51	9.97	48.38	10.01
Industrial wastewater discharge (10 thousand tons)	1606	3.85	0.50	3.68	0.47
Industrial sulfur dioxide emissions (tons)	1604	4.74	0.44	4.48	0.52
Emissions of industrial smoke and dust (tons)	1602	4.37	0.41	4.11	0.50
Rate of comprehensive utilization of industrial solid waste	1588	82.18	39.59	80.95	19.76
Treatment rate of domestic sewage	1545	72.19	23.45	65.23	26.71
Rate of harmless treatment of domestic garbage	1530	88.18	20.10	79.85	26.73
Green coverage area in built-up areas (hectares)	1606	3.66	0.49	3.41	0.47
Actual foreign investment (10 thousand dollars)	1592	4.57	0.93	4.16	0.87
The total industrial output value of enterprises (10 thousand yuan)	1607	6.99	0.67	6.60	0.75
Number of urban unemployed registered (person)	1601	4.38	0.41	4.30	0.36
Population density (person/km2)	1491	2.64	0.35	2.54	0.37
Number of public automobiles and electric vehicles per 10,000 people	1609	9.91	12.25	7.85	9.77
Technology progress	1610	0.93	0.15	0.926	0.15
The proportion of the tertiary industry in GDP	1610	38.41	10.75	36.95	8.69
Industrial structure rationalization	1610	–4.98	86.89	–1.45	52.93
Energy consumption per unit of GDP (ton of standard coal/100 million yuan) (log)	1610	3.99	0.26	4.01	0.22

Source: the data on air quality originate from the world density map; the weather data come from the National Climatic Data Center; the China Energy Statistical Yearbook calculates energy consumption per unit of GDP; other city characteristic variables are from the Statistical Yearbook of Cities.

4. Empirical Estimation and Results

Using the data on 115 cities across China from 2003 to 2016, we utilize the DID method to empirically analyze the impact of circular economy city pilot policy on air pollution and conduct the related tests. We estimate the heterogeneity of circular economy city effects on air quality and perform event analysis, the placebo test, and a series of robustness tests. Finally, we identify the mechanisms influencing air pollution reduction and formally test the hypotheses.

4.1. Dynamic Effect Test: Event Study Designs

A prerequisite for using the DID model is that the treated and control groups must maintain the same time trend before policy implementation. We used the event study method to estimate the dynamic effects by generating the interaction terms between the time dummy variables and the group dummy variables. Figure 2 delineates the estimated value of parameter β at a 95% confidence level. The vertical dotted line represents the year when the policy was implemented. The x-axis indicates the number of years before and after the circular economy city pilot, and the y-axis denotes the difference in the changes in PM2.5 levels. It can be seen that the estimated value of parameter β cannot reject the null hypothesis, indicating that before implementing the pilot policy, the indicator of the PM2.5 emissions in the pilot cities is similar to that in the unpiloted cities; thus, this demonstrates that the DID method employed herein satisfies the dynamic effect test. Therefore, compared with the control group, the treatment group changed significantly after 2005, which is due to implementing the circular economy pilot city policy rather than previous differences.

Figure 2

Dynamic effect test. Note: the vertical line represents the 95% confidence level of each point.

4.2. Basic Results

Table 2 tabulates the baseline regression results for the impact of the pilot cities on air quality. Columns 1 and 2 present the estimation results of all the cities, and Columns 3 and 4 show the estimation results except for the municipalities; Columns 5 and 6 list the estimation results of the ordinary cities. In other words, based on Columns 3 and 4, Columns 5 and 6 further remove the cities and the provincial capitals separately listed in the National Social and Economic Development Plan. Columns 1, 3, and 5 consider the year-fixed effects and the city-fixed effects, and Columns 2, 4, and 6 take the weather control variables and the other control variables into account. Therefore, after controlling for the city-fixed effect and the year-fixed effect, the estimated coefficient of the circular economy urban pilot is negative and significant regardless of whether the model contains control variables, indicating that implementing the pilot policy reduces the emissions of air pollutants and helps enhance air quality.

