The Inverted U-Shaped Effect of Environmental Taxation on Green Innovation: The Roles of Corporate Environmental Responsibility and Green Finance

Qi Zhang, Liangqun Qi () and Lawrence Loh ()
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Qi Zhang: School of Economics and Management, Harbin University of Science and Technology, Harbin 150086, China
Liangqun Qi: School of Economics and Management, Harbin University of Science and Technology, Harbin 150086, China
Lawrence Loh: Centre for Governance and Sustainability, NUS Business School, National University of Singapore, Singapore 117592, Singapore

Sustainability, 2025, vol. 17, issue 21, 1-26

Abstract: Implementing environmental protection taxes implies a shift in environmental policy from government enforcement to market incentives, fostering long-term sustainability. Based on institutional theory, this study explores the nonlinear impact of environmental taxes on corporate green innovation and its influencing mechanism, by considering the complex interaction between innovation offsets and environmental costs. Utilizing data from Chinese A-share listed companies on the Shanghai and Shenzhen stock exchanges during 2012 and 2023, the study reveals an inverse U-shaped relationship between environmental taxes and green innovation performance, within which corporate environmental responsibility functions as a mediator. Furthermore, the results also reveal that the relationship between environmental taxes and green innovation is positively moderated by the development level of regional green finance. In addition, the heterogeneity analyses show that the inverse U-shaped relationship is more pronounced among heavily polluting and large-scale firms, and firms in more marketized areas and areas with higher levels of intellectual property protection. The research enriches the literature on the dual-edged effects of environmental taxes anchored in green innovation and unpacks the internal mechanism of the effectiveness of environmental protection tax policy. It also provides practical implications for the design of tiered taxes and green finance policies aimed at achieving sustainable development.

Keywords: environmental tax reform; corporate environmental responsibility; green innovation performance; green finance (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2025
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