What is it about?

This study explores the causal impact of China’s environmental tax reform—an institutional transition from pollution discharge fees to an environmental protection tax implemented in 2018—on the green development of industrial enterprises. The reform symbolizes a fundamental shift in China’s environmental governance framework, seeking to internalize pollution externalities, improve the efficiency of environmental fiscal instruments, and motivate firms toward sustainable production. Despite its national significance, empirical evidence on its real economic and environmental consequences remains limited. To address this gap, we construct a Difference-in-Differences (DID) model using the reform as a quasi-natural experiment. The dataset consists of A-share listed firms in pollution-intensive industries from 2013 to 2022. Industrial green development is proxied by firm-level green total factor productivity (GTFP), which captures both economic efficiency and environmental performance. Furthermore, mediation models are developed to identify two potential transmission mechanisms: the alleviation of resource misallocation and the promotion of green technological innovation. These mechanisms reflect the reform’s dual influence on production structure and innovation dynamics. Robustness is tested through multiple approaches, including the parallel trends test, propensity score matching (PSM), and placebo tests, ensuring the reliability of the causal inference. The empirical findings reveal that the environmental tax reform significantly improves GTFP, particularly for state-owned enterprises and heavily polluting sectors, where the reform’s enforcement intensity and compliance incentives are stronger. Mechanism analysis confirms that the reform enhances green productivity mainly by improving resource allocation efficiency and stimulating enterprises’ green R&D investment. Overall, the research provides compelling evidence that fiscal environmental policies, when well-designed and enforced, can drive industrial systems toward greener and more efficient development trajectories.

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Why is it important?

This study is significant for both academic research and policy formulation. From a theoretical perspective, it bridges the long-standing debate between environmental regulation and economic performance, showing that properly structured fiscal policies can reconcile environmental sustainability with industrial competitiveness. China’s environmental tax reform represents one of the world’s largest policy experiments in transforming environmental fees into a tax-based system, yet little empirical work has verified its impact at the firm level. Our findings provide direct micro-evidence that environmental taxation can serve as a market-oriented mechanism for achieving “polluter pays” principles and incentivizing cleaner production. For policymakers, this research highlights that environmental fiscal reform not only reduces pollution but also enhances total factor productivity, thus generating co-benefits for both the economy and the environment. It demonstrates that taxes—traditionally viewed as a cost burden—can instead act as a stimulus for innovation and efficiency improvements when coupled with appropriate institutional design. These findings offer valuable lessons for emerging economies facing similar challenges of balancing rapid industrialization with ecological preservation. On a broader scale, this study enriches the international literature on green taxation, industrial upgrading, and sustainable governance, reinforcing the idea that fiscal tools are central to achieving carbon neutrality, green transition, and the Sustainable Development Goals (SDGs). It deepens our understanding of how environmental tax reform transforms the behavioral logic of enterprises and redefines the interaction between government regulation and market incentives in promoting green industrial growth.

Perspectives

The findings open several promising directions for future research and policy refinement. First, fiscal policies should be further integrated with innovation incentives, such as R&D tax credits or green technology subsidies, to reinforce the reform’s motivating effects. Aligning environmental tax revenues with dedicated green innovation funds would create a positive feedback loop between taxation and technological upgrading. Second, differentiated tax rates should be introduced according to industry characteristics, pollution intensity, and enterprise size to enhance fairness and efficiency while preventing excessive burdens on small and medium-sized enterprises. Third, the government should strengthen information transparency and corporate environmental disclosure systems, thereby magnifying the reputational and signaling effects of the tax reform. This would push firms to voluntarily improve environmental performance and adopt cleaner technologies. Moreover, the reform’s long-term and spatial spillover effects deserve further investigation, as environmental taxation may generate cross-regional externalities through industrial relocation, supply-chain transmission, or inter-provincial policy competition. For other developing countries, China’s experience provides a valuable reference for designing green fiscal systems that combine regulatory effectiveness with innovation-driven incentives. Academically, this study contributes to the literature by integrating firm-level microdata, quasi-natural experimental design, and mechanism identification to evaluate fiscal environmental policy effectiveness. Future research may extend this framework by exploring dynamic productivity effects, inter-industry linkages, or interactions between environmental taxation and carbon trading. Ultimately, this study underscores that well-designed fiscal instruments are not merely revenue tools but strategic levers for steering industrial transformation toward sustainability and ecological modernization.

Professor ZHAOYANG LU
Southwest University of Political Science and Law

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This page is a summary of: The impact of environmental tax reform on industrial green development: evidence from China, Frontiers in Environmental Science, July 2025, Frontiers,
DOI: 10.3389/fenvs.2025.1593549.
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