Using data from both the industrial sector and China City Statistical Yearbook from 2002 to 2008， this paper studies the effect of the central government’s policy of “11th Five-Year National Total Emissions Control Plan of the Major Pollutants”proposed in 2006. The popular quasi-experiment treatment effect method is used to empirically investigate the impact of this environmental regulation on city level economic efficiency in China. Furthermore，the channels through which this environmental regulation took effect is analyzed. The dynamic Olley-Pakes method is introduced to decompose the components of city’s manufacturing productivity， so as to explore how the regulation policy affect these components. The paper finds that，compared with cities with low emission reduction targets，the TFP of cities with high emission reduction targets was 8. 8% higher on average in the short run after the implementation of the policy. It is argued that this city-level TFP increase was mainly due to the improving of the TFP of surviving enterprises and hindering the entry of low-TFP enterprises as a result of this policy. However，the policy also causes withdrawal of some enterprises with high TFP and the inefficiency of resource allocation. These findings could help local governments to clarify the relationship between environmental regulation and city economic efficiency and promote more effective implementation of the central government’s environmental protection policies.