The unintended energy efficiency gain from tax incentives for investment: Micro‐evidence from quasi‐natural experiments in China

Yijia Song, Xitao Li, Ruoxi Liu and Xin Peng

Review of Development Economics, 2024, vol. 28, issue 1, 310-338

Abstract: In light of the economic recession in the post‐pandemic era, countries have implemented a wide array of fiscal stimulus measures as a means of addressing the prevailing economic challenges but often neglect to consider the consequences of these stimuli on the environment. Therefore, it is crucial for the government to take environmental considerations into economic stimulus packages, aiming to achieve a sustainable “green recovery.” Using China's value‐added tax (VAT) reform as a quasi‐natural experiment, we find that VAT incentives have significantly improved the firm's energy efficiency through factor substitution and technological progress, indicating that tax incentives are beneficial to economic stimulus and energy saving. In addition, we find that energy market distortions play a significant negative moderating role, which weakens energy efficiency gained from the VAT incentives. Furthermore, heterogeneity analysis shows that the improvement of energy efficiency is concentrated in non‐state, high‐capital intensity, and high financing‐dependent firms. According to our findings, policymakers should have a thorough understanding of the potential of tax incentives for investment as a policy tool for achieving a “green recovery” as long as the energy market is efficient.

Date: 2024
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