Table 2

Baseline regression results for the impact of circular economy pilot cities on air quality (PM2.5 in μg/m3).

Variables	Air quality
	(1)	(2)	(3)	(4)	(5)	(6)
treatit	−1.2573∗∗	−1.6823∗∗∗	−1.3529∗∗	−1.7831∗∗∗	−1.4101∗∗	−1.8027∗∗∗
	(0.5665)	(0.5990)	(0.5811)	(0.6167)	(0.6391)	(0.6683)
Weather control variables	No	Yes	No	Yes	No	Yes
City control variables	No	Yes	No	Yes	No	Yes
City-fixed effects	Yes	Yes	Yes	Yes	Yes	Yes
Year-fixed effects	Yes	Yes	Yes	Yes	Yes	Yes
Observations	1610	1608	1554	1552	1274	1272
R 2	0.4397	0.4574	0.4371	0.4572	0.4366	0.4595

Note: (1) The weather control variables include the average wind speed, the sunshine hour, and the average air pressure index. (2) The city control variables include the industrial sulfur dioxide emissions, the emissions of the industrial smoke and dust, the treatment rate of the domestic sewage, the rate of the comprehensive utilization of the industrial solid waste, the rate of the harmless treatment of the domestic garbage, the rate of the innocuous treatment of the domestic garbage, the industrial wastewater discharge, the green coverage in the built-up areas, the actual foreign investment, the total industrial output value of the enterprises above the designated size, the number of the registered unemployed in the urban areas at the end of the year, the population density, the number of the public automobiles and electric vehicles per 10,000 people, and the proportion of the secondary industry in GDP. (3) Robust t-values are stated in parentheses below coefficients and clustered by city level. (4) The symbols , , and represent a significance level of 10%, 5%, and 1%, respectively.

Regarding the economic significance of the estimated coefficients for the circular economy cities, compared with the unpiloted cities, it is clear that the pilot cities markedly reduce PM2.5 levels by 1.68 μg/m3 ceteris paribus. The estimated coefficient of the benchmark model is the average treatment effect for a total of 12 years from 2005 to 2016. Implementing the pilot policy on circular economy cities reduces the pollution index by 14% each year. Meanwhile, according to the data, the average PM2.5 in the sample cities is 57.59 μg/m3, indicating that the construction of the circular economy pilot cities decreases a city's PM2.5 by about 2.92%.

4.3. Placebo Test

Although the above demonstrates that constructing circular economy pilot cities achieves a preliminary air pollution control effect, this result may still be disturbed by omitted variables and self-selection. Thus, a placebo test is required to verify the reliability of the DID identification strategy employed herein. A group of cities was randomly selected as the control group and the experimental group in the sample, and the selection was repeated 1,000 times; the regression was also performed based on model (1): Y = α + βTreat + X′γ + δ + μ + ε. The kernel density distribution in Figure 3 reveals that the t-values obtained based on the random samples are normally distributed near zero, and the p-values are all higher than 0.1, implying that the pilot cities used in the 1,000 random samplings have an insignificant effect. Therefore, the policy effect of circular economy pilot city construction on PM2.5 levels is not disturbed by omitted variables.

Figure 3

The kernel density distribution.

4.4. How Robust Are These Findings?

Despite using the best available multiperiod data set, we may not be able to rule out the possibility that implementing and not implementing circular economy policy units experienced differential outcomes because of selection. Hence, we report on numerous checks to see how our essential findings are affected.

First, Table 3 lists the regression results. Column 1 is the year-by-year matching result, and Columns 2–4 represent the results of neighboring 1 : 1 matching, neighboring 1 : 2 matching, and neighboring 1 : 3 matching, respectively. The estimated coefficient of the circular economy city pilots is between −1.3112 and −1.9550, which passes at least the 10% significance level test. The estimation results in Column 1 are consistent with the benchmark regression results, and, after alleviating the endogenous effects, the reverse effect of circular economy pilot policies on air quality is still significant.

