1. Introduction
China’s economic development has gradually changed from the pursuit of high speed to the pursuit of high quality. Continuous breakthroughs have been made in improving the economic scale and efficiency, and remarkable development accomplishments have been achieved [
1]. However, under the traditional industrial economic development pattern characterized by energy consumption and serious pollution emissions, the accumulation of waste and pollutants beyond the carrying capacity of the natural ecosystem, resulting in serious environmental damage [
2] and resource scarcity and other problems [
3], have become the shackles that slow down the sustainable development of China’s economy [
4,
5]. Environmental pollution affects the ecological balance [
6], hinders the achievement of sustainable development goals, and seriously restricts the high-quality development of China’s economy. At the same time, due to the public goods attribute of the ecological environment and the external diseconomies caused by environmental pollution, the serious environmental pollution problem is difficult to be significantly alleviated and improved through the self-regulation of the market mechanism; based on this, environmental regulation has become an important means to make up for the market failure [
7,
8]. The enactment and implementation of environmental regulation has the potential to mitigate the over-reliance of economic progress on natural resources and ecological sustenance [
9]. Since the 17th National Congress of the Communist Party of China, the Party and the State have unequivocally articulated the imperative of “ecological civilization” construction, integrated environmental governance into the overall framework of national development, and steadfastly constructed the environmental governance system with the participation of multiple bodies, and they have also advocated for the comprehensive establishment of an efficient resource utilization regime and the stringent delineation of responsibilities for ecological environmental conservation [
10,
11], which shows the emphasis on ecological protection and green development, as well as the determination to strengthen the environmental regulation [
12].
The roots of environmental problems are deeply entrenched in the irrationality of the economic development model, and the adjustment and optimization of the industrial structure, as an important component of the economic system, is the link between economic activities and ecological efficiency, which also is the key path to guide the high-quality development of a country’s economy [
13]. Whether the industrial structure is reasonable or not shows the coordination of economic growth [
14,
15]. Some scholars believe that diversified environmental regulation policies can generate double pressure from local government regulation and public opinion, which plays the role of an external binding force and provides a driving mechanism for industrial structure transformation and upgrading [
16], while the promoting effect of environmental regulation tools such as legislation, supervision and economic incentives will be gradually become more prominent with the improvement of the regional economic development level. Therefore, it is necessary to enrich the environmental regulation policy tools and seek precise regulation in the field of the environment, and support the upgrading of the industrial structure [
17]. With the improvement and enhancement of environmental regulation policies, industrial structure, as the target of environmental regulation, can stimulate the expansion of economic scale and the growth of economic benefits through optimization and upgrading, as well as spatial agglomeration effects. This not only facilitates the provision of various public pollution control infrastructures for enterprises within clusters, achieving economies of scale in pollution control, but also fosters the development of specialized environmental industries, offering tailored pollution treatment solutions, thereby reducing per-unit pollution control costs for clustered enterprises [
18], which can help to realize the mutual benefits of environmental protection and sustainable economic development [
19,
20]. Furthermore, industrial structure upgrading can also reduce the excessive dependence on energy consumption by increasing the development and utilization of clean energy, while encouraging clean production and consumption, promoting coal removal and emission reduction [
19], in order to promote the rapid development of the circular economy.
Therefore, under the predicament of economic growth facing enormous environmental challenges, the policies of environmental regulation have been continuously enriched. In this context, it is worth exploring whether environmental regulation has a promoting effect on the performance of the circular economy, as well as the specific mechanism that determines how environmental regulation impacts circular economy performance; it is of great significance in order to realize the compatibility between the protection of environmental interests and the high-quality green development of the economy, as well as to satisfy the people’s demand for a better living environment, and so on.
