The EPT Law was the first environmental policy in China to introduce environmental tax incentives to corporations to reduce pollution. Using the EPT Act as a natural experiment, this study examines the impact of environmental tax incentives on corporate environmental performance. Therefore, firms may universally increase their environmental obligations after the implementation of the EPT Act, regardless of different environmental tax rates across provinces.
We find that after the implementation of the EPT law, the treatment group saw a significant improvement in their environmental performance compared to the control group. This result indicates that the tax incentives introduced by the EPT law significantly increase companies' commitment to the environment. The unintended consequence of the EPT law found in this study has important policy implications, especially for economies with weak institutions.
In general, firms are facing higher costs for pollution emissions after the implementation of the EPT law. Serving as an inventive market method of environmental regulation, the EPT law encourages firms to improve their environmental activities (Cheng et al., 2022). It has also been found that the implementation of the EPT law in China causes corporate tax avoidance activities (Yu et al., 2021) and negatively affects firm performance (He, Wen, & He, 2020; Zheng & He, 2022).
The cost of pollutant discharge increased greatly after the PDF policy was replaced by the EPT Act.
Empirical results 1 Descriptive statistics
The DID estimator is 𝛽1, which measures the impact of the EPT law on CEP of companies headquartered in provinces that apply the higher EPT rates, relative to the impact in companies subject to the minimum EPT rates. We construct a univariate analysis to compare the change in CEP before and after the EPT law in both the treatment and control groups and report the results in Table 2. Therefore, companies generally improve their environmental performance after the EPT law came into effect .
Overall, Table 2 provides preliminary evidence that firms headquartered in provinces with higher EPT rates are associated with better environmental performance after the EPT Law, which tentatively supports our hypothesis. This shows that compared to firms located in provinces that apply minimum EPT rates, firms in provinces that apply higher EPT rates are associated with a significant improvement in their environmental performance after the implementation of the EPT law. Overall, the DID results are consistent with the findings in the univariate analysis and support our hypothesis 1, showing that the environmental tax-based incentives introduced by the EPT Law significantly improve corporate environmental performance.
If the parallel trend hypothesis is fulfilled, it is not difficult to deduce that the regression coefficients for the interactive terms before 2017 should not have any significant difference from 0. We set the year indicators from -3 to 2, representing the years from 3 years before to 2 years according to the EPT Act. As illustrated in Figure 1, when we take a year before the EPT law took effect as the benchmark year, the 95% confidence intervals before the benchmark year all pass through zero, indicating that there is no significant difference in CEP between treatments and control groups in the pre-EPT period.
However, after the implementation of the policy, the interactive term coefficients are significantly higher than 0 and show some durability, indicating that the treatment group has better CEP than the control group in the post-EPT period. Overall, the parallel trend assumption is met in our DID design, verifying that the policy effect is effective. Furthermore, a challenge in the studies of political changes is that there may be other influences from macroeconomic factors.
For example, the regional environment can shape the regional economy, it is possible that EPT rates depend on local economic development, which in turn affects the impact of the EPT law on CEP in our study. To address these concerns, we additionally control for provincial macro-level factors in the pre-EPT period in model (2), which are measured as the average of macroeconomic indices from 2015 to 2017. First_proportion, Second_proportion, and Third_proportion are calculated as the ratio of provincial primary value added, secondary and tertiary industries and GDP.
Additional analyses
As a result, firms located in areas with weak enforcement of legalization may face higher pollutant discharge costs after the implementation of the EPT law. The coefficient of Policy is positive and significant at the 1% level, indicating that the EPT Law improves CEP overall. However, the coefficient of Tax Policy is insignificant, suggesting that the impact of the EPT Law on CEP between the treatment and control groups is not statistically different when the regional legalization environment is good.
We find that the coefficient of tax*policy is positive and significant at the 1% level, indicating that the study group has a higher CEP than the control group under the EPT law when firms are located in provinces with a worse legalization environment. Overall, the subsample analysis in Table 5 shows that the EPT law has a stronger impact on CEP when regional enforcement of legalization is weak. After the introduction of the EPT Law, state-owned enterprises may face a higher tax burden due to the increased tax rate, which makes the effect of tax incentives more pronounced in state-owned enterprises than in non-state-owned enterprises.
While the coefficient of Tax*Policy is significant and positive at the 5% level, implying that the positive impact of the EPT law on CEP is more pronounced in treatment SOEs than in control SOEs. We construct a subsample analysis to test the heterogeneous effect of the EPT law across heavy and non-heavy polluting firms and report the results in Table 7. We find that the coefficient for Tax*Policy is positive and significant at the 5% level, which indicates treatment firms from non-heavily polluting industries are associated with higher CEP under the EPT law compared to corresponding control firms.
In column (2), however, we find no significant impact of the EPT Act on CEP in heavily polluting firms. Interestingly, the results in Table 7 indicate that the EPT law is more likely to promote corporate environmental obligations in non-heavy polluting firms, but has limited impact on heavy polluters. The impact of tax incentives introduced by the EPT law weakens when companies face serious survival difficulties.
Consistently, we find that the coefficient of Tax*Policy is positive and significant in low-polluting firms but not significant in high-polluting firms, which supports our argument that the EPT Law has a limited impact on CEP when firms face survival difficulties. The heterogeneity analysis shows that the impact of the EPT Law on CEP is more evident in non-polluting firms than in heavy polluting firms. This finding shows that the EPT law significantly improves the CEP in treatment firms when they face fewer financial constraints, regardless of whether they are non-high-polluting or high-polluting firms.
Conclusion
Listing age The natural logarithm of the number of years between listing and the year of observation plus one. Indep The ratio of the number of independent directors to the total number of directors on the board. The influence of China's Environmental Protection Tax Law on firm performance – evidence from stock markets.
From Pollution Tax to Environmental Protection Tax: A Comparative Analysis of the Potential and Limitations of China's New Environmental Policy Initiative. The Impact of Government Intervention on Corporate Environmental Performance: Evidence from China's National Civilized City. This table reports the subsample analysis regarding the impact of the EPT law on CEP under different legalization.
This table reports the sub-sample analysis on the impact of the EPT law on CEP in SOEs and non-SOEs. The heterogeneous effects of tax policy on corporate environmental performance in heavy vs non-heavy polluting industries. This table reports the results of the impact of the EPT Act on CEP in non-heavy polluting and heavy polluting industries.
