This paper uses the panel data of 280 prefecture-level cities in China from 2010 to 2020 to explore the impact and mechanism of ERTP on TFEE. The contribution of this paper is as follows. Firstly, theoretically, this study explores the impact of ERTP on TFEE from the perspective of market-based incentive-based environmental regulation. This not only provides a new theoretical framework for understanding the complex effects of market-based incentive-based environmental regulation, but also expands the application of Coasean property rights theory in the energy sector. Second, methodologically, this study develops a method for measuring urban energy consumption based on satellite nighttime light data and incorporates a non-radial super slacks-based measurement (Super-SBM) model to accurately measure city-level TFEE, effectively addressing the data acquisition difficulties and measurement biases inherent in traditional methods. Third, in terms of policy practice, this study finds that ERTP can significantly improve TFEE in pilot cities, with the policy effect being more pronounced in coastal, high-tier, and resource-rich cities. This provides a scientific basis for policymakers to implement differentiated regional energy policies. Fourth, the negative spatial spillover effects identified in this study reveal the uneven allocation of resources across regions under market-based incentive-based environmental regulation, providing important theoretical guidance and empirical evidence for policymakers in designing regional coordination mechanisms.
As a core issue in the field of energy economy, TFEE has broken through the limitations of traditional single factor efficiency in its measurement framework. TFEE is based on Solow's concept of total factor productivity and introduces the Data Envelopment Analysis (DEA) method (Färe et al., 1994; Honma and Hu, 2014; Zhang et al., 2011). Based on a comprehensive consideration of various input factors such as energy, labor, and capital, the energy efficiency under multiple input and output conditions is systematically characterized by incorporating expected and unexpected outputs for evaluation. Especially in the context of increasing energy and environmental constraints, improving TFEE is seen as the core path to achieving green growth and high-quality development.
From the perspective of influencing factors, factors such as technological innovation, industrial structure, economic openness, and financial development will all have an impact on TFEE. Among them, technological innovation is the core driving force for improving TFEE. Xu et al. (2024) found that digital technology innovation has a more significant effect on improving TFEE in eastern provinces. Lu and Li (2024) found that digital technology innovation mainly enhances TFEE by improving environmental responsibility fulfillment and internal control quality, and has a stronger promoting effect on TFEE of large enterprises and state-owned enterprises. The optimization of industrial structure is an important support for the evolution of TFEE. With the shift of economic focus from high energy consuming and high polluting heavy industries to service industries and strategic emerging industries with higher added value and lower energy intensity, the overall energy efficiency of the economy has significantly improved (Mulder and de Groot, 2012). At the institutional level, there are significant spatial differences in the impact of economic openness and regional market integration on TFEE. Su and Liang (2021) found that due to the high level of economic openness, the improvement of energy productivity in China's coastal areas relies more on market integration to achieve efficient flow and allocation of factor resources, thus matching the high level of openness. Green finance also plays an important role in the improvement of TFEE. Guo et al. (2023) demonstrated that green finance has a spatial spillover effect, which can improve the energy efficiency of local and surrounding areas, and Internet development and environmental regulation are important channels for green finance to further promote energy efficiency.
With the increasingly serious environmental problems, whether environmental regulation can improve TFEE has become a research hotspot in the field of environmental economics.Based on neoclassical economics, scholars believe that environmental regulation increases the cost of corporate pollution control, which has a "countervailing effect" on productive inputs and innovative activities, and thus inhibits the improvement of TFEE (Hancevic, 2016). Some scholars have put forward the opposite view from a dynamic point, arguing that appropriate environmental regulation can not only promote technological innovation, but also produce an "innovation compensation effect", which partially or completely offsets the negative impact of cost-effectiveness, and then promotes the improvement of TFEE. It is known as the "Porter hypothesis" (Porter and Linde, 1995). Many scholars have verified the validity of the "Porter hypothesis" from the perspective of different types of environmental regulation (Song et al., 2023; Wang et al., 2019; Wu and Lin, 2022). In addition, scholars have found a nonlinear relationship between the two [33].