Regarding the relationship between environmental regulation and the circular economy, some scholars have explored the impact of environmental regulation on enterprises engaging in circular economy practices. Wang (2021) [
21] believes that environmental regulation can stimulate the environmental responsibility of manufacturing enterprises and encourage them to develop green technology innovations, and thus environmental regulation can promote the development of the circular economy and environmental sustainability at the enterprise level. Barón Dorado’s (2022) [
22] research also reinforces this opinion. Dorado believes that environmental regulation is an important way to promote sustainability and develop effective ecological innovation within enterprises, which can maintain and potentially improve their environmental performance, motivate enterprises to engage in more circular economy practices, emphasize the importance of formulating environmental regulation, and this research also points out that an effective environmental management system is a guarantee for the implementation of environmental regulation policies. Other scholars have also explored and verified the role of environmental regulations in promoting circular economy performance. Shang (2022) [
23] provides evidence of the relationship between environmental regulations and circular economy performance, based on the decomposition of China’s circular economy performance and the growth rate of the circular economy, that is, environmental regulations can play a linear role through the “catch-up effect”, while the “innovation effect” and “demonstration effect” have not yet played an effective role, so the role of “innovation effect” and “demonstration effect” should be further strengthened to improve circular economy performance on the basis of measuring the value of provincial circular economy performance.
The above studies provide useful references for analyzing the relationship between environmental regulations and circular economy performance, but there is little literature that delves into the specific path of interaction between the two. Based on this, this paper conducts an empirical analysis using provincial-level panel data in China from 2011 to 2020, focusing on thirty provinces in China as research subjects, in order to explore the impact mechanism of environmental regulation on circular economy performance. This paper also conducts a heterogeneity analysis and proposes targeted policy recommendations. The possible marginal contributions of this paper are: (1) constructing a higher-order constructive measurement model for measuring environmental regulation and circular economy performance, which complements the methodology for quantifying environmental regulation and circular economy performance; (2) applying structural equation modeling, constructing and verifying the mechanism connection between environmental regulation, industrial structure upgrading and circular economy performance; and (3) testing whether there is regional heterogeneity in the impact of environmental regulation on circular economy performance under different levels of economic development.
2. Literature Review and Hypothesis
A circular economy is described as the process economy of “resource-product-renewable resource”, which promotes sustainable development [
24,
25]. It advocates achieving maximal economic benefits through investment savings, waste recycling, and other methods, while also conserving the use of scarce resources and non-renewable energy, as well as the safe treatment and the efficient flow of waste, so as to achieve the regeneration of “waste” to “resource” [
26]. The root of the circular economy is the coordinated development among economy, environment and resources [
27]. Circular economy performance is the comprehensive relationship between the input costs of operation and the results obtained during the process of circular economy development [
28].
The circular economy plays a vital role in ensuring the reuse of waste created and, therefore, reducing the waste of limited resources, which is the primary goal of the general economic concept [
29]. The circular economy has gained a great deal of attention among scholars. Still, the transition to the circular economy is a complex task [
30]. The circular economy is frequently advocated and acknowledged as a tool or strategy for achieving sustainable development through encompassing the three pillars of environmental, economic and social development [
27,
31]. The pursuit of sustained economic growth cannot be at the expense of environmental degradation; therefore, in order to realize sustainable development, one dimension should not be pursued at the expense of others. Millar et al. (2019) [
32] emphasize that the circular economy could serve as an effective tool to achieve sustainable development. Schroeder et al. (2018) [
33] suggest that the circular economy can contribute directly to attain a variety of sustainable development goals. Hondroyiannis et al. (2024) [
26] regard that the circular economy can contribute to the promotion of sustainable development issues by improving economic, environmental and social goals.
To address the environmental challenges stemming from the conventional industrial development model characterized by high-input, high-energy consumption, and high levels of pollution, Du (2023) points out that environmental regulation has emerged as a pivotal instrument in national governance for mitigating environmental pollution and reshaping economic development [
34]. Environmental regulation focuses on rectifying the negative externalities of environmental pollution, through mechanisms such as the enactment and enforcement of governmental environmental measures, the incentives of market regulation, and the exertion of public supervision, which involves the collective participation of various subjects to collectively adjust and constrain activities detrimental to ecosystems. It effectively alleviates environmental issues resulting from extensive economic development [
35], internalizes the external diseconomies caused by pollution, and makes recycling all kinds of resources and improving utilization efficiency a priority choice for reducing emission costs. This approach significantly elevates the level of environmental governance, improves the trajectory of economic growth, and facilitates the advancement of green production [
36]. It serves as a crucial pillar and safeguard for enhancing circular economy performance.
