Environmental protection tax and green innovation of heavily polluting enterprises: A quasi-natural experiment based on the implementation of China’s environmental protection tax law

Abstract

Environmental protection tax is an important tool for directing environmentally friendly growth in heavily polluting enterprises, but existing research has yet to provide consistent conclusions on whether and how environmental protection tax can promote green innovation in heavily polluting industries. The paper uses a double difference model based on data from Chinese listed companies in heavily polluting industries from 2012 to 2021 to empirically investigate whether environmental protection tax drives green innovation behavior of heavily polluting enterprises. The findings show that the environmental protection tax increases the degree of green innovation in heavily polluting enterprises, primarily through the anti-driving effect, in which an increase in environmental management expenses forces firms to increase their R&D investment, which improves the degree of green technical innovation. Furthermore, the environmental protection tax has a strong promotion effect on heavy polluters’ green innovation for state-owned enterprises and those in growing period or located in high marketization regions. However, this promotion effect is insignificant for non-state-owned enterprises and those in recession period, and environmental protection tax hinders green innovation of enterprises in mature period and those located in low marketization regions. Accordingly, it is suggested to improve preferential tax policies, increase investment in corporate green innovation and strengthen the supervision of environmental tax.

Environmental Protection Tax and Green Innovation: The Mediating Role of Digitalization and ESG

“…Firstly, regarding the incentive effect, the Porter hypothesis posits that environmental regulations act as stimuli for technological innovation and competitiveness, with the innovation effects partially offsetting the cost effect induced by environmental regulations [27]. Deng et al conclude that the imposition of EPT intensifies legitimacy pressure on firms, forcing polluting entities to improve legitimacy management efforts and increase R&D investment [28]. Zhao et al confirm that EPT improves the green R&D efficiency of firms, particularly enhancing the GI of heavily polluting firms [18].…”

“…Building upon the resource-based theory, Hart and Dowell claim that the active disclosure of ESG information, encompassing comprehensive performance of environmental protection, social responsibility, and corporate governance, facilitates the establishment of a good image and cultivates a reputation for firms' responsibility [48]. To maintain a positive reputation and the recognition brought by environmental performance, firms may allocate additional resources to GI activities, turning from a reactive to a proactive focus on GI [28]. Secondly, from the perspective of social performance, the imposition of EPT helps firms establish a positive image with a robust sense of social responsibility.…”