The mechanisms by which different types of environmental regulatory policies affect the goals of "reducing pollution" and "increasing efficiency" also vary (Xie et al., 2017). Command and control environmental regulation policies and market incentive environmental regulation policies are the two mainstream perspectives in current research. Command and control environmental regulation policies mainly refer to the government's mandatory measures such as setting emission standards, technical specifications, and deadline management to directly constrain the environmental behavior of enterprises. Li et al. (2023) pointed out that under restrictive pollution control policies, enterprises often allocate resources to environmental protection facilities at the production front and emission control at the production end to directly reduce pollutant emissions. These pollution control measures not only reduce pollutant emissions, but also bring "compliance costs" to enterprises. However, the 'innovation compensation effect' has failed to compensate for the 'compliance costs' brought about by pollution control, making it difficult for command and control environmental regulation policies to achieve the dual goals of' pollution reduction 'and' efficiency improvement 'simultaneously. Hong et al. (2024) believe that command and control environmental regulation policies can also balance efficiency improvement while ensuring emission reduction effects, and that "pollution reduction" and "efficiency improvement" are not necessarily in conflict. Market incentive based environmental regulation policies rely more on price mechanisms, property rights systems, and other means to guide enterprises to achieve environmental goals through independent technological innovation and energy conservation and emission reduction. Due to their higher flexibility and adaptability, such policies are considered to have more potential in long-term incentives for enterprises to achieve "pollution reduction" and "efficiency improvement" (Wang et al., 2022).
In summary, existing literature has indirectly explored the relationship between environmental policies and TFEE from different theoretical perspectives and regulatory types, but no unified conclusion has been reached yet. Meanwhile, there is relatively little research in academia on ERTP. The existing literatures mainly focus on the indicators allocation of ERTP (Pan and Dong, 2022), energy-saving effects (Che and Wang, 2022), economic effects (Wang et al., 2023), and the connection with policy systems such as carbon emissions trading (Yizhong Wang et al., 2022; Zhang et al., 2022). However, few scholars have studied the impact on TFEE from the perspective of ERTP. Therefore, this article starts from the perspective of ERTP and directly explores the actual impact of ERTP on TFEE, providing theoretical and empirical basis for evaluating its policy performance.
The impact mechanism of ERTP on TFEE is shown in Fig. 1. According to Schumpeter's innovation theory, green technology innovation is a "creative destruction" process of economic development. It breaks the traditional high pollution and high energy consumption production mode by introducing new color processes, green products, and green services, forming new competitive advantages and growth momentum (Tzeng, 2014). However, the distortion of energy factor prices formed with the help of administrative pricing or subsidies has led to an underestimation of energy usage costs, and the lack of intrinsic motivation for enterprises to invest in energy conservation, consumption reduction, and green technology, which has suppressed the enthusiasm for green technology innovation. At the same time, green technology innovation also has a "dual externality" characteristic, where the positive externality of innovative knowledge spillover and the negative externality of pollution emissions often inhibit its development. But the Coase theorem states that as long as property rights are clear and transaction costs are low, market mechanisms can effectively solve externalities and achieve Pareto optimal allocation of resources. Based on this, ERTP establishes tradable property rights for energy use rights, returning the originally distorted energy prices to the market price level that reflects marginal social costs. On the one hand, it corrects the distortion of factor prices, and on the other hand, it enables enterprises to bear the real energy consumption costs and green innovation benefits in market transactions, effectively resolving the "dual externality" dilemma of green technology innovation and promoting enterprises to engage in green technology innovation.
The compliance pressure of ERTP and the additional income obtained through the sale of energy-consuming indicators can encourage enterprises to carry out green technology innovation (GTI), thereby improving the overall technological efficiency of the industry, reducing energy consumption, and thus promoting the improvement of TFEE. According to Porter's hypothesis, moderate environmental regulation can stimulate enterprises to carry out green technology innovation, offset compliance costs through the "innovation compensation effect", and achieve a win-win situation of environmental benefits and efficiency improvement (Porter and Linde, 1995). When the energy consumption of enterprises exceeds the free quota allocated by the government, enterprises can purchase limited energy consumption indicators in the energy-consuming right trading market, which will increase the production cost of enterprises and bring severe energy-saving pressure to enterprises. However, the energy-consuming right trading market can promote the formation of a balanced energy-consuming right trading price, which also provides regulated enterprises with incentives to reduce costs, forcing enterprises to increase technology investment (Porter and Linde, 1995), and promote enterprises to reduce energy consumption through green technology innovation. Enterprises obtain the "innovation compensation effect" and make up for the cost of purchasing energy-consuming indicators and establish cost advantages (G. Du et al., 2021; Hu et al., 2020; Porter and Linde, 1995). With the improvement of green innovation capabilities, TFEE will also be greatly improved (Sun et al., 2019; Wurlod and Noailly, 2018). Enterprises can reduce energy consumption and improve energy efficiency by optimizing production equipment, production processes, and improving resource recycling rates, thereby improving TFEE (Chen et al., 2019). The application of green technology innovation can enable enterprises to provide better green products for the society and guide consumers to green consumption through marketing activities. Consumer demand for green products will in turn promote enterprises to carry out green production, thereby forcing enterprises to transform to clean and green production, and then promote the improvement of TFEE. Thus, this paper proposes the following hypothesis.
H1: ERTP can effectively promote the improvement of green technology innovation capabilities, thereby improving TFEE.