The “Pollution Haven Hypothesis” posits that environmental regulation will affect the transfer of different types of industries between countries or regions, which in turn will have an impact on the industrial structure adjustments of both the transferring and receiving countries or regions. Specifically, countries or regions with stringent environmental constraints tend to relocate pollution-intensive industries to areas with more relaxed environmental regulations for production activities [
37,
38]. Environmental regulations will constrain or gradually phase out the enterprises with high pollution levels or inadequate potential for transformation, and at the same time establish high environmental standards as barriers to market entry, thereby providing greater development opportunities for energy-saving industries [
39], and accelerating the advancement of the circular economy.
The “Porter hypothesis” contends that in the short term, enterprises may be subjected to greater pressure because of the “compliance costs” brought by environmental regulation, leading to a compression of profit margins [
40]. However, in the long term, environmental regulation will stimulate the innovation potential and technological investment of enterprises [
41,
42], the progress and innovation of production technology will substantially reduce the cost of environmental regulation, yielding the “innovation compensation” effect. The lingering belief that environmental regulations erode competitiveness has resulted in a stalemate. Porter and van der Linde C. (1995) [
43] proposed that the relationship between environmental regulations and economic competitiveness should not be viewed as mutually exclusive. Stricter environmental regulations can actually motivate businesses to adopt innovative environmental technologies and management practices, which can lead to increased resource efficiency, reduced waste and lower operating costs. Such environmental regulation can actually incentivize businesses to seek innovations in environmental protection and to improve efficiency, which in turn enhances their competitiveness.
The progress of production technology and innovation will largely reduce the cost of environmental management, that is, to produce the “innovation compensation” effect. Under the supervision of environmental regulation, enterprises will strengthen the control of pollutant emissions during the production process by adopting energy-saving technologies and improving production methods, which aims to elevate energy conservation and environmental protection standards, enhance production efficiency, and ultimately achieve environmental preservation objectives. Consequently, it incentivizes a shift in industrial structure towards industries with higher added value and more rational resource allocation, thus providing high-level technological support for economic green development. Moreover, while environmental regulation restricts the development of high-polluting and low-end manufacturing industry industries [
44], it will concurrently provide greater opportunities for the growth of low-carbon and environmentally friendly industries, which can enhance their comparative advantages, attract more capital inflows, and expand their production scales [
45]. For instance, governmental subsidies and support measures tend to favor low-carbon and green environmentally friendly industries, thereby facilitating the optimization and adjustment of the industrial structure.
Environmental regulation, besides its coercive binding force, serves as a vehicle for disseminating green, low-carbon, and eco-friendly consumption ideologies, thus fostering consumer awareness regarding the importance of environmental preservation and resource conservation [
46]. Consumer demand structures undergo corresponding changes with different stages of economic development. Presently, due to continuous advancements in economic development, there is a heightened emphasis on personalized and diversified consumption demand among the public. Particularly in this era of heightened environmental consciousness, public consumption preferences are shifting towards eco-friendly products, manifesting a preference for green and environmentally sustainable goods. Consequently, this trend amplifies the demand for eco-friendly products while reducing the demand for non-environmentally friendly alternatives. Fluctuations in individual consumption patterns impel enterprises to adapt their production strategies accordingly, thereby instigating continual adjustments and upgrades in industrial structures [
47]. At the same time, the rising demand for environmental protection among the public necessitates greater transparency in environmental information, which exerts supervisory pressure on corporate pollution behaviors [
48], which, in turn, urges enterprises to actively assume environmental responsibilities and accelerate green transformation efforts, so as to mitigate the adverse repercussions associated with the exposure of polluting practices.
