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| Environmental Policy Combinations, Credit Discrimination, and Total Factor Productivity: A Perspective Based on Enterprise Pollution Control Investment |
| LIU Fengliang, CHEN Yanlong
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| School of Economics, Renmin University of China |
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Abstract On January 1, 2018, the Chinese government fully implemented the Environmental Protection Tax Law of the People's Republic of China. An environmental tax can help correct an imbalance in the economic structure that favors heavily polluting industries, while reducing environmental pollution. However, such an asymmetrical policy can also suppress economic activities in heavily polluting industries, leading to output losses and negatively impacting economic and environmental coordination. Therefore, an exploration of how the environmental economic policy toolbox can be fully utilized under different economic conditions and the timely selection of an optimal combination of environmental economic policies is urgently needed. Such research would support efforts to adjust resource allocation and the economic structure, incentivize green production vitality to improve efficiency, and reduce environmental pollution.
We first conduct an empirical analysis based on Chinese firm-level data to clarify the characteristics of pollution control and credit allocation among Chinese firms affected by the environmental tax. We then construct a dynamic general equilibrium model that includes both pollution-intensive and clean industries, introduce an environmental tax, and endogenize the intensity of the accompanying policies. Finally, we quantitively study the impacts of different environmental policy combinations on total factor productivity (TFP) in terms of misallocation and TFP losses caused by pollution. Our study shows that although an environmental tax can alleviate environmental pollution exacerbated by credit discrimination, a higher tax rate may excessively suppress the output of polluting enterprises, resulting in a new resource misallocation bias favoring clean industries. However, polluting enterprises can effectively reduce this distortion by bearing pollution control costs to equalize the marginal output across industries, thus promoting an improvement in overall efficiency. The study proposes that implementing complementary policies, such as clean production subsidies and green credit interest subsidies, can increase the likelihood of realizing the triple dividend of an environmental tax: correcting misallocation, improving efficiency, and reducing pollution.
By distinguishing three scenarios based on varying credit discrimination levels and environmental tax rates, this study simulates the effects of different policy combinations under various scenarios and ranks the optimal policy combinations. First, under a high environmental tax rate, imposing complementary policies, such as clean production subsidies and green credit interest subsidies, on both pollution-intensive and clean enterprises can incentivize pollution-intensive enterprises to increase their pollution control investment, thus mitigating the negative effects of the environmental tax. Second, under a low environmental tax rate, with limited tax revenue and a weak accompanying policy intensity, the effectiveness of policies imposed on both pollution-intensive and clean enterprises in terms of optimizing resource allocation is inferior to issuing directly subsidies to clean enterprises. Third, when credit discrimination is weak, optimal resource allocation can feasibly be achieved by imposing an environmental tax, without requiring other complementary policies. Therefore, allocating tax revenues directly to green investments can enable an improvement in environmental quality from a good to an excellent level.
The main contributions of this study are as follows. First, this study delineates the characteristics of firms' behavior under the condition of an environmental tax and simulates the effects of this tax and associated policy combinations in the Chinese context, thus enriching understanding of pollution phenomena and environmental policy formulation in China. Second, this study considers pollution control investment, a crucial factor in classical tax and subsidy theoretical research, and thus expands the explanatory power of classical tax theories to the environmental field. Third, this study focuses on resource allocation distortion caused by an asymmetric environmental tax and provides theoretical references regarding the design of asymmetric policy through counterfactual analysis. Fourth, by endogenizing different levels of accompanying policy intensity, this study enables comparison of the effects of different policies, thus providing an analytical framework for evaluating the coordination effects of environmental policies. This approach has certain theoretical and practical implications in terms of effectively utilizing the environmental economic policy toolbox to systematically construct an environmental-economic governance system.
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Received: 01 June 2023
Published: 17 July 2024
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