This paper studies how centralized decision-making can help local governments internalize regional environmental spillovers, and investigates the associated economic and welfare consequences. Utilizing novel firm-level geocoded emission and production panel datasets, and exploiting more than 3000 cases of township mergers in China, we find that as township mergers eliminate the borders between neighboring townships, the negative externalities of polluting firms located on these borders are suddenly internalized by the new jurisdiction. As a result, these firms spend more effort on emission abatement, which leads to lower emissions, as well as lower output and profit levels. Further analysis suggests that household welfare improves with the internalization of border spillovers, as reflected by increased residential land price around the merging borders.