The adjustment and optimization of industrial structure, beyond being the primary targets of environmental regulations, play an indispensable role in reducing resource dependency and improving environmental quality throughout the process of economic development. Specifically, under the constraints of environmental regulation, the industrial structure upgrading primarily involves enhancing ecological efficiency, reducing pollutant emissions, and promoting sustainable economic development, thereby impacting the circular economy. Firstly, in the process of industrial structural upgrading, the center of gravity of economic structure shifts gradually towards the tertiary industry, while the proportion among three industries aligns more closely with the demands of high-quality economic development. Given the low energy consumption, minimal pollutant emissions, and high economic returns associated with the tertiary sector, its increased proportion contributes to environmental quality optimization, alleviating and ameliorating structural pollution issues. As the industrial structure shifts from lower to higher levels, industrial division becomes more refined, and the industrial chain extends towards industries with higher added value [
49], stimulating the rapid development of high-end industries characterized by high knowledge and technological content, efficient utilization of material resources, environmental friendliness, and promising growth prospects. This, in turn, injects new strengths and dynamics into economic growth [
50].
Furthermore, the industrial structure upgrading deepens the coordination and integration among industries, leading to a more balanced allocation and utilization of resources across sectors [
51], and the factors of production such as labor and capital in low-efficiency sectors undergo a swift transition towards more efficient sectors through mechanisms such as market-driven adjustments, fostering the expansion of sectors with high productivity within the overall industrial structure. Consequently, the overall economic efficiency of the industries will also obtain significant enhancement. Simultaneously, the efficient utilization of energy will further elevate green productivity, which will in turn improve ecological welfare performance and the level of economic sustainability.
Moreover, the process of industrial structural upgrading is accompanied by increased investment in enterprise innovation, leading to the development and implementation of smarter, environmentally friendly production processes and technologies, thereby creating a conducive environment for the advancement of the circular economy and providing complementary technical support. With the adoption of new production technologies, outdated and excessive production capacity will be phased out. The energy consumption structure transitions from predominantly non-renewable energy consumption to an increasing proportion of clean energy usage [
52], which effectively reduces pollution per unit of output, thus the economy tends towards greener and higher-quality development [
53], facilitating the enhancement of circular economy performance.
In summary, the following hypotheses are proposed in this paper:
Hypothesis 1 (H1). Environmental regulation has a positive impact on circular economy performance.
Hypothesis 2 (H2). Environmental regulation has a positive impact on industrial structural upgrading.
Hypothesis 3 (H3). Industrial structural upgrading has a positive impact on circular economy performance.
Hypothesis 4 (H4). Industrial structural upgrading serves as a mediator in the impact of environmental regulation on circular economy performance.
The Environmental Kuznets Curve (EKC) theory posits that there is an inverted U-shaped relationship between the degree of environmental pollution and the economic development of a country or region [
1,
54]. Therefore, disparities in economic development levels affect environmental quality, which in turn influences the adoption of environmental regulatory policies and the realization of their binding effect. Specifically, the advancement of economic development levels is typically accompanied by increased investment in capital and R&D investment, which can be allocated towards supporting green technology innovation, infrastructure development, and production process upgrades. This can foster the development and utilization of new technological achievements to enhance resource allocation efficiency, alleviate resource consumption pressures, and increase the rate of production waste recycling, thereby invigorating the healthy development of eco-industries and consequently improving the performance and development of the circular economy.
In regions with varying levels of economic development, governmental capacity for environmental governance and the stringency of environmental regulations differ. Typically, in regions with higher economic level, governments tend to pay greater emphasis on environmental protection and sustainable economic development [
55], the intervention in environmental regulation may be intensified, such as introducing more stringent environmental laws and policy measures to restrict and prohibit the entry and development of pollution-intensive industries, augmenting penalties for environmental degradation, and fostering green innovation and development within enterprises. Such interventions can influence the intensity and effectiveness of environmental regulation and the performance of the circular economy.
