Green taxes: Productivity effects of tax-based environmental regulations on heavily polluting firms

Yuqiang Cao, Shaoyan Lin, Mangmang Li, Yaowen Shan and Peipei Wang

Economic Modelling, 2024, vol. 140, issue C

Abstract: Environmental regulations, particularly tax-based measures, significantly impact firm productivity and corporate behavior. This study uses China's Environmental Protection Tax (EPT) law as a quasi-natural experiment to explore whether and how such tax-based environmental regulations influence the productivity of heavily polluting firms. Using a difference-in-differences approach, we find that the EPT law has positively impacted firm productivity by fostering higher research and development investments and encouraging the substitution of labor with capital. The productivity-enhancing effect is more pronounced for state-owned enterprises, large firms, firms with fewer financial constraints, firms receiving more government subsidies, and firms operating in less competitive sectors. These findings support the Porter hypothesis, suggesting that well-designed environmental regulations can stimulate innovation and improve competitiveness, ultimately enhancing productivity. This study underscores the importance of tax-based environmental regulations in promoting productivity and economic growth, providing valuable insights for policymakers aiming to balance environmental protection with economic development.

Keywords: Tax-based environmental regulation; Firm productivity; Heavily polluting firm; China (search for similar items in EconPapers)
JEL-codes: D22 G39 M41 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:140:y:2024:i:c:s0264999324001913

DOI: 10.1016/j.econmod.2024.106834

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