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| Environmental Protection Tax, Firm Entry and Industrial System Green Transformation |
| LIU Xiaoling, CHEN Shenglan, MA Hui, WANG Pengcheng
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Lingnan College, Sun Yat-sen University; School of Economics, Zhejiang University of Technology;
Institute of Accounting and Finance, Shanghai University of Finance and Economics;
School of Economics, Zhejiang University of Technology |
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Abstract The high-cost negative consequences of environmental pollution, including increased infant mortality and neurodevelopmental disorders, reduced educational attainment, and labor market participation, have garnered widespread global attention. Green development has increasingly become a global consensus, with governments actively formulating corresponding environmental regulatory policies to enhance pollution control capabilities and mitigate the adverse effects of environmental pollution. China has long implemented a pollution discharge fee system to control corporate pollution emissions. However, due to apparent deficiencies such as low fee standards, insufficient pollutant coverage, and weak enforcement, the legislative authority deliberated and passed the Environmental Protection Tax Law on December 25, 2016, which came into effect on January 1, 2018. Its implementation marked a transition toward the legalization of China's environmental governance, where taxpayers refusing to pay environmental protection taxes will face legal sanctions rather than merely administrative penalties. Green transformation is not only a critical component of China's industrial system upgrading but also a fundamental characteristic of its modern industrial system. The dynamics of firm entry and exit are not only important sources of economic growth and job creation but also crucial intermediate links in the formation of industrial systems. Understanding how environmental regulations influence the green transformation of the industrial systems by affecting the entry dynamics of firms in both heavy-pollution and clean industries is of great significance for building a modern industrial system, promoting high-quality economic development, and achieving Chinese-style modernization
Theoretically, the increase in entry costs will restrict entrepreneurs with low initial wealth and external financing constraints from entering the market. When entrepreneurs have sufficient wealth and external financing capacity, the entry decisions also depend on the comparison between the present value of expected returns and entry costs. The implementation of the Environmental Protection Tax Law has significantly improved green innovation and environmental performance among incumbent firms in heavy-pollution industries. Higher levels of green innovation and patent holdings help polluting firms maintain leading positions and market share, which to some extent raises the technological barriers and entry thresholds for new firms, thereby leading to an increase in entry costs. At the same time, the implementation of the Environmental Protection Tax Law has increased the tax fees that enterprises must pay for pollution emissions, raising the production and operational costs of polluting firms and reducing their future profit margins. It can thus be expected that the increase in entry costs and production costs brought about by the implementation of the Environmental Protection Tax Law will discourage the entry of firms into heavy-pollution industries. A direct manifestation of the reduction in firm entry into these industries is the decline in the share of heavy-pollution industries, which will direct more social and financial resources toward clean industries, ultimately achieving a greener transformation of the industrial structure
To validate the above expectations, we use full-sample industrial and commercial enterprise registration data to examine the effect of the Environmental Protection Tax Law implementation on firms' entry decisions. Results from difference-in-difference-in-differences (DDD) tests show that after the implementation of the law, the number of new entrants in heavy-pollution industries decreased by approximately 14% in regions where the pollutant tax standards for taxable pollutants were raised. Further tests show that the inhibitory effect of the Environmental Protection Tax Law on firm entry primarily exists in non-state-owned enterprises, industries with higher entry barriers, and regions with stricter tax enforcement. Finally, we examine the macro effects of the Environmental Protection Tax Law implementation on regional industrial structure, environmental quality, and economy performance. The results show that by inhibiting firm entry into heavy-pollution industries, the implementation of the law has significantly reduced the gross industrial output and employment in these sectors, thereby promoting the green transformation of industrial structures in regions with raised tax standards. At the same time, we find that the implementation of the law has significantly reduced regional industrial pollution emissions, but has not had any significant negative impact on local economic output and employment.
This paper makes contributions to the following three aspects: First, it contributes to research on the economic effects of environmental protection taxes. We investigate how the Environmental Protection Tax Law affects firm entry, industry dynamics, and thus industrial structures, providing insights and reference value for comprehensively understanding and evaluating the law's economic effects. Second, it contributes to research on determining factors of entrepreneurial activity. The Environmental Protection Tax Law represents China's first legislative attempt to curb environmental pollution, aiming to strengthen environmental regulation through the rigidity of taxation law enforcement. Unlike regional and short-term regulations, taxing pollution emissions accompanies the entire production and operation process of enterprises, affecting not only firms' entry costs but also their subsequent production costs, future profits, and thus becoming one of the critical factors influencing firm entry behavior. Third, as environmental protection taxes constitute real costs for microeconomic entities, exploring whether and to what extent the Environmental Protection Tax Law can achieve a “double dividend” holds practical significance. We find that the law's implementation significantly reduces regional pollution emissions without significantly decreasing economic output or employment, indicating that China's current environmental protection tax system design have achieved a “weak double dividend” to some extent. Additionally, the study reveals that the law promotes the green transformation of regional industrial structures, which is of great significance for building a modern industrial system and, further a modern economic system.
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Received: 10 April 2024
Published: 05 April 2025
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