Furthermore, as economic development levels rise, public attitudes towards green consumption and individual environmental awareness evolve, paying more attention to environmental protection and sustainable development, leading to increased demand for eco-friendly products and services, thereby stimulating the development of the circular economy industry chain. Additionally, advancements in education and heightened social awareness prompt individuals to prioritize environmental quality, resulting in stronger recognition and enforcement of environmental policies, along with spontaneous monitoring and rejection of industries that neglect ecological conservation.
In summary, the following hypothesis is proposed:
Hypothesis 5 (H5). There is heterogeneity in the impact of environmental regulation on circular economy performance across regions with different levels of economic development.
Based on the above analysis and hypothesis, the conceptual model of this paper is shown in
Figure 1.
5. Discussion
Initially, a two-stage approach is employed to assess and analyze the two higher-order constructs in this study. In the first stage, a measurement model for environmental regulation, as a higher-order construct, is constructed from three dimensions (first-order construct): administrative directives, market incentives, and public participation. Simultaneously, a measurement model for circular economy performance, as another higher-order construct, is constructed from three dimensions (first-order construct): energy consumption and utilization, environmental pollution, and economic and social development. The results of the higher-order measurement model test indicate satisfactory reliability and validity for the measurement items of each first-order construct, which proves the effectiveness of constructing the measurement system for assessing environmental regulation and circular economy performance from multidimensional perspectives, thereby mitigating the shortcomings of some previous studies that relied solely on a single indicator for measurement.
Subsequently, utilizing the scores obtained from the first-order constructs is the first stage to downgrade the corresponding higher-order constructs, followed by testing the structural equation modeling established in this study. The results show that the path coefficient of ER→CEP is 0.461, indicating a direct facilitating effect of environmental regulations on circular economy performance, and the path coefficient of ER→ISU→CEP is 0.189, indicating that the environmental regulation can indirectly promote the circular economy performance through the intermediary of industrial structure upgrading.
Environmental regulations exert normative and regulatory constraints on behaviors detrimental to ecological integrity, such as excessive emissions and inadequate hazardous waste management, through intensified supervision, management, and punitive measures. Additionally, they stimulate voluntary attention and monitoring by fostering public environmental consciousness. Through administrative directives, environmental regulations normatively guide enterprises to comply with environmental standards, thereby mitigating actions harmful to the ecosystem. Furthermore, by internalizing the costs of pollution through mechanisms like environmental protection taxes and emission charges, environmental regulations induce enterprises to adjust their energy consumption structures and invest in technological innovation for energy conservation and environmental protection. Consequently, this facilitates not only the reduction of environmental pollution costs but also the attainment of higher production efficiency and economic benefits. This integration of market economy principles with ecological imperatives enhances circular economy performance, fostering sustainable development.
The transformation and upgrading of industrial structures under environmental regulations entail a shift towards more technologically intensive industries and the relocation of resources to sectors characterized by higher efficiency and environmental friendliness. This transition augments the benefits of economic sustainability and ecological civilization, thereby promoting the development of the circular economy.
6. Conclusions and Implication
6.1. Conclusions
Based on the panel data of 30 provinces in China from 2011 to 2020, this paper establishes an evaluation index system for environmental regulations and circular economy performance by employing structural equation modeling to construct the impact mechanism of environmental regulation on circular economy performance, and conduct empirical analysis. The main conclusions are as follows: environmental regulation has a significant positive impact on circular economy performance; industrial structure upgrading has a mediating role in the path of environmental regulation on circular economy performance; the heterogeneity study shows that the mechanism of environmental regulation on circular economy performance varies according to the level of regional economic development. The heterogeneity study reveals variations in the mechanism through which environmental regulations affect circular economy performance due to disparities in regional economic development levels.
