Can raising environmental tax reduce industrial water pollution? Firm-level evidence from China

This paper examines the effect of raising tax rates on reducing industrial water pollution, exploiting China's environmental tax reform in 2018 as a quasi-natural experiment. Based on micro-level data covering >19 thousand firms nationwide, we estimate that for every unit of tax rate increase, the emissions of water pollutants, Chemical Oxygen Demand (COD) and Ammonia Nitrogen (NH3-N) have fallen by 8.63% and 3.79%. High emission intensity firms reduce their emissions more than low emission intensity firms. We also document that state-owned enterprises are less responsive to the tax increase than non-state-owned enterprises. Our findings provide evidence that the increased environmental tax has contributed to significant reductions in industrial emissions in China.

Automated summary

This paper examines the effect of raising tax rates on reducing industrial water pollution in China. The study uses the 2018 environmental tax reform as a quasi-natural experiment and analyzes micro-level data from over 19,000 firms nationwide. The results indicate that for every unit of tax rate increase, water pollutant emissions of COD and NH3-N decrease by 8.63% and 3.79% respectively. The study also finds that high emission intensity firms reduce their emissions more than low emission intensity firms, and state-owned enterprises are less responsive to the tax increase compared to non-state-owned enterprises. Overall, the findings suggest that the increased environmental tax has played a significant role in reducing industrial emissions in China.