Table 3

The estimation results based on the PSM-DID method.

Variables	Air quality
	Year-by-year matching	Neighboring 1 : 1 matching	Neighboring 1 : 2 matching	Neighboring 1 : 3 matching
	(1)	(2)	(3)	(4)
treatit	−1.6703∗∗	−1.9550∗∗	−1.8199∗∗	−1.3112∗
	(0.7023)	(0.9673)	(0.8157)	(0.7706)
Weather control variables	Yes	Yes	Yes	Yes
City control variables	Yes	Yes	Yes	Yes
City-fixed effects	Yes	Yes	Yes	Yes
Year-fixed effects	Yes	Yes	Yes	Yes
Observation	1226	605	818	953
R 2	0.4790	0.5319	0.5158	0.5084

Note: (1) The matching method in Column 1 is the year-by-year matching, and the matching method in Columns 2–4 is the nearest neighbor matching. (2) The control variables are the same as the benchmark regression equation. (3) The symbols , , and represent a significance level of 10%, 5%, and 1%, respectively.

The second robustness test examines the influence of the annual maximum value of PM2.5 on the regression results. The above regression uses the annual mean value of PM2.5 as the dependent variable to measure the degree of air pollution. However, the maximum value of pollution may attract people's attention more than the average value. Therefore, here we replace the core explanatory variable with the annual maximum value of PM2.5 as an indicator of measuring the degree of air pollution. The results listed in Column 1 of Table 4 indicate that circular economy city construction reduces the maximum annual pollution value to about 1.54 μg/m3.

Table 4

The heterogeneity results.

Variables	Climatic zone			Economic development level
	Temperate monsoon	Temperate continental	Subtropical monsoon	High	Medium	Low
	(1)	(2)	(3)	(4)	(5)	(6)
treatit	−2.5877∗∗	−4.7858	−0.3426	−1.6634	−0.3895	−3.5551∗∗∗
	(1.1101)	(3.7357)	(0.7564)	(1.0471)	(1.0467)	(1.1852)
Weather control variables	Yes	Yes	Yes	Yes	Yes	Yes
City control variables	Yes	Yes	Yes	Yes	Yes	Yes
City-fixed effects	Yes	Yes	Yes	Yes	Yes	Yes
Year-fixed effects	Yes	Yes	Yes	Yes	Yes	Yes
Observation	616	97	881	546	531	531
R 2	0.5067	0.7692	0.5912	0.4995	0.4772	0.5064
Variables		Geographical location
		East		Central	West
		(7)		(8)	(9)
treatit		0.4515		−6.3822∗∗∗	−1.5485
		(0.8425)		(1.1188)	(1.2900)
Weather control variables		Yes		Yes	Yes
City control variables		Yes		Yes	Yes
City-fixed effects		Yes		Yes	Yes
Year-fixed effects		Yes		Yes	Yes
Observation		728		531	349
R 2		0.4717		0.5348	0.6906

Note: (1) Robust t-values are stated in parentheses below coefficients and clustered by city level. (2) The symbols , , and represent a significance level of 10%, 5%, and 1%, respectively.(3) Sample cities (1)–(3) are divided into temperate monsoon climate, temperate continental climate, and subtropical monsoon climate, respectively, according to climate zone characteristics. Sample cities (4)–(6) are categorized into high-, medium-, and low-level economic development, respectively, according to the level of per capita GDP, and sample cities (7)–(9) are divided into eastern, central, and western cities, respectively, according to their geographical locations.

The third robustness test considers the impact of the regression results after incorporating the other benchmark factors into the pilot cities. Column 2 of Table 5 presents the estimated results after adding the other benchmark variables. The coefficient of the cross term is still significantly negative, and the coefficients before the added benchmark variable and the cross term of the linear trend of time are both very small and negligible, implying that the inherent interregional differences do not cause a bias in the estimated results.

