【Abstract】We show that misallocation across firms amplifies industrial pollution by distorting the firm size distribution in China. Using a unique firm level data from China, we find that larger firms are more likely to use clean technology, and emit less pollutants per output. We also provide evidence of size-dependent distortions that reallocate factors away from large productive firms. In a heterogeneous firm model with an endogenous choice of pollution treatment technology, we show that size-dependent distortions lower the adoption rate of clean technology, amplify aggregate pollution intensity, and lower aggregate output. Our quantitative results show that eliminating size-dependent distortions would increase mean firm size by 130% and aggregate output by 30%. Meanwhile, the fraction of firms using clean technology would increase by 27% and aggregate pollution decrease by 20%. In contrast, tightening environmental regulations would result in a sizable decrease in aggregate pollution, but have a negligible effect on aggregate output.