Dynamic nexus between urban digitization and pollutant discharge: RBC theory and empirical evidence from China

Abstract

An economy undergoing digitalization may experience environmental degradation. This study aims to explore the potential environmental consequences of digitalization. First, the paper develops a real business cycle model that incorporates pollution constraints and endogenous digital capital investment. Second, the study identifies three stages of endogenous digital capital accumulation: resource mismatch, scaling, technology spillovers, and eventual monopolization. Correspondingly, environmental changes unfold in three stages: degradation, subsequent improvement, and regression back to deterioration. Finally, the empirical analysis draws on the process of digital capital accumulation across Chinese cities, revealing that while digital capital accumulation initially contributed to environmental degradation, technology spillovers could help mitigate these effects. Furthermore, the study highlights the differing levels of digital capital across cities, placing them at various stages of development. It underscores the critical need for policymakers to carefully balance the scale of digital capital, as both insufficient and excessive accumulation can exacerbate environmental challenges. This analysis offers valuable insights for policymakers seeking to foster digital development while mitigating environmental pollution.