Table 5

The regression results of the robustness tests.

Variables	The annual maximum value of PM2.5	Other benchmark factors	Heihe-Tengchong line	Other environmental policies
	(1)	(2)	(3)	(4)
treatit	−1.5384∗∗	−1.7324∗∗∗	−1.6798∗∗∗	−1.6712∗∗∗∗
	(0.7305)	(0.6028)	(0.5994)	(0.5991)
“Two-control area” × time trend		−0.1202
		(0.0734)
Capital cities × time trend		−0.0923
		(0.0996)
Special economic zone × time trend		−0.0519
		(0.2134)
Weather control variables	Yes	Yes	Yes	Yes
City control variables	Yes	Yes	Yes	Yes
City-fixed effects	Yes	Yes	Yes	Yes
Year-fixed effects	Yes	Yes	Yes	Yes
Observation	1608	1608	1608	1608
R 2	0.4185	0.4595	0.4582	0.458

Note: (1) The regression result in Column 1 is the annual maximum value of PM2.5, and the regression results in Columns 2–4 are PM2.5PM2.5. (2) Column 1 controls the annual maximum value of PM2.5 of the city. (3) Column 2 further controls the time trend of the original characteristics of the city on the basis of the baseline regression. The characteristics of the city include whether the city is a pilot city of the “dual control area,” a provincial capital city, or a particular economic zone city. (4) Column 3 controls the influence of the difference between the left and right sides of Heihe-Tengchong Line on the estimation. (5) Column 4 controls other location-based environmental policies. (6) The control variables are the same as the benchmark regression equation. (7) The symbols , , and represent a significance level of 10%, 5%, and 1%, respectively.

The fourth robustness test takes account of the influence of geographical location and demographic factors on the estimated results. A variable that can comprehensively consider spatial differences in population distribution, regional differences in the resource and environment base, and the characteristics of the man-land relationship in China is the Heihe-Tengchong Line. The majority of the circular economy pilot cities are located on the right side of the Heihe-Tengchong line, and there are apparent differences between the left and right sides of the Heihe-Tengchong line. Therefore, the distribution of the samples may bias the estimation of the results. Hence, this work further adds B′ × trend, which is a cross term between a dummy variable on the left and right sides of the Heihe-Tengchong line and the time trend to control for the influence of factors related to the Heihe-Tengchong line on the estimated results in the time trend. The results tabulated in Column 3 of Table 4 indicate that the principal estimated coefficients are basically consistent with the estimated results in Table 2, implying that the estimated results are not affected by the geographic location.

The final robustness test examines the influence of other environmental policies implemented simultaneously on the regression results. Since there are many environmental policies in other regions during the sampling period, and this paper cannot exhaustively list all of the policies, we select representative large-scale environmental policies: the “low-carbon city” pilot policy, the policy on new-energy vehicle city pilots implemented in 2010, and the policies on limiting the emissions of particular air pollutants implemented in 2013. According to equation (8), this part further employs the cross term between these three dummy variables of the policies mentioned above and the linear trend of time to control for the impact of the other regional-based policies regarding the environment on the results. The results in Column 4 of Table 5 demonstrate that the principal estimated coefficients are still consistent with the benchmark results in Table 2, indicating that the other environmental policies implemented in the sampling period do not affect the estimated results.

4.5. Heterogeneity Analysis

The above regression results demonstrate that climate conditions affect the efficiency of air pollution diffusion, while the effect of the circular economy on the improvement in air quality is more significant in the subsamples of the temperate monsoon climate. Meanwhile, air quality in central cities and those with a low level of economic development improves markedly.

4.6. Mechanism Analysis

Column 1 in Table 6 is listed as the baseline regression result. The result demonstrates that the coefficient of air quality estimated by the pilot policies of circular economy cities is −1.682 and significant at 1% level, meeting the prerequisite requirements of mechanism analysis.

