Digitalization boosts carbon reduction, yet urban industrial clusters suppress green gains

A new study has revealed that while the digital economy is helping China cut carbon emissions, its positive impact is being partially offset by the way industries cluster together in urban areas.

The paper, “Assessing the Impact of the Digital Economy on Carbon Emission Reduction: A Test of the Mediation Effect Based on Industrial Agglomeration,” published in Sustainability (2025), analyzed data from 278 Chinese cities over the period 2011 to 2020. Using a fixed-effects econometric model alongside mediation analysis, robustness tests, and instrumental variable strategies, the authors found that digitalization contributes significantly to lowering carbon intensity, but its benefits are suppressed when industrial agglomeration increases emissions.

How the digital economy shapes carbon reduction

Does the digital economy, encompassing digital infrastructure, internet penetration, and technology-driven industries, truly lowers carbon emissions at the city level? According to the analysis, it does. A one-percentage-point rise in the digital economy index reduces carbon intensity by nearly a tenth of a percent.

The researchers explain that the mechanisms driving this reduction include improved energy efficiency, smarter allocation of resources, and the integration of digital tools into energy management systems. Big data, cloud platforms, and smart grids all contribute to minimizing energy waste. By accelerating green innovation and enabling low-carbon business models, the digital economy directly supports China’s climate targets.

However, the study highlights that this impact is not straightforward. While digitalization is a force for greener development, the same technological push fosters urban industrial clustering, which introduces a new layer of complexity to carbon reduction strategies.

Why industrial agglomeration suppresses digital gains

The study brings into light the critical role of industrial agglomeration, the concentration of businesses, industries, and workers in specific urban centers. The analysis reveals that while the digital economy accelerates agglomeration, these clusters are currently associated with higher, not lower, carbon emissions.

This counterintuitive outcome stems from what the authors describe as congestion and scale effects. As industries cluster, resource consumption intensifies, pollution grows, and infrastructure is strained. Instead of creating synergies that reduce emissions, the concentration of activity has exacerbated environmental pressure.

The mediation model developed by the researchers shows that agglomeration suppresses about six percent of the carbon-reduction effect of the digital economy. In other words, the benefits of digitalization are real but are partially cancelled out by the way industries are reorganizing themselves around new digital hubs.

The suppression effect is not uniform. It is far stronger in small and medium-sized cities, particularly in western regions, where industrial transfers have concentrated energy-intensive production. In contrast, large cities, especially in China’s eastern provinces, have managed agglomeration more efficiently, limiting its negative effect. The sectoral breakdown adds another layer: the tertiary industry, often seen as clean, has shown a surprising positive link with emissions when clustered, underscoring the need for higher-level technological integration to unlock its green potential.

What policy measures can balance growth and emissions

The authors argue that deepening digital transformation must go hand in hand with high-quality industrial upgrading. This means prioritizing innovation-driven clusters rather than traditional, resource-heavy ones.

First, investment in digital infrastructure should target not just connectivity but also carbon management capabilities, such as AI-powered monitoring and low-carbon digital industrial parks. These initiatives can ensure that the digital economy’s growth does not inadvertently fuel unsustainable practices.

Second, urban planning needs to address the imbalance between regions. Small and medium-sized cities must focus on upgrading industrial structures and avoiding the pitfalls of becoming relocation sites for polluting industries displaced from wealthier eastern areas. Managing westward industrial transfer responsibly will be crucial to prevent the west from becoming a high-emission zone.

Third, the service sector’s role requires rethinking. The study points out that tertiary-industry agglomeration can increase emissions unless it is underpinned by advanced technologies. Policymakers must foster high-tech and knowledge-intensive clusters that leverage the digital economy to drive green outcomes rather than congestion effects.

Lastly, climate governance must remain adaptive. The research shows that carbon mitigation policies should not assume uniform effects of digitalization but instead account for city size, regional differences, and industry composition. Tailored strategies will be essential to harness the digital economy’s benefits without letting industrial agglomeration undermine progress.