Environmental Protection Tax Reform in China: A Catalyst or a Barrier to Total Factor Productivity? An Analysis through a Quasi-Natural Experiment

Abstract

China’s 2018 environmental protection tax (EPT) reform was introduced in response to increasing concerns about environmental degradation. It aimed to use fiscal policy to enhance environmental governance while fostering economic productivity. This study employs a difference-in-differences approach to analyze panel data from publicly listed companies between 2009 and 2019. It examines the reform’s influence on total factor productivity (TFP) in pollution-intensive industries, addressing both environmental and economic objectives. The results reveal that the tax reform significantly enhances TFP, acting as a robust catalyst for economic growth rather than a barrier. This effect is particularly strong in state-owned enterprises and those with less-severe financing constraints. Mechanism analysis indicates that the reform boosts TFP through the promotion of green innovations and alleviation of financing constraints. These findings provide empirical evidence at the micro-level of the reform’s efficacy in promoting sustainable business practices. The study offers insights for future environmental tax policies in China and underscores the necessity of aligning environmental and economic strategies to achieve sustainable development.