Table 6

The results of the mechanism analysis.

Variables	Structure effect
	Air quality	Advancement of the industrial structure	Air quality	Industrial structure rationalization	Air quality
	(1)	(2)	(3)	(4)	(5)
treatit	−1.682∗∗∗	0.496	−1.615∗	−0.653	−1.833
	(0.599)	(0.405)	(0.863)	(0.996)	(0.234)
Advancement of the industrial structure			−0.026
			(0.108)
Industrial structure rationalization					−5.652
					(3.118)
_cons	−79.011∗	110.861∗∗∗	−76.105	−65.345	−49.545
	(81.352)	(36.390)	(86.305)	(41.236)	(56.921)
Weather control variables	Yes	Yes	Yes	Yes	Yes
City control variables	Yes	Yes	Yes	Yes	Yes
City-fixed effects	Yes	Yes	Yes	Yes	Yes
Year-fixed effects	Yes	Yes	Yes	Yes	Yes
Observation	1608	1608	1608	1608	1608
R 2	0.457	0.849	0.457	0.029	0.011
Variables	Scale effect		Technology effect
	Energy consumption per unit of GDP	Air quality	Technological progress		Air quality
	(6)	(7)	(8)		(9)
treatit	−0.044∗∗∗	−1.819∗∗	0.001		0.988
	(0.017)	(0.843)	(0.009)		(0.760)
Energy consumption per unit of GDP		−4.310∗
		(2.394)
Technological progress					3.622
					(1.543)
_cons	4.047∗∗∗	−61.572∗	56.345		39.298
	(1.692)	(85.531)	(35.451)		(51.332)
Weather control variables	Yes	Yes	Yes		Yes
City control variables	Yes	Yes	Yes		Yes
City-fixed effects	Yes	Yes	Yes		Yes
Year-fixed effects	Yes	Yes	Yes		Yes
Observation	1608	1608	1608		1608
R 2	0.756	0.459	0.122		0.168

Note: (1) The control variables are the same as the benchmark regression equation. (2) The symbols , , and represent a significance level of 10%, 5%, and 1%, respectively.

Columns (2)–(5) indicate that the pilot policies on circular economy cities do not appear to emerge significantly on advanced industrial structure and rationalization of industrial structure, and neither of them has a significant impact on air quality, indicating that the pilot policies on the circular economy cities have failed to induce a structure effect to improve air quality. Hence, hypothesis 1 is not supported.

Columns (6)–(7) demonstrate that the impact of the pilot policies on circular economy cities with respect to the energy consumption per unit of GDP is negative and significant at the 1% level, while the energy consumption per unit of GDP on air quality is negative and significant at the 5% level, indicating that circular economy urban pilot policy can induce a scale effect to reduce air pollution. Thus, hypothesis 2 is supported.

Column 4 demonstrates that the pilot policy has an insignificant effect on technological progress, indicating that in the short term, the construction of circular economy cities does not affect air quality through progress in science and technology. Hence, hypothesis 3 is not supported.

In summary, the above results confirm that the pilot cities are associated with a significant decrease in the emissions of pollutants by inducing a scale effect, thereby enhancing air quality. However, there is not sufficient evidence that the pilot policy on circular economy cities improves air quality through a technology effect and a structure effect in the short term.

5. Discussions and Implications

With the adoption of the 2030 Sustainable Development Goals by the United Nations and the adoption of a new agreement on global climate change at the Paris Conference, countries around the world are attaching greater importance to developing a circular economy [13, 14]. However, there is limited evidence in the literature to foresee the impacts of implementing circular economy city construction on air quality. To fill this gap in the literature, we study the effect of China's national circular economy pilot policies on air quality.

