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

Abstract

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.