6.2. Policy Recommendations
First, environmental regulatory policies should be adjusted appropriately to foster a harmonious equilibrium between the economy and the environment. Given the existence of regional disparities, targeted formulation and the amalgamation of various environmental regulatory policies are necessary to circumvent adverse impacts resulting from blindly increasing or relaxing the intensity of environmental regulation. Therefore, regional governments need to scientifically and systematically assess the actual development situation, implement differentiated environmental regulatory policies to oversee and rectify polluting behaviors, and gradually refine measures such as environmental expenditure and investments in pollution control, in order to moderately alleviate the burden of enterprises transitioning towards greener practices. Initiatives to establish carbon emissions trading and pollutant discharge rights markets should be explored to enhance market-regulated capacity, prevent the escalation of additional costs for enterprises, and promote the development and utilization of solar energy, wind power, and other clean, low-carbon, renewable energy, thereby injecting fresh impetus into the advancement of the circular economy.
Secondly, it is imperative to enrich environmental regulatory policies to propel industrial transformation and upgrading. Environmental regulations encompass various types, which entail measures such as administrative penalties, environmental monitoring, taxation, and pollution reporting and complaints. These measures can complement and coordinate with each other to form a multi-agent, systematic environmental monitoring and management system, collectively advancing industrial structural transformation and upgrading. Enhancements in taxation and penalties for highly polluting industries, coupled with subsidies for environmental clean industries, compel enterprises to assume clear responsibilities and address pollution behaviors at its source. By harnessing the stimulating effect of environmental regulations on enterprise innovation, companies are encouraged to take proactive measures in green production, thereby accelerating the pace of technological innovation, and fostering a cleaner and more efficient industrial development pattern. Expanding the scope of environmental information disclosure, establishing convenient channels for pollution reporting, and exposing corporate pollution behaviors are essential steps. Conducting public hearings, citizen voting, and other forms of public participation in environmental governance intensifies public engagement, and enhances the fairness and transparency of environmental governance, combining with the collective strength of public entities to regulate corporate production behaviors.
Thirdly, enhancing regional collaborative governance is vital to fostering the development of the circular economy. According to the “Pollution Haven Hypothesis”, inter-regional cooperation is required to prevent certain regions from becoming havens for outdated and polluting industries. Strengthening cooperation and coordination among diverse regions facilitates resource sharing and complementary advantages, thereby promoting mutual industrial development and synergies, that will drive the development and construction of industrial chains within the circular economy. Utilizing digitization, cloud computing, and other technologies to establish cross-regional platforms for environmental information sharing is essential. These platforms facilitate the timely dissemination of effective environmental regulatory policies and pollution control experiences. Regional governments engage in joint monitoring, law enforcement, and punitive actions against transboundary pollution to prevent polluting enterprises from evading regulations through production relocation. Furthermore, promoting investments in cross-regional environmental governance and research and development of environmental protection technologies optimizes industrial structures, enhances ecological benefits, and elevates the overall performance of the circular economy.
6.3. Limitations and Prospects
The scope of research warrants further expansion. Due to issues such as data scarcity and statistical interruptions, this paper only encompasses data from 2011 to 2020, with a focus limited to 30 provinces. Therefore, future research endeavors may extend the time series and delve into more targeted investigations to enhance the specificity of the findings.
Due to variations in the implementing entities and methods of environmental regulations, future research can classify them to explore the mechanisms through which heterogeneous environmental regulations affect circular economy performance. This entails delving into the characteristics and specific pathways through which different types of environmental regulations promote the growth of circular economy performance, along with conducting comparative analyses. Simultaneously, in-depth investigation into the mediating or regulating variables through which environmental regulations impact circular economy performance should be conducted. These will enrich and refine the framework illustrating the influence mechanisms of environmental regulations on circular economy performance, thereby furnishing theoretical support and policy recommendations for further promoting the development of the circular economy. In a future study, with the completion of data collection, the measurement dimensions of circular economy performance can be further enriched to improve the comprehensiveness of the measurement index system.