Our study contributes to the growing body of literature on the interactions between the formal environmental regulations of China's government and pollutant emissions. While previous studies have shown that the development of a circular economy has a positive effect in urban areas, the research focus does not directly encapsulate the effect of the policy on air quality [7, 43]. We demonstrate for the first time the impact of building a circular economy city on air quality through a novel analytical model. The concentration of PM2.5 in the pilot cities is reduced by 2.92% compared to the unpiloted cities, which implies that the air quality of the pilot cities is substantially enhanced after the policy on circular economy cities is implemented, confirming the effectiveness of the policy on pollution reduction.

Regional differences in environmental regulations in previous studies via the environmental policies implemented by the government are more prominent in the eastern and developed regions than in other regions. However, exploring the heterogeneity of the impact of the pilot policy on air quality, our analysis demonstrates that the effect is more considerable in the subsample of cities with a temperate monsoon climate, and the enhancement of air quality is more significant in cities located in the central region and cities with a low level of economic development. The possible reason for this finding is that the cities with a temperate monsoon climate are primarily distributed in areas with a low level of economic development and are geographically located in the middle of China. Compared with the cities located in the east with a high level of economic development, these cities have relatively low emissions of air pollutants, low population density, and low energy consumption, so the lock-in effect of the air pollutants is weaker. As a result, the cities in the middle of China with a low level of economic development respond more quickly to the policies on the circular economy. In other words, the pilot policy enhances air quality more effectively in the cities located in the central part of the country with a low level of economic development.

We developed our research hypotheses by drawing upon the prior literature on environmental economics [17-19]. The mechanism analysis supports our second research hypotheses. The mechanism analysis demonstrates that the circular economy city pilot policy can reduce air pollution and improve air quality by decreasing energy consumption per unit of GDP. However, there is not sufficient evidence that the pilot policy on circular economy cities improves air quality through technological progress advancement of the industrial structure and industrial structure rationalization in the short term. The circular economy pilot policy has no significant impact on the structure effect possibly because China's industrial structures have severe structural imbalances, structural problems are prominent, and the urban industrial structure does not follow the local economic development level and consumer demand. The structure, the essential quality of the labor force, and the resource endowment are adjusted rationally, and economic growth is overly dependent on this unreasonable industrial structure, indicating that the rationalized development of the industrial structure may not yet fully utilize its PM2.5 emission reduction. Thus, in promoting the advanced development of the industrial structure, more attention should be paid to the rational development of industrial structures, and the effect of the rationalization of industrial structures on PM2.5 pollution reduction should be prioritized. The circular economy pilot policy has no marked impact on technological progress possibly because technological progress mainly comes from original innovation and basic innovation activities.

On the one hand, the application of innovation results to enterprise production practices often has a long lag, which affects the technological level of enterprises since the improvement in energy and management efficiency are difficult to achieve in a short period. On the other hand, using innovation results in enterprise production practices will often make a leap in developing new technologies and products, which will give rise to energy rebound effects. As a result, the energy-saving effects and pollutant emission reduction impacts produced by the improvement in energy efficiency at the technical level are eroded by the new round of energy consumption and pollutant emissions brought about by capital deepening and output growth. Thus, the promotion effect is relatively weak [44].

According to the mechanism analysis, the local government could establish a reasonable and orderly industrial structure based on local industrial characteristics to further optimize the allocation of resources and enhance the relationship between industries so that the rationalization of the industrial structure becomes an important channel for improving air quality. Finally, the government could strengthen the independent development and innovation of common and key technologies and could promote the technologies for pollution control and cleaner production. It may be highlighted that the government could pay more attention to breaking through technical bottlenecks in environmental protection and could develop technologies for the comprehensive prevention and control of air pollution.

This research has limitations, some of which represent future research opportunities. Our study only explored the net effect of circular economy pilot policies on air pollution. Firstly, air pollution significantly affects human health, and pollution control results in substantial benefits. Therefore, future studies can further assess the health benefits of circular economy urban pilot policies based on our findings. Secondly, air pollution leads to health problems and economic losses worldwide. Future studies can further evaluate the economic benefits of pilot policies on circular economy cities.