According to the Pareto Clark theorem, as the level of economic development continues to improve, labor will gradually shift from the primary industry to the secondary industry, and then to the tertiary industry. This process is accompanied by the reconfiguration of production factors such as capital and technology, forming the core connotation of industrial structure upgrading. As a market-based environmental regulatory tool, ERTP drives the transformation and upgrading of industrial structure towards green and low-carbon direction (Du et al., 2021).
ERTP mainly works together through the "forcing mechanism" and "guiding mechanism" to upgrade the industrial structure, thereby inducing a "structural dividend" and promoting the concentration of social resources towards low pollution, low-energy consumption, and high value-added industries, thereby achieving sustained improvement in TFEE. ERTP establishes energy use rights as scarce tradable property rights, makes energy use costs explicit, and incorporates them into the marginal cost consideration system of enterprises, promoting high energy consuming enterprises to face real environmental cost pressures. Based on the assumption of rational economic agents, in the face of this endogenous market punishment mechanism of externalities, enterprises will take corresponding measures to reduce energy costs and maintain their competitive position (Chen and Ma, 2021). In highly competitive industries, companies have thin profit margins and are highly sensitive to cost changes. The compliance costs brought by ERTP will directly translate into survival pressure, forcing high energy consuming enterprises to undergo technological transformation or directly exit the market, accelerating the survival of the fittest and the elimination of outdated production capacity. At the same time, low-energy enterprises can gain stronger market competitiveness by leveraging their cost advantages and the benefits brought by energy use rights transactions, thereby amplifying the "incentive guidance" effect of policies. Even in industries with high market concentration, with the increasing improvement of the energy trading market mechanism and the continuous improvement of regulatory systems, policy pressure will gradually be internalized in the business behavior of enterprises. Through mechanism design, it can stimulate the willingness of enterprises to undergo green transformation and promote the industrial structure to continuously move towards a green, intensive, and efficient direction. With the upgrading of the industrial structure, the production factors in the market will be more effectively allocated. With the continuous release of the "industrial structure dividend" (Li and Lin, 2019), social resources such as energy will be reallocated among industrial sectors, promoting the development of low-pollution, low-energy-consumption, high-value-added industries, and improving the ecological efficiency of society (Han et al., 2021), thereby effectively promoting the improvement of TFEE. Thus, this paper proposes hypothesis H2.
H2: ERTP can improve TFEE by promoting industrial structure upgrading.
The spatial spillover effect refers to the non-local impact of a region's behavioral activities and their consequences on other regions in the spatial dimension, usually manifested as the "siphon effect" or "trickle down effect" (Chen and Wang, 2022). From the perspective of spatial economics, regional environmental regulatory policies can induce resource reallocation and industrial redistribution between regions, which not only affects local TFEE, but may also have significant spatial externalities on TFEE in surrounding areas through factor flow, industrial transfer, and policy imitation (Liu et al., 2020).
The implementation of ERTP not only affects the energy usage decisions of local enterprises, but may also trigger changes in the industrial structure between regions, thereby affecting the TFEE of neighboring areas. On the one hand, according to the "pollution paradise hypothesis", when high-energy consuming enterprises face stricter environmental constraints and higher compliance costs, they may shift some of their high-energy consumption production activities to neighboring non-pilot areas with relaxed policies and lower factor costs for the purpose of maximizing profits. The new economic geography theory points out that enterprises will comprehensively consider factors such as production costs, market access, and institutional environment in the process of site selection. The intensity changes of environmental regulations will affect the spatial distribution balance, leading to the relocation of polluting industries. In the "tournament style competition" pattern of local governments in China, in order to attract investment and maintain fiscal and employment growth, some regions will relax environmental constraints, lower factor prices, and form "regulatory depressions", thereby attracting high-energy consuming enterprises to move in (Chen et al., 2018), ultimately leading to an increase in energy consumption in these regions, forming negative spatial spillover effects, and suppressing the improvement of TFEE in surrounding areas. On the other hand, according to the theory of "pollution halo effect", high polluting enterprises may be forced to introduce cleaner production processes, adopt more efficient equipment and technologies in order to adapt to higher environmental standards and regulatory systems in the host region during their outward migration, especially to cities or regions with higher regulatory levels. This may result in positive spillover effects of green technology spillover and environmental performance improvement in the host region. However, considering the current differences in regional environmental governance capabilities in China, financial pressure among local governments, and fierce competition for investment, the "pollution paradise hypothesis" is more common in reality, and its negative externalities have a more significant inhibitory effect on TFEE in neighboring regions. Hypothesis 3 is proposed.
H3: ERTP will not only promote the improvement of TFEE in the region, but also have a negative spatial spillover effect on neighboring regions through the transfer of high-energy-consuming industries.